Treasury Official Addresses 2018 Excise Tax Concerns

A number of matters are awaiting forthcoming guidance—or congressional action

By Stephen Miller, CEBS Mar 25, 2015

updated 5/20/2015

Unresolved issues involving the Affordable Care Act's (ACA’s) excise tax on high-value health plans, slated to take effect in 2018, were addressed by J. Mark Iwry, Senior Advisor to the Treasury Secretary and Deputy Assistant Secretary (retirement and health policy), speaking March 24 at the Society for Human Resource Management's 2015 Employment Law & Legislative Conference, held in Washington, D.C.

Iwry wasn't always able to provide additional clarity, as a number of matters are awaiting forthcoming guidance. But he affirmed his belief that employers were adapting to the new compliance landscape, including preparing to pay—or taking steps to avoid—the high-value tax.

The excise tax “has been a particular concern for so many plan sponsors, notwithstanding that it's a few years off,” Iwry noted. “We recognize that lots of plan sponsors, and even labor unions negotiating with management for bargaining agreements that will last into the period that spans 2018, would like some guidance on this earlier rather than later,” giving plan sponsors time to undertake a cost-reduction strategy that may allow them to avoid or minimize the tax.

The nondeductible 40 percent excise tax is to be imposed on employer-sponsored coverage subject to the employer mandate when the total cost of providing health coverage is in excess of statutory thresholds (in 2018, $10,200 for self-only coverage and $27,500 for non-individual coverage, subsequently adjusted for inflation based on the consumer price index). The total cost includes annual insurance premiums (whether paid by the employer, the employees or shared by both), health savings account (HSA) and health flexible spending account contributions (made by the employer or by employees through pretax salary deferral), plus employer contributions to health reimbursement arrangements.

“Many employers who may face uncertainty today as to whether or not they will be subject to this tax might conclude, perhaps with cost-reducing measures, that in fact they won't be subject to the tax,” Iwry said. “The way to conclude that would be to project your costs to 2018 in accordance with the rules in this statutory provision, as interpreted by our regulations, and we will be issuing regulations after an initial round of dialogue with the employer community and other interested stakeholders this year.”

To “kick that off,” Iwry said, Treasury issued its first notice on the high-value excise tax in February 2015, and “subsequent notices will be coming out soon, followed by proposed regulations planned for later this year, and then formal regulations in 2016.”

Handling Tiered Coverage

Iwry said the Treasury Department understood that non-individual coverage in employer-provided plans is sometimes tiered, with one premium cost for employee plus spouse, and a higher cost for employee, spouse, and one or two children, for instance, and perhaps an even higher cost for the couple and three or more children.

Iwry expects that future guidance will clarify how the cost of non-individual coverage can be averaged among such tiers to determine if the threshold falls below the $27,500 other than self-only (“family coverage”) maximum. He also suggested that employees could be aggregated together based on geographic location in determining how the tax is accessed.

HSAs and Other Benefit ‘Costs’

As regards costs that are included and excluded, Iwry said that the expense of maintaining onsite clinics that provide “de minimus” or very basic care could be deemed excludable from the total cost calculation.

On the contentious issue of why employees' pretax contributions made through salary deferral to their health savings accounts are considered the same as employer costs, as affirmed in the Treasury's February 2015 guidance, Iwry said that “Treasury has no discretion to carve out” employee HSA contributions since “Democrats in Congress had specifically made it a point” to include HSAs under the threshold, and altering that would require statutory change.

The issue of HSAs and the excise tax is not expected to go away, however, as many critics contend that if employee pretax contributions are treated as part of the employer's “total cost” that could trigger the excise tax, employees could be left with high-deductible health plans no longer linked to HSAs that promote savings. Between now and 2018, HSA advocates are expected to lobby Congress to address this concern.

On a related matter, Iwry said it was possible that Treasury would carve out from the threshold stand-alone dental and vision coverage, treating vision and dental as “excepted benefits” and “using current excepted benefit regulations as a guideline for the excise tax as well.”

HSA Inclusion: Another View

The American Bankers Association in a May 2015 comment letter to the IRS contended, contrary to Iwry's assertion that excluding employee HSA contributions from the excise tax threshold would require statutory action by Congress, that the IRS has the authority to make this change, stating:

In our view, because of how different HSAs are, the IRS has the necessary discretionary authority to characterize employee contributions to the employee’s HSA, even if facilitated by the employer through Section 106 authority, as “excludable” without also being included in the definition of “applicable coverage” precisely because employers don’t own any of the money in an employee’s HSA. Funds in an HSA are the property of the beneficiary and are non-forfeitable under 26 U.S. Code Section 223 (d)(1)(E).

We respectfully request that IRS exempt employee contributions from the calculation of the excise tax.

To reiterate, along with HSA contributions (if payroll deducted), FSA contributions and employer contributions to HRAs will also be added to the value of health benefits subject to the tax if the total benefit value is above the excise tax threshold.

Collective Bargaining Agreements

On collective bargaining, Iwry said Treasury understood that the parties that have already negotiated agreements or are currently in contract negotiations might not know if the provided health benefit will cross the excise tax threshold in 2018, given the unpredictability of health care inflation and other factors. Congress, he noted, did not provide an excise tax exemption for previously negotiated union agreements, nor address whether contract negotiations should be reopened on the matter, saying, “they didn't go there, they just decided to let the parties figure it out.”

Plan sponsors going into collective bargaining now, however, “should not assume there will be some kind of special relaxation of the rules,” he warned. Consequently, the parties may want to include a provision to revisit or reopen benefit commitment levels in the future, “if the parties aren't ready to decide exactly what the benefits are going to be in some irrevocable way. Or, if you don't want to reopen, make a deal that reflects that the excise tax is likely to apply in 2018.”

Iwry added, “We don't think people ought to proceed on the assumption that in 2017 or 2018 they'll be able to come in and say, ‘Well, we just didn't think about it, so how do you expect us to be exposed to the tax when we had to lock in a deal back in 2015?’ People know full well that this is coming.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related Resource:

What Does the ACA's Excise Tax on High-Cost Plans Actually Tax?, Milliman, April 2015

Related SHRM Articles:

Cadillac Excise Tax Notice Raises Questions, SHRM Online Legal Issues, March 2015

IRS Issues Initial ‘Cadillac’ Excise Tax Guidance, SHRM Online Benefits, February 2015

Employers Alter Health Plans to Drop Costs, Avoid Tax, SHRM Online Benefits, November 2014

Tracking the Excise Tax Impact on High-value Plans, SHRM Online Benefits, October 2014

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