Many employers planning ahead as to their employee health benefit plans are considering modifying or eliminating employee flexible spending accounts (FSAs), according to an article this week in the Atlanta Business Chronicle. The Affordable Care Act (ACA) will begin to tax high-cost employer health insurance at 40 percent on benefits over a set threshold in 2018. The Chronicle notes that numerous other news sources have cautioned that this upcoming tax, known as the “High Cost Plan Tax” or “Cadillac Tax,” will cause employers to rethink their offering of employee FSAs, with some employers capping the amounts their employees may place in the accounts, and other employers eliminating FSAs altogether. See Wall Street Journal article; Politico article; Healthline article. The intent behind the ACA’s Cadillac Tax was to discourage employers from offering premium health insurance plans that drive up healthcare costs and to generate revenue to help pay for coverage of the uninsured.
Use of Flexible Savings Accounts
Flexible Spending Accounts are tax-advantaged financial accounts offered by employers. FSAs were created in the 1970’s to allow workers to save as to out-of-pocket healthcare costs, in response to employer requirements of annual deductibles and coinsurance for their health benefit plans, and health insurance plan exclusions of certain medical items that were allowed to be covered by IRS regulations. FSAs allow employees to reserve funds from their pre-tax earnings for purposes of paying qualified expenses, such as medical or health expenses. In years past, FSA funds were “use or lose” from year to year. But under the Affordable Care Act, FSA plans may allow employees to carry over up to $500 from one year to the next. (FSAs differ from similar so-called “health savings accounts” in several ways. For example, all funds in an employee’s HSA can be carried over from year to year. HSAs and health reimbursement arrangements could be impacted by the tax as well.)
A recent report from the Kaiser Foundation estimates that about 19 percent of employers today offer at least one health plan that exceeds the High Cost Tax Plan coverage threshold of $10,200 for individual plans, that about 16 percent of employers will have such plans in 2018 (the effective year of the tax); 22 percent of employers in 2023; and 36 percent in 2028.
The Kaiser article recommends the following ways that employers can reduce costs under the tax:
- Increasing deductibles and other cost sharing;
- Eliminating covered services;
- Capping or eliminating tax-preferred savings accounts like Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), or Health Reimbursement Arrangements (HRAs);
- Eliminating higher-cost health insurance options;
- Using less expensive (often narrower) provider networks; or
- Offering benefits through a private exchange (which can use all of these tools to cap the value of plan choices to stay under the thresholds).
Congressional Response to Cadillac Tax
Congressional representatives from both parties are openly concerned about the impact of the Cadillac Tax on employers and consumers, offering legislative proposals with bipartisan support to change or eliminate the tax. “Two pieces of legislation were introduced in the House earlier this year, by Rep. Frank Guinta (R-N.H.) and Rep. Joe Courtney (D-Conn.). Guinta’s legislation (H.R. 879) and Courtney’s bill (H.R. 2050) both would completely repeal the tax.” However, those proposals to repeal the tax are not believed to be viable to fill the “87 billion dollar hole” that the tax is expected to fill. See article at Bloomberg BNA.
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