The IRS recently issued Notice 2015-16, which initiates the process of developing regulations under section 4980I of the Internal Revenue Code. Congress enacted section 4980I as part of the Affordable Care Act. The section applies to taxable years beginning after December 31, 2017 and it imposes a 40% excise tax on any excess benefit provided to an employee. An excess benefit is the excess of the cost of applicable employer sponsored coverage of the employee over the applicable dollar limit. The coverage provider is liable for paying the tax.
The Notice addresses the definition of applicable coverage, the determination of the cost of applicable coverage and the application of the annual dollar limit to the cost of applicable coverage. Regarding applicable coverage, Treasury and the IRS anticipate that future regulations will provide that employer contributions to health savings accounts (HSA) and Archer medical savings accounts (Archer MSA), including salary reduction contributions to HSAs, are included in applicable coverage. However, employee after-tax contributions to HSAs and Archer MSAs will likely be excluded from applicable coverage. The cost of applicable coverage will be determined under rules similar to rules that calculate COBRA applicable premiums. The COBRA applicable premium is “based on the cost of coverage for similarly situated non-COBRA beneficiaries.”
Regarding the annual dollar limit, section 4980I provides two applicable dollar limits: one for employees with self-only coverage and one for employees with other-than-self-only coverage. An employee can simultaneously have coverage that the self-only dollar limit and the other-than-self-only dollar limits apply and the IRS and Treasury are considering two main approaches for determining the applicable dollar limit in these situations. Under the first approach, the applicable dollar limit for an employee will depend on whether the employee’s primary coverage/major medical coverage is self-only or other-than-self-only. Under the second approach, the applicable dollar limit is determined by “prorating the dollar limits for each employee according to the ratio of the cost of the self-only coverage and the cost of the other-than-self-only coverage provided to the employee.”
The Notice is not guidance under section 4980I on which taxpayers may rely. Treasury and the IRS anticipate issuing another Notice under section 4980I prior to publishing proposed regulations.
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