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Colleges and universities historically have provided graduate student employees (e.g., teaching assistants) with a stipend or reimbursement to help defray (or even fully cover) the cost of their medical coverage under the student health plan. Competing guidance under the Affordable Care Act (“ACA”) from the Departments of Health and Human Services (“HHS”), Labor (“DOL”), and the Treasury (collectively, the “Departments”) will soon make such arrangements quite problematic.

Four years ago, HHS released regulations clarifying that student health insurance is a form of individual market coverage (rather than a group health plan). This was meant in part to ensure that students enrolled in these plans benefit from consumer protections applicable to individual market coverage under the ACA. About a year later, the Departments issued guidance that effectively prohibits employers from using a health reimbursement arrangement (an “HRA”) to reimburse employees for individual market coverage. The goal there was to prevent employers from incentivizing employees to opt for public exchange coverage over an employer group health plan. The result? Any school that provides a stipend to student employees enrolled in a student plan is considered to be using an HRA to reimburse individual market coverage, and could be subject to penalties.

Such penalties are severe. This type of HRA would be considered its own group health plan, and thus would be subject to the ACA’s market reforms, which include, among other things, prohibitions on annual and lifetime limits and on cost-sharing for preventive services (each of which this type of HRA would inherently fail to satisfy). Such a failure can result in a penalty of up to $100 per day per employee under Internal Revenue Code §4980D.

While none of the above-described guidance was likely intended to keep schools from being able to offer these healthcare stipends to their graduate student employees (a point which an IRS representative informally confirmed to Jackson Lewis shortly after this clash in the guidance came to the attention of practitioners), the Departments appear to have doubled down on their position with the release of Notice 2016-17 and corresponding guidance from the DOL and HHS. This most recent guidance states that schools must re-structure their graduate student benefits and provides a period of transition relief by indicating that no penalties will apply for plan years beginning prior to January 1, 2017.

On whether there has been any talk of extending or making permanent the transition relief, given the unintended consequences of the prior guidance to graduate student subsidies, an IRS representative indicated to Jackson Lewis that the IRS was not aware of any such talks, but pointed out that the problem is a “three agency question” and that another Department could propose a permanent fix.

In the meantime, schools continue wrestle with the issue. Solutions under consideration include allowing graduate student employees to participate in the school’s employee group health plan (under the ACA, an employer may provide a stipend/reimbursement through an HRA that is integrated with the employee group health plan) or offering a cash bonus that, at the student’s discretion, can be put toward the cost of healthcare.

The Supreme Court in a unanimous opinion remanded Zubik v. Burwell — and the six cases consolidated with Zubik — back to the Courts of Appeals to rule on the contraceptive opt-out notice provisions.  The Court directed the lower courts to consider the new information presented in the parties’ post-oral argument briefs ordered by the Court on March 29.  The petitioners in each of these cases are religiously-affiliated nonprofit organizations which are challenging the requirement that notice be given to the government of religious objections to providing no-cost contraceptive coverage under employee health insurance plans, as required by the Affordable Care Act (“ACA”) and its regulations.

In the ruling, the Court stated that the parties had agreed in their briefs to a regulatory compromise solution originally suggested by the Court in its March 29 order. The high court’s workaround would permit an objecting religious nonprofit employer to contract with their insurance provider for a health insurance plan that excludes contraceptives.  The insurer, in turn, would provide the contraceptive coverage directly to the nonprofit organization’s employees, with no further action or notice required from the organization.

The Court further provided that until the lower courts rule on the cases, the government could consider the petitioners as having provided adequate notice of their religious objection, and could proceed to provide contraceptive coverage at no cost to the nonprofit’s employees through their insurance provider in accordance with the ACA and its regulations. The Court’s ruling also stayed the imposition of any fines the petitioners might face for failing to comply with the notice requirements.

Additionally, pending the lower court rulings, the government can continue to act on notices of religious objection provided by other religious nonprofits, by providing no-cost contraceptive coverage through the nonprofits’ insurance providers in accordance with the ACA regulations.

For religious nonprofits who object to providing contraceptive coverage to their employees, but who are not among the petitioners or among the petitioners in 13 similar cases that the high court has not yet agreed to hear, the likely best approach at this point would be to provide appropriate notice of religious objection to the government in accordance with current ACA regulations. The risk, however, of incurring penalties as a result of noncompliance may not be great, given that the high court appears to be championing a compromise solution.

On May 12, 2016, the United States District Court for the District of Columbia issued an opinion in U.S. House of Representatives v. Burwell et al., No. 14-1967 (D.D.C. May 12, 2016), enjoining the federal government’s use of unappropriated monies to fund reimbursements to health insurers under Section 1402 of the Patient Protection and Affordable Care Act (the “ACA”).  Section 1402 of the ACA provides cost-sharing reductions (e.g., reductions in deductibles, coinsurance and copayments) to certain people who obtain health insurance through the government exchanges.  Section 1402 also provides that the insurer is supposed to be reimbursed by the government for the cost-sharing reductions it gave to those people.

The opinion did not invalidate Section 1402 or rule that insurers cannot be reimbursed at all. However, the Court ruled that Congress had not appropriated federal money for those reimbursements, and it would be unconstitutional for those reimbursements to continue without a Congressional appropriation.  The injunction has been stayed pending appeal, so it remains to be seen what affect this case will have in the end.  If it’s upheld, it could have major ramifications for insurance companies and individuals who rely on cost-sharing reductions.  Insurers may exit the exchange market, refuse to provide cost-sharing reductions, or sue the government to get reimbursed for the cost-sharing reductions.

The decision, however, has little effect on employers that sponsor group health coverage. As you may be aware, the ACA provides that employers with 50 or more full time employees must pay penalties if they (i) fail to provide employees with minimum essential coverage or (ii)  provide coverage that is unaffordable or does not meet a minimum actuarial value.  Those penalties only kick in, however, if a full-time employee goes to the exchange and gets coverage along with a premium tax credit and/or cost-sharing reduction.

This case does not affect an individual’s ability to go to the exchange and get a tax credit or cost-sharing reduction. It only affects an insurer’s ability to get reimbursed for providing a cost-sharing reduction.  So, if one your employees goes to the exchange and gets a tax credit or cost-sharing reduction, your company will still be on the hook for penalties.

For assistance on the ACA and what it means to your company, please contact your Jackson Lewis preferred attorney or one of the members of our Health Care Reform Team.

Less than one week after hearing oral arguments on seven consolidated cases in which non-profit organizations challenged the opt-out process for religious organizations opposing the Affordable Care Act’s contraceptive coverage mandate, the United States Supreme Court took the unusual action of ordering the lawyers on both sides to brief additional issues. The Court’s Order asked the attorneys to address whether contraceptives could be provided to employees of objecting religious nonprofits without requiring them to comply with the current ACA opt-out process. See Order, March 29, 2016. The opt-out process — outlined in final regulations — requires religious nonprofits (and for-profit companies with religious objections) to submit a form with their insurer or the government stating their objection to providing contraceptive coverage. See Treasury, Labor and Health and Human Services, Final Regulation, July 14, 2015.

The Order proposes an example of a compromise solution which would allow the nonprofit to inform their insurance company of their objection to providing contraception coverage as part of the process of contracting for the organization’s health insurance. Under this scenario, not only would the nonprofit have no obligation to provide or pay for contraceptive coverage (as is already permitted under the ACA), but they would not be required to provide any form of opt-out notice to the government or their employees. The Court further suggests that the insurance company then would be responsible for notifying the employees of the nonprofit that cost-free contraceptive coverage would be provided by the insurer and would be completely separate from the objecting nonprofit organization’s health plan.

If the Court is deadlocked in a 4 to 4 vote on the nonprofit contraceptive cases, the lower court rulings would stand and religious nonprofits would be required to comply with the opt-out notice requirements. The issuance of this highly unusual Order suggests that in the face of a potential tie vote on these cases, the Court is seeking an extra-judicial compromise that would permit religious nonprofits to avoid any type of notice requirement.

The Court established tight filing deadlines – with the first briefs due on April 12, and reply briefs due on April 20. No additional hearings on the cases have been scheduled.

Last month the IRS issued Notice 2015-87, providing further guidance for applicable large employers on the employer shared responsibility provisions of Code § 4980H. For federal contractors required to provide a certain amount of health and welfare fringe benefits to employees, the Notice brought some welcome relief, at least for the time being.

Employers with benefit obligations governed by the McNamara-O’Hara Service Contract Act (“SCA”) or the Davis-Bacon Act and related acts (“DBRA”) typically meet those obligations by providing employees working under government contracts with benefits, cash in lieu of benefits, or a combination of both. Federal contractors with fifty or more employees (full-time or full-time equivalents) in a calendar year are considered applicable large employers who are thus subject to the ACA’s employer shared responsibility provisions and employer informational reporting requirements concerning offers of minimum essential coverage.

Notice 2015-87 addresses how fringe benefits mandated under the SCA or DBRA may be treated for purposes of determining whether an applicable large employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan. The Notice provides that for plan years beginning before January 1, 2017, such fringe benefits — including flex credits, flex contributions, or cash payments made in lieu of benefits — will be treated as reducing the employee’s required contribution for participation in the plan for purposes of the Code § 4980H(b) penalty to the extent the payment amount does not exceed the fringe benefit amount required under the applicable federal contract. Furthermore, these same amounts may be treated by the employer as reducing the employee’s required contribution for purposes of employer reporting obligations under Code § 6056 (Form 1095-C), to the same extent that the payment amount does not exceed the fringe benefit amount required under the applicable federal contract. However, individual taxpayers are not required to consider these amounts in reducing the employee’s required contribution for purposes of Code §§ 36B — concerning premium tax credit eligibility — and 5000A — concerning the individual mandate affordability exemption.

To illustrate, the Notice provided the following example:

Facts: Employer offers employees subject to the SCA or DBRA coverage under a group health plan through a § 125 cafeteria plan, which the employees may choose to accept or reject. Under the terms of the offer, an employee may elect to receive self-only coverage under the plan at no cost, or may alternatively decline coverage under the health plan and receive a taxable payment of $700 per month. For the employee, $700 per month does not exceed the amount required to satisfy the fringe benefit requirements under the SCA or DBRA.   Conclusion: Until the applicability date of any further guidance (and in any event for plan years beginning before January 1, 2017), for purposes of §§ 4980H(b) and 6056, the required employee contribution for the group health plan for an employee who is subject to the SCA or DBRA is $0. However, for purposes of §§ 36B and 5000A, that employee’s required contribution for the group health plan is $700 per month.

Employers subject to the SCA or DBRA must keep in mind that while monetary contributions to fringe benefits are taken into account for purposes of the “affordability” requirement under the ACA, applicable large employers must continue to meet the ACA’s mandate to offer minimum essential coverage that is affordable and provides minimum value to full-time employees in order to avoid ACA penalties.

For more information on the impact of this guidance outside the context of government contracts, see the recent Benefits Law Advisor article by Kathleen Barrow and Stephanie Zorn, here.

In Notice 2016-4, the IRS has extended the due dates for certain 2015 Affordable Care Act information reporting requirements.

Specifically, the Notice extends:

  • the due date for furnishing to individuals the 2015 Form 1095-B and Form 1095-C from February 1, 2016, to March 31, 2016, and
  • the due date for filing with the IRS the 2015 Form 1094-B, Form 1094-C and Form 1095-C from February 29, 2016, to May 31, 2016, if not filing electronically, and from March 31, 2016, to June 30, 2016 if filing electronically.

For detailed information about these Forms, please see our earlier article.

In the Notice, the IRS also grants special relief to certain employees and related individuals who receive their Form 1095-C or Form 1095-B, as applicable, after they have filed their returns:

  • For 2015 only, individuals who rely upon other information received from employers about their offers of coverage for purposes of determining eligibility for the premium tax credit when filing their income tax returns will NOT be required to amend their returns once they receive their Forms 1095-C or any corrected Forms 1095-C.
  • For 2015 only, individuals who rely upon other information received from their coverage providers about their coverage for purposes of filing their returns will NOT be required to amend their returns once they receive the Form 1095-B or Form 1095-C or any corrections.

Thus, generally, employers should not be concerned that furnishing these Forms on a delayed basis in accordance with the Notice will force employees to file amended 2015 income tax returns.

Finally, the extensions do not require the submission of any request or other documentation to the IRS and have no effect on information reporting provisions for other years.

 

The Employee Benefits Security Administration (EBSA) of the Federal Department of Labor plans to publish on November 18, 2015, new claims procedures for adjudicating disability benefits designed to enhance existing procedures for those benefits under Section 503 of the Employee Retirement Income Security Act (ERISA). EBSA’s goal is to apply to disability benefits many of the new procedural protections and safeguards that have been applied to group health plans under the Affordable Care Act (ACA). Interested parties may submit comments to these proposed regulations no later than 60 days after publication.

What are disability benefits?

In general, if an ERISA-covered plan conditions the availability of a benefit to the claimant upon a showing of disability, that benefit is a disability benefit. This is true whether the plan is a pension plan or a welfare plan. See FAQs About The Benefit Claims Procedure Regulation, A-9.

Why the change?

Fearing an increase in disability claims due to an aging population likely to be more susceptible to disabilities, EBSA anticipates an increase in disability litigation. The agency also expressed concern that disability benefit costs may be motivating insurers and plans to aggressively dispute disability claims. The proposed regulations states:

This aggressive posture coupled with the inherently factual nature of disability claims highlight for the Department the need to review and strengthen the procedural rules governing the adjudication of disability benefit claims.

What would the DOL like to change?

In short, the proposed regulations would incorporate into the rules for processing disability benefits many of the procedural protections for healthcare claim in the Affordable Care Act (ACA), such as:

  • Procedures would need to be designed to ensure independence and impartiality of the persons making the decision. For example, plans would not be permitted to provide bonuses to a claims adjudicator based on the number of denials.
  • Denial notices would be required to provide a full discussion of the basis for denial and the standards behind the decision. For instance, denial notices would have to do a better job explaining why the plan’s decision is contrary to the claimant’s doctor’s view.
  • Claimants would need to be given access to their entire claim file and permitted to present evidence and testimony during the review process.
  • Notice would need to be given to claimants, along with an opportunity to respond to, any new evidence reasonably in advance of an appeal decision. EBSA is considering whether the timing rules will need to be adjusted to allow for dialogue between the plan and the claimant about the new evidence.
  • Final denials at the appeals stage would not be permitted to be based on new or additional rationales unless claimants first are given notice and a fair opportunity to respond.
  • Claimants would be deemed to have exhausted administrative remedies if the plan fails to comply with the claims processing rules, with limited exceptions. These exceptions include circumstances where the violation was: (i) de minimis; (ii) non-prejudicial; (iii) attributable to good cause or matters beyond the plan’s control; (iv) in the context of an ongoing good-faith exchange of information; and (v) not reflective of a pattern or practice of non-compliance.
  • Certain rescissions would be treated as adverse benefit determinations, subject to appeals procedures.
  • Notices would need to be written in a culturally and linguistically appropriate manner. In short, if a claimant’s address is in a county where 10 percent or more of the population residing in that county, as determined based on American Community Survey (ACS) data published by the United States Census Bureau, are literate only in the same non-English language, notices of adverse benefit determinations to the claimant would have to include a prominent one-sentence statement in the relevant non-English language about the availability of language services. Such services would include (i) oral language services in the non-English language, such as through a telephone hotline, (ii) written notices in the non-English language upon request, and (iii) answering questions and providing assistance with filing claims and appeals in any applicable non-English language.

Plan sponsors, plan administrators and carriers will have to watch the development of these rules carefully. Once finalized, changes likely will be needed to ERISA-covered pension and welfare plan documents that provide disability benefits.

Since the enactment of the Affordable Care Act (ACA), larger employers have wondered about an auto-enrollment provision that the ACA added to the Fair Labor Standards Act (FLSA). Under that provision, employers that are subject to the FLSA and which employed more than 200 full-time employees would have been required to automatically enroll new full-time employees in one of the employer’s health benefits plans (subject to any waiting period authorized by law). Certain notices would have been required giving employees an opportunity to opt out of any coverage in which the employee was automatically enrolled.

Employers have been in limbo about auto-enrollment since December 2010, when the Department of Labor advised in a Frequently Asked Question that because the statute requires implementation of the requirement “[i]n accordance with regulations promulgated by the Secretary [of Labor],” and no regulations had been issued, employers were not required to comply with FLSA section 18A until the DOL completed its rulemaking.

Wonder no more. Today, President Barack Obama signed H.R. 1314, the “Bipartisan Budget Act of 2015,” which among other things repealed the auto-enrollment requirement from the FLSA. For many employers, this will be welcomed relief from yet another ACA compliance requirement.

Note, however, employers may decide to use “default” or “negative” elections for enrolling employees into health plan coverage or certain other benefits. Under a default or negative enrollment arrangement, an otherwise eligible employee will be deemed to have elected a certain type and level of coverage, unless the employee timely returns a written waiver of that coverage. The Internal Revenue Service permitted this practice in a 2002 Revenue Ruling, and affirmed the approach in proposed regulations under Section 125, issued in 2007. This practice may even be applied to HSA contributions made under a cafeteria plan.

As many expected would be the case for the ACA’s auto-enrollment requirement, to implement default or negative elections under Section 125, employers would need to provide notice to employees about the coverage and cost, and provide the opportunity to opt-out of the arrangement. In many cases, negative or default elections will involve payroll deductions made without an affirmative election by the employee to reduce his or her wages to pay for that benefit. Some state wage withholding laws, however, have an express requirement that there be an affirmative election by the employee before any deductions may be made. But, the DOL has taken the position that in this context such wage withholding laws are preempted by ERISA. Still, employers may want to avoid the ire of an aggressive state labor official seeking to enforce his or her state’s wage law, even if the battle may be won by the employer in court.  Employers should consider this practice carefully and consult with appropriate counsel.

 

Internal Revenue Code section 6056 requires applicable large employers (“ALEs”) to report certain details about the group health plan coverage they offer to full-time employees annually in a similar manner as wages are reported on Forms W-2. Very recently, the IRS issued the final versions of Forms 1094-C (the ALE’s summary report of health plan coverage to the IRS) and 1095-C (the ALE’s reports to full-time employees and persons enrolled in health plan coverage), along with instructions to these Forms. The IRS also published final Form 1094-B and 1095-B, the Forms for reporting by health insurance carriers and self-funded plans required under Code section 6055. The forms and instructions contain several requirements that ALEs and certain other employers will find surprising and often difficult to administer.

 

As an initial matter, it is extremely important that ALEs both recognize the circumstances under which they are required to comply with the ACA’s reporting requirements and put into place the operational measures to assure their Forms 1094-C and 1095-C are filled out correctly and completely. It is the ALE who is responsible for the Form 1094-C and 1095-C reports, not the health insurance carrier or plan administrator. It is the ALE who will be liable for tax penalties if the Forms are either not submitted to the IRS and employees or are erroneous.

 

All employers who have 50 or more full-time plus full-time equivalent employees must report on Forms 1094-C and 1095-C for 2015, whether or not they have below 100 employees and are entitled to the transition relief that renders them ineligible for ACA penalties until 2016. The information an ALE must put together in order to complete the required forms includes the identities of employees who were offered coverage; the identities of individuals covered by the ALE’s health plan by month; the type of coverage chosen; the price of coverage; and the affordability safe harbor relied upon by the ALE. ALEs who wait until the end of the year to commence gathering and organizing the data needed for reporting will find themselves scrambling to get Forms out to full-time employees and plan participants by the February 1, 2016 deadline.

 

Penalties for failing to submit correct reports to the IRS and to covered individuals are $250 per report, per year, up to a $3 million cap. If the IRS determines an ALE intentionally disregarded ACA reporting requirements, the penalty is $500 per report, per year, with no monetary cap. This means, for example, that an ALE with 200 full-time employees who mistakenly fails to report, or submits erroneous reports, may be penalized $50,000 in 2016. The same ALE who intentionally disregards the reporting requirements will be penalized $100,000. These penalties are in addition to the assessable penalties under Code section 4980H that an ALE may incur if it fails to offer full-time employees minimum essential coverage that is affordable and has minimum value.

 

An ALE may be granted relief from the reporting penalties if it can demonstrate it attempted in good faith to comply with the reporting requirements. There is no “good faith” defense available to an ALE who is found to have acted with intentional disregard of Code section 6056’s reporting obligations.

 

One “surprise” contained in the 2015 ACA reporting instructions impacts non-ALE employers: Non-ALEs must submit Form 1094-B to the IRS and Form 1095-B to covered individuals if they sponsor a group health plan that is self-funded. Essentially, the IRS requires these employers to comply with the same reporting requirements as group health insurance carriers.

 

Another potential 2015 ACA reporting “surprise” concerns supplemental health plans. In mid-September, the IRS published Notice 2015-68, stating that a forthcoming Proposed Regulation will provide that reporting will not be required for minimum essential coverage that supplements and provides benefits to participants with other minimum essential coverage, so long as the primary and supplemental coverage have the same plan sponsor or the coverage supplements government-sponsored coverage, like Medicare. Following the guidance proposed by Notice 2015-68, the final Instructions to Form 1094-B and 1095-B provide the following rules with regard to supplemental minimum essential coverage:

 

  • A health plan provider is only required to report one type of minimum essential coverage with respect to an individual who is covered by more than one type of minimum essential coverage.

 

  • If an individual is covered by two group health plans sponsored by the same employer, a provider of minimum essential coverage will not need to report such coverage with regard to that individual; so long as a report is required to be filed with respect to the individual’s other minimum essential coverage plan.

 

Thus, an ALE who sponsors both a self-funded major medical health plan and an HRA that covers an employee will be required to report on Form 1095-C for the employee on either the major medical plan or the HRA, but not both.

 

Good news may be found, consistent with the draft IRS Instructions: the final Instructions for Forms 1094-C and 1095-C allow ALEs who make payments to a union for minimum essential coverage for full-time employees are, this year, permitted to indicate on Form 2019-C (via a Code series 2 indicator on line 16) that they make such payments and, thereby, avoid providing the more detailed coverage information required by the Form. This likely provides some solace to those ALEs who voiced concerns that they may not possess the information necessary to complete the Forms.

 

Employers who are members of an Aggregated ALE Group (i.e., a controlled or affiliated service group under Code § 414) must each report and file with the IRS one “Authoritative Transmittal” Form 1094-C. On this Form, the employer member will not only report the Forms 1095-C that it has distributed to full-time employees and covered persons, but will also identify the other ALEs that are part of the Aggregated ALE Group.

 

For employees who work for more than one member of an Aggregated ALE Group there are two different reporting requirements for the two types of arrangements that may exist. For full-time employees who work for more than one member of the Aggregated ALE group each month, each employer member must issue a Form 1095-C for the employee for each month of coverage. For full-time employees who work for one employer member for some months of the year and another employer member for the remainder of the year, the employer member need report only for those months the employee work for that member.

 

Finally, perhaps in an effort to simplify reporting (whether or not it accomplishes that goal) the IRS has permitted certain eligible ALEs to rely upon a “Qualifying Offer Method” of ACA-required reporting. This method relieves the ALE from having to complete Part II, line 15 of Form 1095-C for each month for which the employee received a “Qualifying Offer.”

 

To be eligible to use the “Qualifying Offer Method,” the ALE must certify that it made a “Qualifying Offer” to one or more of its full-time employees for each month of the year in which the employee was “full-time” and thus may expose the ALE to a Code section 4980H penalty. A “Qualifying Offer” is defined in the instructions as “an offer of MEC [minimum essential coverage] providing minimum value made to one or more full-time employees for all calendar months during the year in which the employee was a full-time employee for whom a section 4980H assessable payment could apply, at an employee cost for employee-only coverage for each month not exceeding 9.5% of the mainland single federal poverty line, divided by 12, provided that the offer includes an offer of MEC to the employee’s spouse and dependents.” Various additional requirements may also apply under this method, depending upon whether the ALE is relying upon transition relief for 2015.

 

ALEs should make arrangements for completing and submitting their Forms 1094-C and 1095-Cs now, as the deadlines for February 1, 2016 for delivery of the Forms 1095-C to employees and March 31, 2016 for electronic submission of the Form 1094-C and attachments to the IRS. Hopefully, the Form 1095-Bs that employees receive from the insurance carriers will conform to the information provided by their ALEs on the Form 1095-Cs. The IRS has issued no guidance concerning correction if an employee receives conflicting Forms, or which of the Forms it will rely upon (i.e., the Form 1095-B from the carrier, or the employer’s Form 1095-C) in the event of any inconsistency.   We (meaning employee benefit professionals and ALEs) all look forward to an interesting first quarter 2016.

Background 

Effective 2018, Section 4980I of the IRC — the so-called “Cadillac Tax,” which was added to the IRC by the ACA — will impose a 40% nondeductible excise tax on the aggregate cost of applicable employer-sponsored health coverage that exceeds an annually-adjusted statutory dollar limit. For 2018, the dollar limits are $10,200 for self-only coverage and $27,500 for other than self-only coverage, subject to any potential upward adjustment based on age and gender characteristics of an employee population or other applicable adjustment factors. The cost of coverage that exceeds the dollar limit is referred to as the “excess benefit.”

Notice 2015-52

On July 31, 2015, IRS and Treasury issued Notice 2015-52, describing, and inviting comment concerning, potential approaches to Section 4980I issues for anticipated incorporation into proposed regulations. Notice 2015-52 supplements Notice 2015-16, which was issued earlier in 2015 and which described potential implementation approaches to other and related Cadillac Tax issues.

Public comments concerning Notice 2015-52 must be submitted to the IRS by October 1, 2015.

Notice 2015-52 highlights include:

Who pays the tax?

The coverage provider is liable for the tax. Who is the coverage provider? That depends on the type of plan at issue: with an insured plan, it’s the insurer; with an HSA or Archer MSA, it’s the employer; and for all other applicable coverage, it’s “the person who administers the plan benefits” — a term that is not defined in the ACA or elsewhere. IRS and Treasury are considering defining “the person who administers the plan benefits” as the person responsible for the day-to-day administration of the plan (processing claims, etc.) — generally, the third party administrator of a self-insured plan — or, in the alternative, as the person that has ultimate authority or responsibility for administration of plan benefits (eligibility determinations, etc.) — which is determined based on the terms of the plan document and is typically the employer.

At the end of each calendar year, the employer will calculate the tax that applies for each employee. Then, the employer will notify each coverage provider and the IRS concerning the amount of excise tax the coverage provider owes on its share of the excess benefit. Each coverage provider will then pay its portion of the excise tax.

IRS and Treasury are considering the designation of a particular quarter of the calendar year as the time for payment of the excise tax.

Who’s the employer? 

Related employers will be aggregated and treated as a single employer, consistent with IRC Section 414 provisions. This creates special issues regarding how to identifying: the applicable coverage; the employees to be taken into account for age, gender and high-risk profession adjustments to the applicable dollar limits; the employer responsible for calculating and reporting the excess benefit; and the employer liable for any penalty for improper calculation of the tax.

How is the Cost of Applicable Coverage Determined?

The cost of applicable coverage is determined using rules similar to those that apply in calculating COBRA premiums. Many plans, however, may face timing issues when calculating the cost of applicable coverage: self-insured plans may need to wait for the expiration of a run-out period before the actual cost of coverage can be determined and experience-rated insured plans may need to reflect subsequent period premium discounts back to the original coverage period. With regard to account-based plans with employee contributions that can fluctuate from month to month — such as HSAs, MSAs and FSAs — a safe harbor is being considered under which total annual employee contributions would be allocated on a pro-rata basis over the plan year, without regard to when the contributions are actually made. Safe harbor treatment is also being considered for FSAs with carry-forward salary features: employee annual salary reductions would be included in the cost of applicable coverage only in the year the salary reductions occur, without regard to any carry-forward that happens.

To the extent a coverage provider — other than an employer — incurs liability for the excise tax and passes through some or all of that liability to the employer, the reimbursement from the employer is taxable income to the coverage provider. It is anticipated that any reimbursement of the excise tax — and reimbursement of any associated income tax — could be excluded from the cost of applicable coverage only if separately billed.

Employer takeaways: The Cadillac Tax is highly complex and employers will play a key role in compliance. Although repeal is always possible, employers should start preliminary planning for their role in administering the tax.