Implementing a new “Cadillac plan” tax on high-cost employerhealth coverage could lead to “mind-bending tax administrationissues,” according to Mark Holloway.

Holloway, a benefits compliance law specialist at LocktonCompanies, makes that prediction in an analysis of a new Internal Revenue Service (IRS) Cadillac planrequest for information, in the IRSNotice 2015-52. In the notice, IRS officials ask forideas about how to implement Internal Revenue Code (IRC)Section 4980I, the section of the tax law that gives the Cadillacplan tax rules.

Because a health insurer administering the tax cannot deduct theexcise tax amount from its own taxable income, the full amount aninsurer will expect to get from an employer for paying the tax maybe about 60% bigger than the tax payment itself, Holloway warns inthe analysis.

“Do you have a headache yet?” Holloway asks. “I bet the IRSdoes, as it tries to solicit comments on the best way to structureand pay the tax.”

Drafters of the Patient Protection and Affordable Care Act of2010 (PPACA) added the excise tax, in an effort to raise revenue,encourage employers to hold down health care costs, and reduce theshare of federal health insurance tax breaks going to high-incomeworkers with rich health benefits.

The provision calls for the IRS to have “covered providers” paya 40% excise tax on the “excess benefits” in high-cost planning forthe taxable years starting after Dec. 31, 2017. In the first year,the tax is set to apply to employer benefits packages with a costover $10,000 for an individual and over $27,500 for afamily.

Holloway notes that the total value of the 2018 health benefitspackage for Alan, a hypothetical employee, could include, forexample, fully insured major medical insurance with a value of$10,000, a $2,000 contribution to a flexible spending arrangement(FSA) and a $700 self-insured health reimbursement arrangement(HRA) benefit.

The health insurer and the benefit plan administrator thathandles the employer's FSA program will have no obvious way to knowwhether Alan has a health benefits package with a cost over $12,000because the insurer is getting only $10,000 in premiums, and theFSA administrator is handling just $2,000 in new contributions,Holloway says.

Alan's employer will have to tell the insurer and the FSAadministrator that Alan is over the Cadillac plan limit, Hollowaysays.

PPACA requires the coverage providers — which in this caseare the health insurer, the FSA and the HRA — to allocate theCadillac plan tax responsibility proportionately.

In this example, Holloway says, the coverage providers might owea total of $1,000 in Cadillac plan excise taxes for Alan's benefitspackage, with $787 being the responsibility of the health insurer,$157 being the responsibility of the FSA, and $55 being theresponsibility of the HRA.

The insurer will want Alan's employer to include a payment forthe excise tax liability with the payment for Alan's coverage, but,for the insurer, the total cost of the excise tax liability couldbe much bigger than the tax payment, Holloway says.

The insurer cannot deduct the excise tax payment from itstaxable income. Because of that, Holloway says, the insurer willhave to multiply the $787 excise tax payment times a value equal to1 plus the insurer's own marginal tax rate to calculate the impactof the excise tax payment.

If the insurer pays a $787 excise tax to the IRS for Alan, andthe insurer has a marginal state and federal income tax rate of 27percent, the insurer will have to get an amount equal to $787 times1.27, or $1,000 from the employer to offset the excise tax impact,Holloway says.

The insurer may also want to bill Alan's employer for the $270in income taxes the insurer will owe on the $1,000 in extraCadillac plan tax reimbursement-related revenue, and the insurermay also want to impose a Cadillac plan tax administrative fee,Holloway says.

That means the insurer could end up billing Alan's employer for$787 for the tax, $213 for the nondeductible tax-payment revenue,$270 for the extra $1,000 in excise-tax-related payment revenue,and excise tax administrative fees, Holloway says.

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