ECFC Issue: Excise "Cadillac" Tax
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Employee Contributions to Tax-Advantaged Health Care Accounts Should be Protected and the Excise Tax Repealed:

The Affordable Care Act (ACA) created a new excise tax, commonly referred to as the CadillacTax, on certain high-end health care plans.  The tax is 40% of the value of a plan exceeding value of $10,200 for an individual and $27,500 for a family (actual thresholds will be updated when tax takes effect). Although originally designed to take effect in 2018, Congress created a two-year delay now making its implementation date 2022. During that process, Congress also made the tax payments deductible for employers. Although the delay provided some relief, the marketplace has already started to prepare for the tax and it will negatively impact the offering of HSAs and FSAs.

In particular, the statute is being interpreted to require the contributions made by individuals into their HSAs and FSAs to be deemed as if they were provided by the employer for purposes of calculating the tax. Since employers do not control amounts elected by employees, HSA and FSA contributions could push amounts over the excise tax thresholds resulting in employers limiting or eliminating employees’ ability to participate.

Impact of the Tax on the Marketplace:

Based on the initial 2018 implementation date, preliminary analysis showed that 48 percent of employers were likely to trigger the tax when it took effect, and 82 percent could hit the threshold by 2023.Instead of having a tax that discourages overly generous health benefits, the tax will actually hit the majority of employer sponsored health plans that average Americans receive.

According to an American Health Policy Institute survey using data of large employers collected in 2015, the excise tax is already having, and will continue to have, a significant impact:

  • Almost 90 percent of large employers are taking steps to try to prevent their company from having a plan that triggers the excise tax;
  • Over 30 percent of large employers said they would have at least one plan impacted by the excise tax;
  • Almost half of the employers that did not have plans hitting the excise tax in 2018 said they would have a plan that would be impacted by 2023;
  • Among employers who are going to reduce the values of their plans as a result of the excise tax, 71 percent of employers said that they probably would not provide a corresponding wage increase; 16 percent said they would. According to Internal
  • Revenue Service (IRS) Notice 2015-16, the tax applies to employee contributions to FSAs and HSAs. Including these contributions in the tax calculation will undermine the very options created to make health care more affordable, manageable, and predictable for American families. In an effort to avoid hitting the tax threshold, employers will be less likely to offer such benefits, which help employees pay for their increasing share of out- of-pocket healthcare costs.

 With regard to HSAs and FSAs, the American Health Policy Institute survey found:

  • Almost 19 percent of large employers were already curtailing or eliminating employee contributions to FSAs in order to avoid triggering the excise tax;
  • Almost 13 percent were already curtailing or eliminating employee contributions to HSAs.

 

Recommendation:

It is clear that the excise tax will have an adverse impact on millions of American businesses and consumers. Although the tax has been delayed two years, the marketplace is reacting now in anticipation of the tax and preparing for 2022.  Action must be taken now to counteract the unintended consequence of this provision. Consumer directed arrangements such as FSAs, and HSAs help keep healthcare costs down and allow middle class families to save for and manage their health care bills. The tax should be repealed given its impact on consumers, employers and all consumer directed arrangements