Cadillac tax threatens employer HSA contributions

Even though many health savings account (HSA)-qualified high deductible health plans (HDHP) will likely avoid Cadillac tax liability for several years, the regulatory uncertainty surrounding the implementation of the excise tax on high cost health plans could cause employers to eliminate payroll contributions to HSA accounts in order to avoid paying the tax, according to a recent report from the American Bankers Association’s HSA Council. More than 20 million Americans are covered by an HSA-qualified plan, and many of these Americans depend on employer contributions to the HSA to help manage the large deductible, the Council noted.

Excise tax

In 2018, the Patient Protection and Affordable Care Act (ACA) will impose a 40 percent excise tax on employer-sponsored health coverage that exceeds a threshold amount, otherwise known as “Cadillac” health plans. Employer-sponsored health plans that cost more than $10,200 for employee-only coverage and $27,500 for family coverage will be subject the excise tax in 2018. In coming years, this figure will be adjusted for inflation. Under the ACA, applicable employer-sponsored coverage subject to the excise tax is defined as coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income, or would be so excludable if it were employer-provided coverage, including employer contributions to a HSA.

HSA contributions at risk

The report, HSA Account Contributions through payroll face risk of early elimination if not exempted from “Cadillac Tax,” noted that if an employer’s HSA-qualified HDHP currently costs more than $17,000, it will likely incur the excise tax liability due to medical cost inflation over the next three years. However, many HSA-qualified plans are expected to remain under the initial Cadillac tax threshold for many years, but exceptions to this may cause employers to “play it safe” by avoiding HSA contributions.

The HSA Council noted that some employers are currently contracting for health care plan designs through 2018. These employers and brokers are reacting now to the uncertainty around the tax calculation and treatment of account contributions. According to the report, HSA Council members have heard from their employer-customers with plan costs close to the excise tax threshold that they are planning to either reduce or eliminate pre-tax contributions in order to avoid the tax. Reduced employer contributions will harm employees by reducing the value HSAs provide, including funding wellness programs, managing health care costs, and enabling employees to save for future health care expenses.

The HSA Council recommends that while Congress debates the future of health care reform it is imperative to pass legislation exempting account contributions to prevent consumers from being exposed to HDHPs without the ability to fund those deductibles with their employers’ assistance. (ABA HSA Council: HSA Account Contributions through payroll face risk of early elimination if not exempted from “Cadillac Tax,” May 26, 2015.)

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