The IRS recently issued Notice 2015-16 addressing the excise tax on high cost employer-sponsored health coverage enacted under the Affordable Care Act. This tax, which is commonly referred to as the "Cadillac" tax, will take effect in 2018. While it does not provide definitive guidance on which employers can rely, the Notice does provide some useful insights as to the agency’s intended approach regarding key aspects of the tax.
Section 4980I of the Tax Code imposes a 40% excise tax on the excess (if any) of the aggregate cost of an employee’s monthly “applicable coverage” over the corresponding dollar limit for the month. Thus, the cost of coverage is to be determined, and the tax is to be applied, on a monthly basis. Note also that the tax applies to such coverage provided to former employees (such as retirees) and anyone else who is a primary insured under the plan (e.g., surviving spouse or dependent separately electing COBRA coverage).
In general, the entity responsible for paying the excise tax is the health insurance issuer, under an insured plan; the employer, in the case of an HSA or Archer MSA; or the administrator, in the case of any other coverage. As a practical matter, though, it is likely that any such penalty payable by an insurer or third-party administrator will ultimately be borne by the employer or the plan in the guise of higher premiums or administrative fees. The statute also provides that the employer will be obligated to calculate the tax, inform the liable entities of their share and do any required IRS filings.
Treasury and the IRS have invited comments on a variety of issues raised in the Notice, with a deadline of May 15, 2015, and also indicate that they expect to provide another notice before the publication of proposed regulations.
The attached summary includes an overview of the issues raised in the Notice and items on which comments have been requested.