Internal Revenue Code section 4980I, as enacted by the Patient Protection and Affordable Care Act (ACA), imposes a 40%, nondeductible excise tax on employers, health insurance issuers, and/or other entities administering health plan benefits if the aggregate value of “applicable employer-sponsored coverage” exceeds a specified annual dollar limit.
Earlier this year, Treasury and the Internal Revenue Service (IRS) issued Notice 2015-16 which provides initial guidance about the excise tax and describes certain approaches Treasury and IRS are considering with regard to implementation of the excise tax. The Notice also states that it will be followed by a second notice describing and inviting comments about potential approaches to certain additional issues, including procedural issues relating to the calculation and assessment of the excise tax.
Below are responses to questions we have received regarding the excise tax and the Notice.
When is the excise tax effective?
The excise tax is effective beginning for taxable years beginning in 2018. It is likely that any excise tax owed based on the 2018 tax year will be payable in 2019.
What guidance is provided in the Notice?
In general, the Notice describes potential approaches to the following three issues: (1) the definition of applicable coverage; (2) determination of the cost of applicable coverage; and (3) application of the annual dollar limits to the cost of applicable coverage.
What types of health offerings are applicable coverage subject to the excise tax?
The excise tax apples to “applicable employer-sponsored coverage,” which generally means coverage under any group health plan made available to the employee by an employer that is tax-exempt, or that would be tax-exempt if it were employer-provided coverage. This means that both the employer- paid and employee-paid costs of coverage are generally taken into account in determining whether the excise tax applies.
The Notice provides that Treasury and IRS currently believe all of the following types of coverage will be taken into account in determining what is applicable coverage:
· Employer contributions to HSAs and Archer MSAs, including pre-tax salary reduction contributions (but not employee after-tax contributions)
· On-site medical clinics, except to the extent they offer only de minimis or limited
services to employees
· Executive physical programs
· Retiree coverage
· Multiemployer plans
· Governmental plans
· Coverage for a specified disease or illness if the coverage is excludable or deductible from gross income
· Both insured and self-funded plans
What types of coverage are not applicable coverage subject to the excise Tax?
The following are excluded from the definition of applicable employer-sponsored coverage:
· Coverage for long-term care
· Coverage (whether through insurance or otherwise) described in Code section 9832(c)(1) (other than coverage for on-site medical clinics):
o Coverage only for accident, or disability income insurance, or any combination thereof;
o Coverage issued as a supplement to liability insurance;
o Liability insurance, including general liability insurance and automobile
o Workers’ compensation or similar insurance;
o Automobile medical payment insurance;
o Credit-only insurance; and
o Other similar insurance coverage, specified in regulations, under which
benefits for medical care are secondary or incidental to other insurance
· Insured stand-alone vision and dental plans. (The Notice provides that Treasury and IRS are considering proposing an approach under which self-insured, limited scope
dental and vision coverage that qualifies as an excepted benefit also would be
excluded from applicable coverage.)
· Coverage for a specified disease or illness if offered as an independent, non-coordinated benefit and paid for with after-tax dollars
· Hospital indemnity or other fixed indemnity insurance if offered as an independent, non-coordinated benefit and paid for with after-tax dollars
· On-site medical clinics that offer only de minimis or limited services
· Employee assistance plans (“EAPs”) that qualify as an excepted benefit. (The Notice suggests that Treasury and IRS are considering excluding EAPs that qualify as an excepted benefit, under regulations released in October 2014.)
How is the aggregate cost of applicable employer-sponsored coverage determined?
The aggregate cost of applicable employer-sponsored coverage is determined by adding up the costs of each type of applicable employer-sponsored coverage. Under the statute, the cost of coverage is determined using rules similar to those that apply for purposes of determining the cost of coverage for COBRA purposes.
Treasury and IRS anticipate that the cost of any specific type of applicable coverage for an employee will be based on the average cost of that type of coverage for that employee and all similarly situated employees.
How does an employer determine different groups of similarly situated beneficiaries?
In order to determine the cost of coverage for employees, employers need to know how to determine the different groups of “similarly situated employees.” The Notice sets forth the following general approach that Treasury and IRS are considering for allowing employers to determine groups of “similarly situated employees.”
· Mandatory Aggregation Based on Benefit Package. The initial groups of
similarly situated employees would be determined by aggregating all employees
covered by a particular benefit package provided by the employer (e.g., if an
employer offered an HMO, a PPO, and a high-deductible health plan, each of the three
would be considered a separate benefit package).
· Mandatory Disaggregation Based on Self-Only or Other-Than-Self-Only Coverage. The employer then would be required to disaggregate the employees within the group covered a benefit package based on whether an employee was enrolled in self-only or other-than-self-only coverage.
· Permissive Aggregation Within Other-Than-Self-Only Coverage. Employers likely will not be required to determine separate “costs of coverage” for employees receiving other-than-self-only coverage based on the number of individuals being covered in addition to the employee.
· Permissive Disaggregation. Treasury and IRS are considering whether to allow (but not require) an employer to subdivide further the group of employees that would be treated as similarly situated. Specifically, they are considering whether disaggregation would be permitted based on either a broad standard (e.g., bona fide employment related criteria such as compensation, job categories, etc.) or a more specific standard (for example, current vs. former employees, bona fide geographic distinctions, etc.).
Treasury and IRS are considering whether these same approaches should also apply when determining COBRA premiums.
How does a self-insured plan determine the cost of applicable coverage?
The Notice provides that the methods currently prescribed by COBRA for self-insured plans to compute the COBRA applicable premium — the “actuarial basis” method and the “past cost” method—will also apply for determining the cost of applicable coverage for self-insured plans under the excise tax. The actuarial basis method provides that the COBRA premium (or cost of coverage) can be determined by a plan on an actuarial basis. The past cost method provides that the COBRA premium (or cost of coverage) can be determined based on the cost to the plan for similarly situated beneficiaries during a preceding determination period, adjusted for inflation. A plan must use the actuarial basis method unless the plan administrator elects to use the past cost method and the plan is eligible to use that method. The Notice seeks comments about whether an employer should be permitted to switch between the two methods. The Notice also indicates that Treasury and IRS are considering several different approaches for determining the cost of applicable coverage under an HRA.
How is the applicable dollar limit determined if an employee has both self-only and other-than-self-only coverage?
The statute contains different dollar limits based on whether an employee has self-only or non-self-only coverage. For 2018, the base dollar threshold is (i) $10,200 for self-only coverage and (ii) $27,500 for coverage other than self-only coverage (but these base limits will be adjusted and vary based on a variety of factors).
The Notice describes several potential approaches for applying the dollar limit to employees who have both self-only and other-than-self-only coverage (for example, an employee with self-only major medical coverage and an HRA that covers the employee and his or her family). Under one approach, the applicable dollar limit would depend on whether the primary coverage is self-only or other-than-self-only. Under an alternative approach, there would be a composite dollar limit determined by prorating the dollar limits according to a ratio of the cost of self-only coverage and the cost of other-than-self-only coverage. The Notice requests comments about these approaches and other possible approaches for determining the dollar limit in situations where individuals have both types of coverage. It also requests comments about approaches for calculating and applying adjustments in the limits for qualified retirees, high risk professions, and the age and gender characteristics of an employer’s workforce.
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Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C. She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare. She represents employers designing health plans as well as insurers designing new products. Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.
Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.
PLEASE NOTE: This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.