IRS released Notice 2015-16 on February 23, 2015. The notice describes potential approaches the IRS may take in developing regulations to implement the Cadillac Tax, which imposes a 40% excise tax on high cost employer-sponsored health coverage in excess of a statutory dollar limit. The tax applies if the cost of coverage is in excess of $10,200 per employee for self-only coverage and $27,500 per employee for other than self-only coverage. The issues addressed in Notice 2015-16 primarily relate to:
(1) defining the coverage to which the tax applies,
(2) determining the cost of applicable coverage, and
(3) applying the annual statutory dollar limit to the cost of applicable coverage.
Significant for many employers: the cost of applicable coverage will most likely include amounts made available under a Health Reimbursement Arrangement (HRA), as well as both employer and employee salary reduction contributions to Health Flexible Spending Accounts (Health FSAs), Health Savings Accounts (HSAs), and Archer MSAs. In addition, Notice 2015-16 describes various potential approaches where an employee is covered by both individual coverage (for example an employee may have self-only major medical coverage and supplemental coverage (such as an HRA) that covers the employee and the employee’s family. The notice invites comments on various potential approaches to these and other issues raised by the Cadillac Tax.
This article provides a good primer on one of the rationales the Supreme Court (including some of the conservative justices) could uphold the individual mandate and the employer mandate in the states that have not adopted their own Marketplaces. In essence, the argument is that by interpreting the ACA to preclude subsidies in the 36 states with a Federal Marketplace, the Court would be construing the ACA in a way that unconstitutionally infringes on federalism principles (i.e. states’ rights). The Court would then adopt the constitutional interpretation rather than the unconstitutional one. Of course, this argument could also backfire – if the ACA individual mandate/ employer mandate/ Marketplace structure is not ambiguous and it does unconstituitionally infringe on federalism principles then it is unconstitutional in its entirety (even in the states that have adopted their own Marketplaces).
King v. Burwell Isn’t About Obamacare – Abbe R. Gluck – POLITICO Magazine.
Code Section 4980D imposes an excise tax equal to $100 per day per individual (theoretically, $36,500 per year per person) for not complying with the ACA market reforms. For employers with “employer payment plans” that do not satisfy the ACA market reforms, this penalty theoretically could be imposed for every employee who receives reimbursement of insurance premiums. In addition to the transition relief discussed in a prior post the tax can be reduced, or potentially eliminated entirely, if it was due to reasonable cause and not willful neglect.
No Tax If No-One Knew or Should Have Known About the Failure
First, the penalty could be avoided entirely for any period that the employer could show that no-one at the employer knew, or exercising reasonable diligence would have known, that the failure occurred. Code Section 4980D(c)(1). It is not clear what evidence a taxpayer would need to support taking this position. The Excise Tax return used to report the tax (Form 8929) permits tax payers to calculate the tax as $0 by claiming this exemption without submitting anything other than the Form 8928 claiming the exemption. See the form 8928 here and the Form 8928 Instructions here
No Tax If Failure Was Due to Reasonable Cause and Is Corrected Within 30 Days
Second, the penalty could be avoided if the employer could show that (1) the failure was due to reasonable cause and not willful neglect, and (2) the failure is corrected within 30 days after the employer learned of the failure. Code Section 4980D(c)(2). Correction means the failure is retroactively undone to the extent possible and each beneficiary of the plan is put in the same financial position they would have been in if the failure had not occurred.
It is not clear how one would correct a failure to satisfy the market reforms. In the case of employer re-imbursement plans, options to consider include (1) undo the premium reimbursement arrangement by requiring the recipients to return the re-imbursement; (2) make the reimbursements taxable and then provide additional taxable compensation to all employees so that all employees receive the same amount of additional taxable compensation (either as a percentage of their base, or as a dollar amount); or (3) determine whether anyone was subject to an annual limit or preventative care cost sharing provision under the individual policy (i.e. the market reforms applicable to group plans) that they would not have been subject to had those policies complied with the group policy mandates in that regard, and then provide them additional reimbursement to cover the costs of those services. Each of these options has potential problems and none of them is specifically approved. We recommend employers consult their counsel regarding their particular facts and circumstances before fashioning a correction.
The Tax is Limited to 10% of the Premiums paid.
Finally, for a single employer plan the maximum penalty in the case of a failure that was due to reasonable cause and not willful neglect, is 10% of the amount paid for the group health plan by the employer for the year. In the case of a n employer reimbursement plan, this would be 10% of the mount of the premiums paid or reimbursed by the employer. Code Section 4980D(c)(3).
The IRS has released final Forms 1094 and 1095, which will be used to enforce the ACA employer mandate penalties and the individual mandate and tax credit eligibility rules. These forms must first be filed by employers and insurers in early 2016, for the 2015 calendar year. Filing is optional in 2015 for the 2014 calendar year. While we do not recommend voluntary filing, we do recommend employers review the forms and the instructions so they are aware of what filing in 2016 will involve because they need to be gathering the information to report now.
IRS Notice 2015-17 provides transition relief for employers that are not Applicable Large Employers (“ALEs”) (i.e. those with less than 50 FTEs) that pay, or reimburse employees for individual health policy premiums. These “employer payment plans” do not satisfy the ACA market reforms, which exposes the employers to excise taxes under Code § 4980D ($100 per day per affected individual), as of January 1, 2014. Notice 2015-17 provides that the excise tax will not be asserted (1) for 2014 against employers that are not ALEs for 2014 , and (2) for January 1 through June 30, 2015 for employers that are not ALEs for 2015. After June 30, 2015, such employers may be liable for the Code § 4980D excise tax.
Our subsequent post about reporting and paying the excise tax