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IRS shares thoughts on Cadillac tax administration

Posted On: Aug. 5, 2015 12:00 AM CST

The latest IRS guidance on the health care reform law's controversial excise tax on costly health plans lays out the agency's thinking on several issues, leaving, though, final resolution of those and numerous other issues for future IRS rules.

Under the law, a 40% excise tax is to be imposed, starting in 2018, on the portion of health plan premiums that exceed $10,200 for single coverage and $27,500 for family coverage.

Numerous surveys have spotlighted the widespread effect of the excise tax. Last year, a Towers Watson & Co. survey found that nearly 50% of employers are likely to trigger the tax in 2018, and more than 80% are likely to do so in 2023.

In its latest guidance, the IRS sets out potential approaches — for which it is seeking comment by Oct. 1 — in calculating and paying the tax.

"This is the IRS' thoughts and possible approaches on a number of issues. It is not definitive guidance," said Rich Stover, a principal with Buck Consultants at Xerox in Secaucus, New Jersey.

For example, in the case of self-insured employers, the IRS said it is considering two approaches as to who would pay the excise tax.

Under one, the employer would calculate the tax and determine the liability of different plan administrators, such as third-party administrators and pharmacy benefit managers, with the administrators paying their share of the tax and being reimbursed by the employer.

Under the other, the self-insured employer would directly pay the tax.

One disadvantage to the first: Because employer payments would be taxable income to the TPAs, the administrators likely would seek reimbursement from employers for the tax liability.

“It is a tax on a tax,” said Gretchen Young, senior vice president for health policy at the ERISA Industry Committee in Washington, referring to the additional costs employers likely would face.

The IRS also offered guidance on less-complicated issues involving the tax. For example, the agency said it is considering that payment of the excise tax be made with IRS Form 720, which employers use to pay a health care reform law mandated health research fee.

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

The future of the tax, though, is far from certain. A bipartisan group of lawmakers has backed legislation to repeal the tax.

In addition, a broad-based group of employers, insurers and unions have formed an alliance to win congressional repeal of the excise tax.

While the future of those efforts is far from certain, “repeal of the tax is the only practical answer. It is so complicated that it makes” other parts of the law, by comparison, “look like child's play,” said Andy Anderson a, partner with Morgan, Lewis & Bockius L.L.P. in Chicago.