The excise tax on high-cost, employer-sponsored health coverage (commonly referred to as the "Cadillac Tax") first received considerable attention when the Patient Protection and Affordable Care Act was enacted in 2010. The Cadillac Tax is effective for taxable years beginning after December 31, 2017. With the issuance of IRS Notice 2015-16, employers and other stakeholders have an early opportunity to formally participate in the rule-making process. As we discuss in this client alert, this opportunity also involves the development of further rules concerning COBRA continuation coverage.
I. The Cadillac Tax
In general, the Cadillac Tax is a 40% non-deductible tax on any non-excluded, excess health benefit provided to an employee or former employee. An excess health benefit consists of the excess, if any, of the aggregate cost of applicable healthcare coverage for an employee for a given month over the applicable dollar limit for the employee for such month.
The entity liable for the Cadillac Tax is (1) the health insurance issuer in the case of applicable coverage provided under a group health plan; (2) the employer, if applicable coverage consists of coverage under which the employer makes contributions to an HSA or Archer MSA; and (3) the person that administers the plan in the case of any other applicable employer-sponsored coverage.
Regardless of which entity is liable for the Cadillac Tax, the employer must calculate the tax and notify the entity of the amount of its liability. Employers therefore have a direct administrative stake in the Cadillac Tax as well as a direct or indirect economic stake depending on the nature of the applicable coverage.
II. The Cadillac Tax and COBRA Continuation Coverage
While the Cadillac Tax represents a new provision of the Internal Revenue Code (Code section 4980I), it relies on existing Code provisions for some key concepts. In particular, the statute provides that the cost of the applicable coverage is determined under rules similar to the rules governing the COBRA applicable premium (Code section 4980B). However, comprehensive guidance has yet to be issued on some issues relevant to the COBRA applicable premium, including:
- How to determine which non-COBRA beneficiaries are similarly situated;
- Specific methods for self-insured plans to determine the COBRA applicable premium; and
- How to determine the COBRA applicable premium for HRAs.
In recognition of the need for additional guidance, Notice 2015-16 invites comments both on the Cadillac Tax and on such aspects of COBRA. While some differences between the two sets of rules may be appropriate or necessary, IRS Notice 2015-16 indicates that future guidance will likely attempt to harmonize the COBRA rules with the rules applicable to the Cadillac Tax to the extent practicable.
III. What Stakeholders Can Do Now
As noted above, the Cadillac Tax is effective for taxable years beginning after December 31, 2017. Therefore, IRS Notice 2015-16 represents a valuable opportunity for stakeholders to comment on their concerns and preferred approaches well in advance of its implementation. Stakeholders interested in submitting comments to the IRS may find benefits counsel useful in the identification and presentation of their concerns.
This client alert has discussed the Cadillac Tax and the COBRA applicable premium in the context of the request for comments recently issued by the IRS in Notice 2015-16.
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.
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