“Excess benefits” are defined as the combined value of all employer-sponsored coverage(s) for the employee that exceeds the thresholds of $10,200 for self-only coverage or $27,500 for family coverage. These thresholds may be adjusted for age and gender demographics, certain classes such as employees in high-risk professions or retirees age 55 and older who are not eligible for Medicare, and by indexing for inflation starting in 2020.
To illustrate what this extra tax could mean, assume that a self-only plan’s annual participant expense is $16,000 for the year. The excess benefit over the $10,200 threshold, or $5,800, would be subject to the tax at a 40 percent rate, costing an additional $2,320 for that one employee alone ($5,800 multiplied by 40 percent). Add the taxes calculated on the excess benefits for all employees in a group health plan and the costs can be extremely high. In fact, according to Congressional Budget Office estimates, this excise tax could result in additional fees in excess of $79 billion between 2018 and 2023.
On July 31, 2015 the Internal Revenue Service (IRS) issued Notice 2015-52, addressing rules governing the calculation and payment of the excise tax for plan sponsors and insurers. Interested parties may review and provide comments back to the IRS by October 1st before the rules are finalized.
Plans Covered by the Tax
Based on the general provisions of the legislative text and the IRS notices, the following types of health coverage likely will be included:
- All employer-sponsored group health coverage (other than stand-alone dental/vision plans or certain other excepted benefits);
- Employer and employee contributions to health flexible spending accounts (FSAs);
- Employer contributions to health reimbursement arrangements (HRAs);
- Employee contributions to health savings accounts (HSAs) if made through a § 125 cafeteria plan; and
- Employer HSA contributions.
The “value” of coverage generally will be based on the applicable COBRA rate (without administration fee). For FSAs and HRAs, the “value” will be the amount of contributions. We expect, however, that future regulations will provide various exceptions and adjustment formulas to determine the coverage value.
According to the IRS, the “coverage provider” pays the bill. For those employers with fully-insured plans, this will be the health insurer. While it is not definite guidance, the IRS stated it is considering two approaches as to who would pay the excise tax in the case of self-insured (funded) plans:
- Scenario #1: The self-insured employer would calculate the tax and determine the liability of the third-party administrators (TPAs) as “the person(s) that administer the plan benefits.” The administrators would pay their share of the tax and the employer would reimburse the administrators. This scenario has the effect of creating a “tax on a tax” because those employer payments would be taxable income to the TPAs and then they would most likely seek reimbursement from the employer for that additional tax liability.
- Scenario #2: The self-insured employer would pay the tax directly as the person (or entity) “that has the ultimate decision-making authority over the plan administration.”
Notice 2015-52’s section V, starting on page 5, includes the definitions for the cost of the applicable coverage, with subsection D (starting on page 8) providing the income tax reimbursement formula for the potential tax gross-ups. Comments are requested on these two approaches, as well as allocations of annual contributions to account-based plans, such as HSAs, HRAs, and health FSAs; the calendar year determination period; and administrative notices, reports, and payments of the tax methods.
What Employers Should Do Now
While the lawmakers, politicians, unions, and other interested employer groups work to repeal or amend this complex and extremely unpopular tax, we recommend that employers:
- Review the law and become familiar with the key components.
- Begin preliminary planning by reviewing your current benefit plan strategy and benefit plan costs and projecting those costs for 2018.
- Work with your benefits brokers to amend your benefits strategies as needed, consider other health offerings, and determine resources required for administering the law in 2018.