IRS Issues Initial ‘Cadillac’ Excise Tax Guidance

Pretax employee HSA contributions would be subject to tax on high-value plans

By Richard Stover and Sharon Cohen, © Buck Consultants Feb 25, 2015
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The IRS and the Treasury Department issued a notice on the so-called “Cadillac Tax”—a 40 percent excise tax to be imposed on high-cost employer-sponsored health plans beginning in 2018 under the Affordable Care Act (ACA).

Notice 2015-16, released on Feb. 23, 2015, discusses a number of issues concerning the tax and requests comments on the possible approaches that ultimately could be incorporated in proposed regulations. Notably, the guidance states that the agencies anticipate that pretax salary reduction contributions made by employees to health savings accounts (HSAs) will be subject to the tax.

Background

In 2018, the ACA provides that a nondeductible 40 percent excise tax be imposed on "applicable employer-sponsored coverage" in excess of statutory thresholds (in 2018, $10,200 for self-only, $27,500 for family). As 2018 approaches, the benefit community has long awaited guidance on this tax. While many employers have actively managed their plan offerings and costs in anticipation of the impact of the tax, those efforts have been hampered by the lack of guidance. Among other things, employers are uncertain what health coverage is subject to the tax and how the tax is calculated.

Specifically, Notice 2015-16 addresses:

Definition of applicable coverage

Determination of cost of coverage

Application of dollar limits

The agencies are requesting comments on issues discussed in this notice by May 15, 2015. They intend to issue another notice that will address other areas of the excise tax and anticipates issuing proposed regulations after considering public comments on both notices.

Applicable Coverage

Of most immediate interest to plan sponsors is the specific type of coverage (i.e., “applicable coverage”) that will be subject to the excise tax, particularly where the statute is unclear.

Employee Pretax HSA Contributions

The ACA statute provides that employer contributions to an HSA are subject to the excise tax, but did not specifically address the treatment of employee pretax HSA contributions. The notice says that the agencies “anticipate that future proposed regulations will provide that (1) employer contributions to HSAs, including salary reduction contributions to HSAs, are included in applicable coverage, and (2) employee after-tax contributions to HSAs are excluded from applicable coverage.”

Note: This anticipated treatment of employee pretax contributions to HSAs will have a significant impact on HSA programs. If implemented as the agencies anticipate, it could mean many employer plans that provide for HSA contributions will be subject to the excise tax as early as 2018, unless the employer limits the amount an employee can contribute on a pretax basis.

Self-Insured Dental and Vision Plans

The ACA statutory language specifically excludes fully insured dental and vision plans from the excise tax. The treatment of self-insured dental and vision plans was not clear. The notice states that the agencies will consider exercising their “regulatory authority” to exclude self-insured plans that qualify as excepted benefits from the excise tax.

Employee Assistance Programs

The agencies are also considering whether to exclude excepted-benefit employee assistance programs (EAPs) from the excise tax.

Onsite Medical Clinics

The notice discusses the exclusion of certain onsite medical clinics that offer only de minimis care to employees, citing a provision in the COBRA regulations, and anticipates excluding such clinics from applicable coverage. Under the COBRA regulations an onsite clinic is not considered a group health plan if:

The health care consists primarily of first aid provided during the employer’s work hours for treatment of a health condition, illness or injury that occurs during work hours.

Health care is only available to current employees.

Employees are not charged for use of the facility.

The agencies are also asking for comment on the treatment of clinics that provide certain services in addition to first aid:

Immunizations.

Allergy injections.

Provision of nonprescription pain relievers, such as aspirin.

Treatment of injuries caused by accidents at work, beyond first aid.

In Closing

With the release of this initial guidance, plan sponsors can gain some insight into the direction the government is likely to take in proposed regulations and can better address potential plan design strategies.

Richard Stover, FSA, MAAA, is a principal and actuary, and Sharon Cohen, JD, is a principal, at Buck Consultants at Xerox. This article originally appeared in the Feb. 24, 2015, issue of For Your Information, produced by Buck Consultants’ Knowledge Resource Center. This publication is for information only and does not constitute legal advice; consult with legal, tax and other advisors before applying this information to your specific situation. © 2015 Xerox Corp. and Buck Consultants. All rights reserved. Republished with permission.

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