On July 30, 2015, the IRS issued Notice 2015-52, which offers the IRS's views on additional implementation issues regarding the excise tax on high cost employer-sponsored health coverage under the Affordable Care Act (ACA) (see Practice Note, Cadillac Plan Excise Tax under the ACA). The excise tax, commonly known as the "Cadillac tax," is governed by Section 4980I of the Internal Revenue Code (Code), which was added under the ACA (26 U.S.C. § 4980I). Notice 2015-52 supplements IRS Notice 2015-16 (February 2015), which was the IRS's first significant treatment of Cadillac tax issues (see Legal Update, IRS Cadillac Tax Rules Highlight Need for COBRA Guidance).

Effective for tax years beginning in 2018, Code Section 4980I imposes a 40% excise tax on any "excess benefit" provided to employees, which is the excess of the cost of coverage for a month over the dollar limit for the month. By statute, the cost of coverage for excise tax purposes is determined using rules "similar to" those for defining applicable premiums for COBRA coverage (see Practice Note, COBRA Overview).

Among other issues, Notice 2015-52 addresses:

In addressing these issues, the IRS requested comments (due October 1, 2015) regarding the administrability of its proposals and issues involving Section 4980I in general.

Code Section 4980I makes the "coverage provider" liable for any excise tax, and who the coverage provider is depends on the type of coverage. For example, the coverage provider is:

The phrase "person that administers the plan benefits" includes the ERISA plan sponsor (29 U.S.C. § 1002(16)(B)) if the plan sponsor administers plan benefits. However, the phrase is not:

As a result, the IRS indicated in Notice 2015-52 that it is considering two alternative approaches to defining the phrase. Under the first approach, the person that administers plan benefits would be the person responsible for performing day-to-day administration of plan benefits, for example:

For self-insured benefits, this person generally would be the plan's third-party administrator (TPA). However, the IRS acknowledged the potential for uncertainty for plans with multiple service providers (for example, a pharmacy benefit administrator (PBM) or medical claims benefit administrator) and therefore requested comments on this issue.

Under a second approach, the phrase would mean the person having ultimate authority or responsibility under the plan regarding administration of plan benefits (for example, final decisions on administrative matters), regardless of whether that person typically uses this authority. This authority might be exercised regarding:

The person with this ultimate administrative authority:

The IRS requested comments on the two proposed approaches.

Notice 2015-52 addresses at length the situation where an entity other than the employer is the coverage provider liable for the excise tax, and that entity passes through all or part of the amount of the excise tax to the employer and is then reimbursed for the tax. In the IRS's view, this "excise tax reimbursement" is additional taxable income to the coverage provider. Because the Section 4980I excise tax is not deductible, the coverage provider could therefore have additional income that is not offset by a deduction. As a result, the coverage provider also may need to pass through an amount reflecting the additional income tax that the provider will incur (referred to as an "income tax reimbursement").

IRS proposed regulations under Section 4980I likely will provide that excise tax reimbursements are excluded from the cost of applicable coverage, and the same may be true for some or all of the income tax reimbursement. If income tax reimbursements are viewed as excludable from the cost of coverage, the IRS indicated that the amount of the reimbursement will be determined using a formula similar to that used to calculate tax gross-ups. Notice 2015-52 addresses possible approaches for how this formula may be applied in the Section 4980I context.

Under Code Section 4980I, all employers treated as a single employer under the Code's controlled group rules are treated as a single employer (26 U.S.C. § 414) (see Practice Note, Controlled Group and Affiliated Service Group Rules). In Notice 2015-52, the IRS requested comments on the practical challenges regarding how the controlled group rules apply in the Section 4980I context, including identification of:

Code Section 4980I requires employers to:

In Notice 2015-52, the IRS recognized that employers will need to determine the cost of applicable coverage sufficiently soon after the end of a tax year (which, according to the IRS, will be the calendar year) so that the coverage provider can timely pay any applicable tax. The IRS requested comments on these concerns and noted that these potential timing issues will likely be different for:

For example, a self-insured plan may need additional time to compute the cost of applicable coverage if the cost is determined based on a period at the end of the year, in which case the cost may not be determinable until after:

Applicable coverage for Section 4980I purposes includes coverage under certain HSAs, Archer MSAs, FSAs and HRAs. The IRS indicated in Notice 2015-52 that it may adopt a rule under which contributions to these account-based plans are allocated on a pro-rata basis over the period to which the contributions relate (in most cases, the plan year), regardless of when the contributions are made. Under this approach, for example, if an employer contributes an amount to an HSA for an employee for a plan year, that contribution would be allocated ratably to each calendar month of the plan year. This would be the rule regardless of when the employer actually contributes the amount to the HSA.

For an FSA, the cost of applicable coverage for a plan year is the greater of either:

Notice 2015-52 addresses how to determine the portion of the cost of applicable coverage attributable to non-elective flex credits contributed to an FSA by an employer. Specifically, the cost of the non-elective flex credit is the amount that is actually reimbursed in excess of the employee's salary reduction election for a plan year. The Notice also addresses how to reflect amounts carried over to a subsequent year. To avoid potential double-counting issues, the IRS may use a safe harbor under which the cost of applicable coverage for a year is the amount of an employee's salary reduction, but disregarding carry-over amounts. Unused amounts that are carried forward would be:

Section 4980I contains per-employee dollar limits that are increased for adjustments based on the age and gender characteristics of an employer's employees (see Practice Note, Cadillac Plan Excise Tax under the ACA: Adjustments for Age and Gender). These age and gender adjustments are determined separately for self-only and non-self-only coverage. To determine the age and gender characteristics of an employer's population, the IRS may require employers to use the first day of the plan year as a "snapshot date" for assessing the composition of its employee population. Under this approach:

In Notice 2015-52, the IRS requested comments regarding this approach (for example, whether it is administerable and whether employers should be allowed to use a snapshot day other than the first day of the plan year). The Notice also includes approaches for developing adjustment tables to help with calculating age and gender adjustments.

Section 4980I does not specify the time and manner in which the excise tax must be paid. The IRS indicated in Notice 2015-52 that it may require Section 4980I taxes to be paid by filing IRS Form 720 (Quarterly Federal Excise Tax Return). Although Form 720 generally is filed quarterly, the IRS may designate a particular quarter of the year for which Form 720 is used to pay Section 4980I excise taxes.

Also, the IRS requested comments regarding how to avoid reallocation issues where Section 4980I calculation errors affecting the cost of coverage affect more than one coverage provider (due to how the tax is allocated).

The IRS emphasized that Notice 2015-52 is not guidance on which taxpayers may rely. Although this latest notice (like Notice 2015-16 before it) is not formal guidance for Section 4980I purposes, it is likely that the issues addressed in the Notice will ultimately be reflected in proposed regulations under Section 4980I (assuming attempts to legislatively repeal the provision are unsuccessful). For that reason, employers and their advisors may wish to familiarize themselves with positions the IRS has taken in its two notices and offer comments to shape the upcoming proposed regulations. As one example, some of the proposals regarding capturing age and gender characteristics could involve a fair amount of administrative complexity for employers.