Should FSAs and HSAs Be Counted under the Cadillac Tax?
Debate continues on whether to maintain the “Cadillac Tax” that is part of Health Care Reform and the Affordable Care Act. In its current form, the tax will impact many employers, starting in 2018. Here are some estimates from the Kaiser Family Foundation:
- 46% of large employers will be impacted
- 26% of plans with FSAs will be liable for some tax
- 16% of all employer plans without FSAs will be impacted
Despite the unpopularity of the Cadillac Tax, for fiscal reasons it’s unlikely to go away. Employers should be preparing now to address the tax. No one wants to surprise their board and management with potentially millions of extra dollars to pay based on the 40% nondeductible tax on “high cost” employer health plans.
However, there’s another aspect that could present a difficult decision in terms of employee relations. In its current form, the tax will also take into account pretax contributions made by employees to medical Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). It is estimated that more than 100 million Americans today benefit from these kinds of consumer-directed accounts.
One strategy employers could take to reduce their potential exposure is to significantly limit contributions toward these accounts or eliminate offering them altogether. The downside, of course, is that FSAs and HSAs are popular with employees and play an important part in planning their health expenses. This issue continues to generate considerable political debate as well as challenges for employers and their benefits providers.
Overall, the calculation and reporting for the Cadillac Tax – a responsibility of the employer – would be considerably simpler without having to consider pretax contributions down to the individual employee level.
At Keenan, our goal is to help employers determine that optimum approach to addressing these complex issues for their particular situation. Our role continues to be preparing our clients for complying with the law and assisting them with mitigating exposure to the excise tax.
We invite you to share your thoughts on this important issue.
About Tom Edwards
Tom Edwards, Senior Vice President is responsible for Statewide Technical Consulting and Strategic Planning. He has conducted numerous benefit seminars on a wide variety of subjects and contributed articles to several publications.