Kansas Employment Law Blog Photo
IRS Provides Preliminary Cadillac Tax Guidance

The IRS recently issued Notice 2015-16, which represents the first step in yet another significant ACA guidance project that will unfold over the next two years. This project will flesh out the scope and mechanics of so-called “Cadillac” tax enacted as part of the ACA. Here is an overview of the initial guidance.


Beginning in 2018, a 40% excise tax will be imposed on the value of “applicable employer-sponsored coverage” provided to an employee each year, to the extent that value exceeds a threshold amount. The statutory thresholds are $10,200 for self-only coverage and $27,500 for other-than-self-only coverage. There are some potential upward adjustments to the threshold amounts, including for cost of living, although the thresholds are not anticipated to adjust as quickly as the growth in healthcare costs.

Items Included in Applicable Coverage

Notice 2015-16 begins to clarify the coverage that will (and will not) be included in “applicable employer-sponsored coverage” for purposes of the Cadillac tax, in addition to major medical coverage.

  • Executive Physicals and HRAs. Executive physical programs and HRAs will be included.
  • HSAs. Employer contributions to HSAs and employee salary-reduction contributions to HSAs will be included. Employee after-tax contributions (i.e., employee contributions made outside a cafeteria plan) will not be included.
  • On-Site Clinics. Coverage through on-site clinics generally will be included, but the IRS is considering an exception for on-site clinics that offer only “de minimis” medical care to employees. De minimis on-site medical care generally would be limited to first-aid, but may also include (1) immunizations; (2) allergy shots; (3) nonprescription pain relievers; and (4) treatment of occupational injuries (beyond first aid).
  • Limited-Scope Dental and Vision. Under the statute, only stand-alone fully insured dental and vision coverage is excluded. However, the IRS appears to be leaning toward excluding any dental or vision coverage that qualifies as an excepted benefit.
  • EAP. Like limited-scope dental and vision coverage, the IRS appears to be leaning toward excluding any EAP coverage that qualifies as an excepted benefit.

Calculation of Applicable COBRA Premium

A large portion of Notice 2015-16 is devoted to a discussion of possible approaches for refining the existing guidance on calculating the “applicable premium” for COBRA purposes. Why are we talking about COBRA? The COBRA premium is generally the value to be used when determining the cost of applicable employer-sponsored coverage for purposes of the Cadillac tax.

General. The primary issues the IRS is considering are (1) how to determine which employees are “similarly situated” for purposes of determining the applicable premium; (2) the methods self-insured plans may use to determine the applicable premium; and (3) how to determine the applicable premium for HRAs.

Similarly Situated Employees. COBRA coverage is coverage that is the same as coverage being provided to similarly situated employees. So to understand which plan to value for COBRA (and Cadillac) purposes, it must be understood who is “similarly situated.”

The IRS is considering an approach under which “similarly situated employees” would be determined based on the specific benefit package in which employees are enrolled (e.g., low-deductible, high-deductible, HMO, etc.). Within each benefit package, employees would be further divided into groups based on whether they have self-only coverage or other-than-self-only coverage. The cost of coverage would then be determined based on these subgroups.

For employers that provide multiple tiers of other-than-self-only coverage (e.g., employee-plus-spouse, employee-plus-children, and family), the IRS may not require separately determining the cost of coverage for each tier of coverage, although it may permit doing so. While this may be beneficial for Cadillac tax purposes (fewer calculations will be required), it may not be beneficial for COBRA purposes. It’s not yet clear whether (or to what extent) employers will be required to be consistent for COBRA and Cadillac tax purposes.

Methods for Determining the Applicable Premium. Existing COBRA rules provide two methods for determining the “applicable premium” in a self-insured plan: (1) the past-cost method (looking at costs over a prior determination period and adjusting for cost-of-living), and (2) the actuarial method (obtaining a reasonable estimate of the cost of providing coverage, determined on an actuarial basis). Notice 2015-16 includes considerable discussion about how the guidance on these methods might be refined.

Although it would not be profitable to describe that discourse in detail here, a couple of big-picture concepts are worth noting:

  • Changing Calculation Methods. Future guidance may limit employer flexibility in changing calculation methods by requiring a plan to use a calculation method for at least five years, with only limited exceptions.
  • Time for Electing the Calculation Method. Future guidance may require affirmatively electing the calculation method to be used before the beginning of the period for which the cost is determined.

Cost of Coverage Under an HRA. It has frankly never been clear exactly how to determine the “applicable premium” for COBRA purposes under an HRA. Notice 2015-16 indicates the IRS is considering at least three possible approaches: (1) determining the cost based solely on the amounts made newly available to a participant under the HRA each year; (2) determining the cost of coverage by adding together all claims and administrative expenses (including reasonable overhead) attributable to a level of coverage under the HRA for the year and dividing that sum by the number of employees covered for that year at that level of coverage; and (3) using the actuarial method.

Applicable Dollar Limit (Threshold Amounts)

The IRS has requested comment on several aspects related to the determination of the threshold amounts. Key issues include how the certain potential adjustments to the thresholds will work, such as: (1) an adjustment for qualified retirees; (2) an adjustment for age and gender differences; and (3) an adjustment for employees engaged in high-risk professions. Notice 2015-16 doesn’t shed much light on how future guidance will address these adjustments, only that they will be addressed.

A particularly sticky issue related to the dollar limit is how to handle a situation in which an employee simultaneously has one type of coverage that is self-only coverage and another type of coverage that is other-than-self-only coverage. It is not clear in that situation which dollar limit applies. The IRS is considering an approach under which the dollar limit for an employee would depend on whether the employee’s primary coverage (major medical coverage) is self-only coverage or other-than-self-only coverage.

No Big Surprises

On the whole, Notice 2015-16 does not reflect any big surprises in the anticipated approach to the Cadillac tax. It is encouraging to see some sensible positions being outlined, such as the approach to excepted benefits and de minimis on-site clinics.

But it is also clear that the Cadillac tax will force a focus on some tricky issues that have been skirted for many years, such as the determination of COBRA cost for HRAs and other self-insured health plans. And the Cadillac tax is likely to add yet another layer of administrative complexity for employers.

Open Questions

Notice 2015-16 does not address some of the key open questions with respect to the tax, particularly as to liability for payment of the tax allocable to self-insured coverage. The statute says that responsibility for payment of the tax with respect to a self-insured plan falls on the “person that administers the plan benefits.” But it remains unclear whether this means the plan sponsor, the ERISA plan administrator, the third-party administrator, or someone else.

It also remains unclear how the Cadillac tax will apply within a controlled or affiliated group. The statute says that all employers in a controlled or affiliated group are treated as a single employer. But it’s not clear whether that means the tax will be calculated and paid on an aggregated basis (and, if so, which employer in the group will be ultimately responsible) or whether each employer within an aggregated group must take into account all coverage provided within the aggregated group but separately calculate (and perhaps pay) its own share of any tax liability.

Just the First Step

Notice 2015-16 is just the first step in the process of fleshing out guidance related to the Cadillac tax. The IRS anticipates issuing another notice in the near future discussing procedural issues related to calculation and assessment of the tax. After taking into consideration comments received on these two notices, the IRS will then publish a set of proposed regulations and provide further opportunity for comment.

Presumably all of that will be done with a view to completing final guidance by sometime in early 2017, so employers have time to prepare for 2018. Which means this guidance project will need to go from infancy to (relative) maturity in just about two years. So even though 2018 sounds like it’s a long way off, there is lots of ground to be covered between now and then.

A copy of Notice 2015-16 is here


Don Berner Image
Don Berner, the Labor Law, OSHA, & Immigration Law Guy
Boyd Byers Image
Boyd Byers, the General Employment Law Guy
Jason Lacey Image
Jason Lacey, the Employee Benefits Guy
Additional Sources
Subscribe to Kansas Employment Law Letter Image
Subscribe to Kansas Legislative Insights Image