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Consolidated Appropriations Act of 2016 Postpones Cadillac Tax and Permanently Extends Transit Benefit Parity
Practical Law Legal Update w-001-1015 (Approx. 5 pages)
Consolidated Appropriations Act of 2016 Postpones Cadillac Tax and Permanently Extends Transit Benefit Parity
by Practical Law Employee Benefits & Executive Compensation
| Published on 23 Dec 2015 • USA (National/Federal) |
The Consolidated Appropriations Act of 2016 was enacted on December 18, 2015, and includes several provisions affecting employee benefits, including a two-year delay of the Cadillac Plan Tax and extension of parity for the income exclusion for employer-provided mass transit and parking benefits. The transit benefit amendment and the provisions affecting retirement plans are located in the part of the legislation known as the Protecting Americans From Tax Hikes (PATH) Act.
The Consolidated Appropriations Act of 2016 (Appropriations Act) was enacted on December 18, 2015, and contains several provisions affecting retirement plans and health and welfare plans, including:
- A two-year delay of the Cadillac Plan Tax.
- A moratorium on the annual fees on health insurance providers imposed by Section 9010 of the Affordable Care Act (ACA).
- The Protecting Americans From Tax Hikes (PATH) Act, which provides for:
- an extension of parity for the income exclusion for employer-provided mass transit and parking benefits;
- an extension of tax-free distributions from individual retirement plans for charitable purposes;
- rollovers from retirement plans into SIMPLE-IRAs; and
- various clarifications regarding church plans under the Internal Revenue Code (Code).
Health & Welfare Plan Provisions
Cadillac Plan Tax
The ACA includes a 40% excise tax on high-cost health coverage, a revenue provision commonly known as the Cadillac Plan Tax. The excise tax, which was added as Code Section 4980I, applies to coverage that exceeds certain annual dollar limits (see Practice Note, Cadillac Plan Excise Tax Under the ACA).
The Cadillac Plan Tax was originally scheduled to apply for tax years beginning after 2017, for coverage amounts exceeding $10,200 for self-only coverage and $27,500 for non-self-only coverage. However, the Appropriations Act delays the effective date of the Cadillac Plan Tax by two years, which means that it will first take effect for tax years beginning in 2020.
The Appropriations Act also:
- Makes the Cadillac Plan Tax deductible for employers.
- Requires the U.S. Comptroller General to provide a report to Congress that analyzes new benchmarks for the age and gender adjustment of the applicable dollar limit of the Cadillac Plan Tax, including the premium cost of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan (see Practice Note, Cadillac Plan Excise Tax Under the ACA: Annual Dollar Limits and Adjustments: Adjustments for Age and Gender).
Annual Fee on Health Insurance Providers
The Appropriations Act delays for one year the annual health insurance provider fees under ACA Section 9010 (see Practice Note, Expatriate Health Plans under the ACA and EHCCA: Exemption from ACA Section 9010 Annual Fees on Health Insurance Providers).
Transit Benefits
The PATH Act, located in Division Q of the Appropriations Act, permanently extends the combined maximum monthly exclusion amount for transit passes and commuter highway vehicle transportation so that it matches the maximum monthly exclusion for qualified parking benefits ($250 for 2015, under the extension; $255 for 2016) (see Practice Note, Fringe Benefits under Code Section 132: Limits for Transit Pass/Commuter Highway Vehicles and Qualified Parking Benefits and Legal Update, Tax Relief Extension Includes Provisions on Multiemployer Pension Plans, Transportation Benefits and PEOs). This parity extension applies retroactively to months after December 31, 2014.
Retirement Plan Provisions
The PATH Act contains several provisions that affect retirement plans.
Distributions for Charitable Purposes
The PATH Act amends Code Section 408(d)(8) by permanently extending the provision that allows taxpayers age 70½ and older to exclude from gross income a charitable distribution from an individual retirement account (IRA) of up to $100,000. This extension also applies to distributions made in 2015.
Rollovers Into SIMPLE-IRAs
The PATH Act allows rollovers from employer-sponsored retirement plans to a Savings Incentive Match Plan for Employees-Individual Retirement Account (SIMPLE-IRA), if the retirement plan has existed for at least two years. The provision applies to plan contributions made after December 18, 2015.
Church Plans Clarification
The PATH Act provides that church plans:
- Shall not be aggregated by the IRS for purposes of nondiscrimination testing, unless certain conditions apply.
- Will have greater flexibility to decide which other church plans they are associated with.
- Will now benefit from the preemption of state wage laws that provide criminal penalties for employers that withhold employees' wages without their consent. This preemption will allow church plans to include automatic-enrollment features similar to those used by 401(k) plans.
- Are now allowed to invest in collective (81-100) trusts.
- Will not have to meet defined contribution annual additions limitations, if they are grandfathered defined benefit church plans.
Practical Impact
Delay of the Cadillac Plan Tax under the Appropriations Act will be welcome news for employers, many of whom had already begun assessing the tax's impact and making design changes to avoid it. The transit benefit changes, which are retroactive, likely will be the topic of additional IRS guidance (see Legal Updates, IRS Addresses 2014 Increase in Transit Benefit Limits under TIPA and IRS Procedure Permits Employers to Account for Retroactive Transit Benefit Increase).
The Appropriations Act also extends and makes permanent certain popular exclusions from income and provides much needed clarifications for church plans.