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IRS Publishes Additional Guidance on Affordable Care Act Excise Tax

August 10, 2015

The Internal Revenue Service (IRS) has issued additional guidance, Notice 2015-52, on the excise tax on high-cost employer-sponsored health care coverage that addresses more foundational issues related to payment of the tax: who pays it, how it is paid, and how to determine the employer. The notice, released on July 30, is the second on this issue and comes in advance of proposed rules.

Background. Section 49801 of the Internal Revenue Code, enacted as part of the Affordable Care Act, imposes a nondeductible 40 percent excise tax on any excess benefit provided in employer-sponsored insurance.  The so-called Cadillac tax, which goes into effect in 2018, will apply to the cost of coverage exceeding $10,200 for self-only coverage and $27,500 for all other coverage. Annual caps will be indexed for inflation in future years.

Earlier this year, the IRS published Notice 2015-16, which addressed the definition of applicable coverage, the determination of cost of applicable coverage, and the application of the annual statutory dollar limit to the cost of applicable coverage. 

Continuing the Regulatory Process. In advance of developing and publishing proposed rules (which will invite public comment), the IRS is seeking input on the excise tax on issues that were not raised in Notice 2015-16.

Who Pays the Tax?  Section 4980(c)(1) states that the coverage provider is liable for the tax, which is the health insurer for coverage under group health plans and the employer for health savings accounts (HSAs) and Archer medical savings accounts (MSAs). For all other types of employer-sponsored coverage, the coverage provider is "the person that administers the plan benefits."

Notice 2015-52 outlines two approaches for determining who will be liable for the excise tax. Under one approach, the person that administers the plan benefits would be "the person responsible for performing the day-to-day functions that constitute the administration of plan benefits, such as receiving and processing claims, responding to inquiries, or providing a technology platform for benefits information." Treasury and the IRS anticipate that this person generally would be a third-party administrator for benefits that are self-insured, except in the rare cases in which the employer or plan sponsor performs these functions, or employs the person that performs them. 

Under the second proposed approach, the person that administers the plan benefits would be the person with ultimate authority or responsibility under the plan with respect to the administration of the plan benefits, regardless of whether that person routinely exercises that authority or responsibility. With this method, relevant types of administrative matters over which the person that administers the plan benefits would have ultimate authority could include eligibility determinations, claims administration, and arrangements with service providers, including the authority to terminate contracts with service providers. 

It is anticipated that the person with such ultimate authority under the plan would be identifiable based on the terms of the plan documents and often would not be the person that performs the day-to-day administrative functions under the plan.

Regardless of who pays the excise tax, it is not a deductible expense.  

How will the excise tax be paid? At the end of the calendar year, the employer must calculate if any tax applies for each employee and must notify each coverage provider and the IRS of the excise tax amount each provider owes on its applicable share of the excess benefits with respect to each employee.

The IRS is considering designating Form 720, the Quarterly Federal Excise Tax Return, as the mechanism for payment of the tax. If so, a particular quarter of the calendar will be designated as the payment period. 

Treatment of Contributions to Account-based Plans. Another notable proposal in Notice 2015-52 is the IRS' approach to the allocation of contributions to HSAs, Archer MSAs, flexible spending accounts (FSAs), and health reimbursement accounts (HRAs), for purposes of determining the cost of applicable coverage. Treasury and the IRS are considering an approach under which contributions to these account-based plans would be allocated on a pro-rata basis over the period to which the contribution relates (generally, the plan year), regardless of the timing of the contributions. Employers have voiced concerns that the full value of such contributions to those accounts would be counted each month when determining whether the applicable employer-based coverage provided an excess benefit.

Development of Age and Gender Adjustment Tables. To compare the employer's premium cost with the national premium cost, and thereby determine any excess benefit, it is necessary to establish the age and gender characteristics of the national workforce. The notice outlines the IRS' approach to simplify the calculation of the age and gender adjustment by developing tables, noting that all age and gender adjustments would be determined separately for self-only coverage and for other than self-only coverage.

The IRS seeks comments on the issues raised in the notice, as well as any other aspects of the excise tax. They are due by October 1.

Contact

Mary Bachinger
Director, Tax Policy
202.861.2581
E-mail