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IRS draws road map for Cadillac tax

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While the IRS has laid out its latest thinking on the health care reform law's controversial excise tax on costly health plans and who has to pay that tax, formal regulations are unlikely until well into next year.

Under the Patient Protection and Affordable Care Act, a 40% excise tax is to be imposed annually, starting in 2018, on that part of group health insurance premiums that exceed $10,200 for single coverage and $27,500 for family coverage.

Under what is likely its final notice on the subject until it proposes regulations, the IRS in late July provided insight into its potential approaches to the excise tax, also known as the Cadillac tax, which a 2014 Towers Watson & Co. study found is likely to hit nearly 50% of employers in 2018 and more than 80% by 2023.

Benefit experts emphasize that the IRS notice, on which employers can comment through Oct. 1, is not a road map on what the agency will mandate in those regulations.

“The IRS is saying, "Here are some of the potential approaches.' That is a good thing, but it is not something that can be relied on,” said Anu Gogna, a senior regulatory adviser at Towers Watson in Parsippany, New Jersey.

“It lays out their thinking on nuts-and-bolts issues,” said Steve Wojcik, vice president of public policy at the National Business Group on Health in Washington.

Aside from the potential cost, the biggest administrative-related issue is who will pay the tax.

The ACA is clear that insurers will be liable for the tax for fully insured health plans. In turn, insurers are expected to seek reimbursement from employers and other plan sponsors.

But for self-funded health plans, the law says the tax will be paid by the “person that administers the plan benefits,” a term that the law does not define, the IRS said in its July guidance.

So the federal agency has laid out two approaches to the issue.

In one approach, the third-party administrator would be responsible for paying the tax, with employers reimbursing the TPA.

A potential problem, though, is where an employer uses multiple plan administrators, which the IRS said is a common practice.

The IRS said it wants comments “on whether the person that administers the plan benefits would often be unclear because, for example, multiple parties, such as a pharmacy benefit administrator and a medical claims benefit administrator perform the relevant functions with respect to a benefit package for which a single cost of applicable coverage” would have to be provided to the government.

In addition, there are real-world problems with the approach. Since employer reimbursements to their TPAs would be added to the taxable income of the TPAs, the TPAs almost certainly would seek more money from employers to offset that new tax liability.

“It is a tax on a tax,” said Gretchen Young, senior vice president of health policy at the ERISA Industry Committee in Washington.

Under a second potential approach, the corporate executive with “ultimate authority” involving claims administration and arrangements with service providers would be responsible to pay the tax. The IRS, though, clearly has concerns about that approach.

In its request for comments, the IRS is seeking input on whether the corporate executive administering health care plans “would be easy to identity” or “whether multiple parties have ultimate authority or responsibility” for health plans.

Other issues addressed in the IRS notice are less complicated, however.

For example, the IRS said it is considering that payment of the excise tax be made using IRS Form 720, which employers already use to pay a health research fee mandated by the law.

In addition, the IRS said it is developing tables for employers to adjust the excise health care plan cost triggers based on the age and gender of employers' workforces.

Far from certain, though, is the future of the excise tax. While congressional moves to amend or repeal the health care reform law have been largely Republican-driven, there is bipartisan support to repeal the excise tax.

For example, U.S. Rep. Joe Courtney, D-Conn., introduced a repeal bill that is backed by 135 House Republicans and Democrats.

“There is a strong chance of passage. There is growing repeal momentum as more members of Congress come to realize the widespread negative impact of the excise tax,” said the NBGH's Mr. Wojcik.

“Repeal of the tax is the only practical answer. It is so complicated that it makes other provisions,” such as the employer mandate to offer coverage, “look like child's play,” said Andy Anderson, a partner at Morgan Lewis & Bockius L.L.P. in Chicago.

But even if Congress votes to repeal the excise tax, President Barack Obama almost certainly would veto the measure.

“Overcoming a presidential veto would be a challenge, but not impossible,” Ms. Young said.

In pressing lawmakers not to override the veto, observers say the administration would argue that wiping out the excise tax would take away a revenue source used to help fund federal premium subsidies to the lower-income uninsured who are obtaining coverage through public health insurance exchanges.