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'Steering' the Cadillac Tax: An Opportunity for Employers and Other Stakeholders
Caplin & Drysdale

'Steering' the Cadillac Tax: An Opportunity for Employers and Other Stakeholders

Date: 3/4/2015

The excise tax on high-cost, employer-sponsored health coverage (commonly referred to as the "Cadillac Tax") first received considerable attention when the Patient Protection and Affordable Care Act was enacted in 2010.  The Cadillac Tax is effective for taxable years beginning after December 31, 2017.  With the issuance of IRS Notice 2015-16, employers and other stakeholders have an early opportunity to formally participate in the rule-making process.  As we discuss in this client alert, this opportunity also involves the development of further rules concerning COBRA continuation coverage.
 
I. The Cadillac Tax

In general, the Cadillac Tax is a 40% non-deductible tax on any non-excluded, excess health benefit provided to an employee or former employee.  An excess health benefit consists of the excess, if any, of the aggregate cost of applicable healthcare coverage for an employee for a given month over the applicable dollar limit for the employee for such month.

The entity liable for the Cadillac Tax is (1) the health insurance issuer in the case of applicable coverage provided under a group health plan; (2) the employer, if applicable coverage consists of coverage under which the employer makes contributions to an HSA or Archer MSA; and (3) the person that administers the plan in the case of any other applicable employer-sponsored coverage.

Regardless of which entity is liable for the Cadillac Tax, the employer must calculate the tax and notify the entity of the amount of its liability.  Employers therefore have a direct administrative stake in the Cadillac Tax as well as a direct or indirect economic stake depending on the nature of the applicable coverage. 

II. The Cadillac Tax and COBRA Continuation Coverage

While the Cadillac Tax represents a new provision of the Internal Revenue Code (Code section 4980I), it relies on existing Code provisions for some key concepts.  In particular, the statute provides that the cost of the applicable coverage is determined under rules similar to the rules governing the COBRA applicable premium (Code section 4980B).  However, comprehensive guidance has yet to be issued on some issues relevant to the COBRA applicable premium, including:

  • How to determine which non-COBRA beneficiaries are similarly situated;
  • Specific methods for self-insured plans to determine the COBRA applicable premium; and
  • How to determine the COBRA applicable premium for HRAs. 

In recognition of the need for additional guidance, Notice 2015-16 invites comments both on the Cadillac Tax and on such aspects of COBRA.  While some differences between the two sets of rules may be appropriate or necessary, IRS Notice 2015-16 indicates that future guidance will likely attempt to harmonize the COBRA rules with the rules applicable to the Cadillac Tax to the extent practicable. 

III. What Stakeholders Can Do Now

As noted above, the Cadillac Tax is effective for taxable years beginning after December 31, 2017.  Therefore, IRS Notice 2015-16 represents a valuable opportunity for stakeholders to comment on their concerns and preferred approaches well in advance of its implementation.  Stakeholders interested in submitting comments to the IRS may find benefits counsel useful in the identification and presentation of their concerns.

This client alert has discussed the Cadillac Tax and the COBRA applicable premium in the context of the request for comments recently issued by the IRS in Notice 2015-16.  For more information about Notice 2015-16, PPACA or COBRA in general, or other issues concerning your employee benefit plans, Joanne C. Youn at jyoun@capdale.com or at 202.862.7855.

 

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About Caplin & Drysdale
Having celebrated our 50th Anniversary in 2014, Caplin & Drysdale continues to be a leading provider of tax, tax controversy, and litigation legal services to corporations, individuals, and nonprofits throughout the United States and around the world. We are also privileged to serve as legal advisors to accounting firms, financial institutions, law firms, and other professional services organizations.

The firm's reputation over the years has earned us the trust and respect of clients, industry peers, and government agencies. Moreover, clients rely on our broad knowledge of the law and our keen insights into their business concerns and personal interests. Our lawyers' strong tactical and problem-solving skills - combined with substantial experience handling a variety of complex, high stakes, matters in a boutique environment - make us one the nation's most distinctive law firms.

With offices in New York City and Washington, D.C., Caplin & Drysdale's core practice areas include:

-Bankruptcy
-Complex Litigation
-Corporate Law
-Corporate, Business & Transactional Tax
-Employee Benefits
-Exempt Organizations

-International Tax
-Political Law
-Private Client
-Tax Controversies
-Tax Litigation
-White Collar Defense

For more information, please visit us at www.caplindrysdale.com.

Washington, DC Office: 
One Thomas Circle, NW
Suite 1100
Washington, DC 20005
202.862.5000

       

New York, NY Office:
600 Lexington Avenue
21
st Floor 
New York, NY 10022
212.379.6000

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Disclaimer
This communication does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome.

Attorney Advertising
It is possible that under the laws, rules, or regulations of certain jurisdictions, this may be construed as an advertisement or solicitation.

© 2015 Caplin & Drysdale, Chartered
All Rights Reserved.



 

________________________________________________

About Caplin & Drysdale
Having celebrated our 50th Anniversary in 2014, Caplin & Drysdale continues to be a leading provider of legal services to corporations, individuals, and nonprofits throughout the United States and around the world. We are also privileged to serve as legal advisors to accounting firms, financial institutions, law firms, and other professional services organizations.

The firm's reputation over the years has earned us the trust and respect of clients, industry peers, and government agencies. Moreover, clients rely on our broad knowledge of the law and our keen insights into their business concerns and personal interests. Our lawyers' strong tactical and problem-solving skills -- combined with substantial experience handling a variety of complex, high stakes, matters in a boutique environment -- make us one the nation's most distinctive law firms.

With offices in New York City and Washington, D.C., Caplin & Drysdale's core practice areas include:
For more information, please visit us at www.caplindrysdale.com.
Washington, DC Office:
One Thomas Circle NW
Suite 1100
Washington, DC 20005
202.862.5000
New York, NY Office:
600 Lexington Avenue
21st Floor
New York, NY 10022
212.379.6000

___________________________

Disclaimer
This communication does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome.

Attorney Advertising
It is possible that under the laws, rules, or regulations of certain jurisdictions, this may be construed as an advertisement or solicitation.
© 2020 Caplin & Drysdale, Chartered
All Rights Reserved.

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