Cadillac Tax. Who is Liable?

In a previous blog, we discussed IRS Notice 2015-16, in which the IRS laid out some of its thinking about the implementation of the ACA’s tax on high-cost, employer-sponsored coverage (the “Cadillac tax”).  The IRS has now issued a second Notice (2015-52) in which it provides insights into issues not considered in Notice 2015-16.

Of interest, primarily to employers with self-insured plans, is the question of who is liable for the tax.  In the case of an insured plan, the insurer is liable.  For coverage under an FSA or HSA, it is the employer.  In all other cases – read self-insured health plans, the liable party is the “person who administers plan benefits”.  This is not a term that is defined anywhere in the relevant statutes.

The IRS is considering two approaches.  The first approach would effectively require the plan’s TPA to pay the tax.  The second would impose liability on the “person with ultimate authority with respect to the administration of plan benefits”; this could be a TPA, but it could also be the employer, a plan administrator, a committee or board of trustees among other possibilities.

Both approaches create issues when the “person who administers plan benefits” is two or more persons; for example, a plan may have separate administrators for medical and pharmacy benefits.

In any event, the tax paid by a party other than the employer (“Third Party”) is likely to be passed back to the employer.  However, the payment is not deductible to the Third Party with the result that any recovery of the tax from an employer will produce additional taxable income to the Third Party.  The Notice discusses the methodology that might be used to “gross up” the amount of reimbursement to the Third Party to account for the additional tax liability.

The Notice also discusses allocating FSA and HSA contributions on a monthly pro rata basis for purposes of determining the cost of coverage; the effect of employer flex credits and the handling of FSA roll-overs.

Employers will be required to determine the cost of applicable coverage provided during a taxable year sufficiently soon after the end of that taxable year to enable Third Party’s to pay any applicable tax in a reasonably timely manner.  The Notice discusses various timing issues that may be faced by self-insured plans, FSA and HSAs.  In addition, experience-rated arrangements may provide for payments to be made to or from an insurance company after the end of a coverage period.  The IRS is seeking input on how to address these issues.

The maximum cost of coverage can be adjusted for the age and gender characteristics of an employer’s workforce.   Notice 2015-52 addresses ways the IRS might implement those adjustments.

Interested parties may submit comments no later than October 1, 2015. Comments should include a reference to Notice 2015-52.  Send submissions to: CC:PA:LPD:PR (Notice 2015-52), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.  Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2015-52), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044, or sent electronically, via the following e-mail address: Notice.comments@irscounsel.treas.gov. Please include “Notice 2015-52” in the subject line of any electronic communication.