Recently, the IRS issued Notice 2015-52 requesting additional input on the yet-to-be-proposed Cadillac Tax rules. For those unaware, the Cadillac Tax imposes a 40%, non-deductible excise tax on the cost of health coverage that is over a certain threshold. This deceptively simple description does not begin to uncover the myriad of potential issues, such as…
Who pays the tax?
Well, the “coverage provider” pays the tax. For insured plans, that’s easy: it’s the insurer. For HSAs or Archer MSAs, it’s the employer. But what about a self-funded plan? The statute says it’s the “person that administers the plan benefits.” That phrase is undefined in the statute or really anywhere else.
The IRS is looking at two possible approaches for defining this term. One is to look at a self-funded plan’s third party administrator/ASO provider. That sounds easy, until you remember that many plans have carved out pharmacy benefit management with a separate provider or have otherwise divided up the administration. Regardless, this tax is still getting passed back through to employers anyway.
The second approach is looking at the person with ultimate authority for the plan administration (the relatively pithy ERISA name for this person is the “plan administrator”). Of course, sometimes the plan administrator is a committee of people and not really an individual or entity. (I guess they could divide the tax among them?) The IRS also says that it assumes this person could be easily identified from plan documents. If the IRS takes this approach, it will be important to ensure that the plan administrator is adequately (and correctly) identified in applicable plan documents.
Who’s the employer?
For purposes of the Cadillac Tax, the usual controlled group rules apply. Meaning that many parent-subsidiary companies and even companies with common owners are treated as one employer for purposes of the tax. The IRS notes that this presents some challenges in the Cadillac Tax arena.
For example, the thresholds that apply for purposes of the tax may be adjusted based on age and gender or for certain high-risk professions. Well, a conglomerate with several companies may have some companies in those high-risk professions, and others that are not. Or what about the employer who is responsible for the tax? Is that each company separately (like the “play or pay” mandate) or the group as a whole?
And what do you mean by “cost”?
The IRS did say that they anticipate that cost will be determined on a calendar year basis for all taxpayers, so at least that’s one question that’s (sort of) answered.
Note that employers (yes, employers) are required to determine the cost of the coverage, regardless of who the provider is. The IRS does recognize that some time will be needed to process run-out claims after the end of the year for the employer to be able to calculate the cost of coverage. However, the timing of the tax may influence how long of a run out period a plan is able to have.
Further, coverage providers are going to pass this tax back through, as we all know. The tax itself is not deductible, so they are likely to pass through a gross-up amount as well. In the notice, the IRS states that it currently thinks the excise tax reimbursement will be excluded from the cost of coverage. That way, the tax reimbursement doesn’t create a pyramiding effect, causing the tax to increase. However, the gross-up may not be excluded because the IRS views it as not easy to administer. (Translation: we can’t audit everyone to make sure they aren’t cheating.) Of course, not excluding the gross-up will create a pyramiding effect which will increase the Cadillac tax. The IRS does propose a couple of ways the gross-up may be excluded in the Notice.
Note that the cost is actually determined on a monthly basis. So what does this mean for FSAs, HRAs, or HSAs that receive a bulk contribution from the employer at the beginning of the year? Or what if employees vary their contributions during the year? The IRS is considering applying contributions to those accounts ratably over the year to help smooth out the application of the tax. Additionally, for FSAs, the IRS is proposing to exclude any unused employer flex credits that are forfeited at the end of the year. As with other plans, however, this rule may limit run-out periods for health FSAs, depending on when the tax is paid.
Additionally, the IRS is proposing to treat the full amount of employee FSA contributions as the cost of coverage during a year, but only if the employer does not contribute to the FSA. This would mean that if amounts were carried over from a prior year, they would not be included in the cost of coverage. There is also a proposed alternative safe harbor where the employer does contribute to the FSA.
The IRS also anticipates that discriminatory payments under a self-funded health plan would also be included in the tax.
And the rest…
In the notice, the IRS proposed several alternatives for the age and gender adjustments to the Cadillac tax thresholds.
As noted above, employers are required to calculate the tax and then notify the coverage provider and the IRS of the tax. The IRS requested comments on how this might work. The IRS is also suggesting that the tax will be reported and paid on Form 720, which is the quarterly federal excise tax return.
By now, you might be getting the impression that the IRS has not spent enough time thinking about the tax up to this point. The problem is that the statute, like so much of the ACA, does not fit neatly in the real world. The IRS, to its credit, is trying to be realistic as it crams a square peg down a round exhaust pipe, and this results in many uncomfortable questions. Comments in how best to cram are being accepted by the IRS until October 1, 2015.
When you were last pondering what creative name Congress will use on its next benefits-related bill (and, really, who does not do that in moments of abject despair, after a few glasses of wine, while bowling from time to time), surely the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” was near the top of your mind, wasn’t it? No? Really?
Well, SURPRISE! Because that’s the name of your latest benefits bill. In truth, it does have some provisions about transportation and the VA, but there are also benefits changes buried in various corners of the new law:
- Beginning next year, the automatic extension for the Form 5500 has been, well, extended from 2 ½ months to 3 ½ months from the initial deadline. This will allow plan administrators of calendar year plans more time to prepare for Halloween, but may cut in on their Thanksgiving preparations.
- The law extended for four years (until the end of 2025) the ability to transfer excess pension assets to retiree health and life insurance accounts. Of the four provisions, this is the only one likely to result in an increase in federal revenues. The Joint Committee on Taxation estimates that it will raise $172 million in revenue over 10 years.
- It also amends the ACA “play or pay” mandate to exclude employees receiving coverage under TRICARE or through the VA from the employee count when determining if an employer is an “applicable large employer.” Thus, a small employer with a few veterans might avoid the employer mandate by this rule. However, note that, if the employer is an applicable large employer, then these employees still have to be offered coverage and they still get counted in determining any penalties. This rule is retroactively effective to 2014.
- Additionally, veterans receiving care through the VA for a service-connected disability will still be able to contribute to a health savings account (HSA). This is not effective, however, until next year.
The Departments of Health and Human Services, Labor and Treasury (the “Agencies”) recently issued the latest set of final regulations that purport to provide an accommodation for certain entities with religious objections to the ACA’s requirement that non-grandfathered group health plans provide contraceptive services. The regulations, which were published in the Federal Register on July 14, 2015, finalize the interim final regulations published on August 27, 2014. The regulations provide an alternative procedure for a so-called “eligible organization” to give notice of its objection to some or all contraceptive coverage and add a definition of “closely-held for profit entity” to the definition of eligible organization.
Alternative Notice Procedure.
In the wake of the U.S. Supreme Court’s order in Wheaton College v. Burwell, that indicated that written notice of religious objection to certain contraceptive services would be sufficient for an organization to avail itself of the accommodation, the Agencies issued interim final regulations that added the written notice procedure an alternative to using EBSA Form 700. The final regulations adopt the alternative process without change. Instead of using Form 700, an eligible organization can give notice of its objection to some or all mandated contraceptive services by sending a letter to HHS. The letter must include the following information:
- Name of the eligible organization and the basis on which it qualifies for an accommodation,
- Its objection based on sincerely held religious belief to some or all contraceptive services, including, if applicable, the subset of contraceptive service to which it objects,
- Plan name and type (e.g., a student health insurance plan or a church plan), and
- Name and contact information for the plan’s insurers and third party administrators.
If there is any change in the information, the regulations provide that the eligible organization should notify HHS of any changes. HHS has provided an optional model notice.
Closely-Held For-Profit Entity.
In proposed regulations published on August 27, 2014, the Agencies requested comments on how a closely-held for-profit corporation should be defined in light of another Supreme Court decision – Burwell v. Hobby Lobby, Inc. This request for comments was met with over 75,000 comments. After considering the wide range of comments, the Agencies set forth modified rules providing that a for profit-entity can assert a religious objection to some or all mandated contraceptive services (and avail itself of the same accommodation available to non-profit eligible organizations) if:
- It is not a nonprofit,
- Has no publicly traded ownership interests (i.e., none of its ownership interests are subject to the registration requirements of Section 12 of the Securities Exchange Act of 1934), and
- More than 50% of its ownership interests are owned directly or indirectly by five or fewer individuals (or the entity has a substantially similar ownership structure) on the date the Form 700 certification is provided to the insurer or third party administrator.
Note that an individual is considered to own the ownership interests owned, directly or indirectly, by or for his or her family. Thus, the family members count as a single owner for purposes of these final regulations For this purpose, the term “family” includes only brothers and sisters, a spouse, ancestors, and lineal descendants.
A for-profit entity that is not certain whether it meets the above definition and/or qualifies for the accommodation can send a letter to HHS that (1) describes its structure and (2) seeks input from HHS on its qualification. If it receives no response from HHS within 60 calendar days, it will be considered to satisfy the regulation as long as its structure remains unchanged.
These regulations will almost certainly not end the ACA contraceptive controversy. Numerous cases are still pending in the federal courts. In addition, an individual recently brought a case challenging the mandate on his own behalf. There will be further developments, so stay tuned.