Cadillac tax will impact FSAs, HSAs first

The Patient Protection and Affordable Care Act’s (ACA) excise tax on high-cost health plans—also known as the “Cadillac tax”—was designed primarily to maximize revenue and minimize coverage disruptions, and not to reduce health spending, according to recent research from the Commonwealth Fund. The report, Looking Under the Hood of the Cadillac Tax, noted that the Cadillac tax includes tax-favored savings vehicles such as flexible spending arrangements (FSAs) and health savings accounts (HSAs) in the formula for determining who is subject to the tax. Thus, at least initially, these savings accounts, rather than enrollee cost-sharing or other plan features, are likely to be affected most by the tax as employers act to limit their HSA contributions.

Cadillac tax. The ACA created the Cadillac tax to act as a revenue offset provision to help pay for the cost of the law. Beginning in 2020, a non-deductible excise tax will be imposed on the cost of employer-sponsored health programs that exceed an aggregate value of $10,200 for individual employee-only coverage and $27,500 for family coverage. Each tax period, employers will be responsible for calculating the amount of excess benefit subject to the tax for any applicable employer-sponsored coverage offered to employees. The excise tax must be paid by the employer.

Tax-favored accounts. The Commonwealth Fund’s analysis of the Bureau of Labor Statistics’ (BLS) National Compensation Survey and the Board of Governors of the Federal Reserve’s Survey of Consumer Finances reveals that employers are initially likely to respond to the Cadillac tax by limiting employer and employee contributions to FSAs and HSAs. This change will have the greatest effect on high-income employees, who are most likely to be contributing substantially to these accounts and who face the greatest gap between pre- and post-tax dollars.

The data also suggest that in addition to the primary effect of reducing contributions to savings accounts, the Cadillac tax will have secondary effects on employee plan choices. With reduced contributions, the Commonwealth Fund believes that employees will favor plans with lower premium and out-of-pocket costs, since they will have to pay for these costs with after-tax dollars. This preference, in turn, will encourage employers to offer plans with similar attributes.

In general, employers have two options for reducing the cost of employee health coverage: increasing cost-sharing or offering plans with more restrictive provider networks, according to the Commonwealth Fund. Since the Cadillac tax makes higher cost-sharing less attractive to employees, it will probably lead to somewhat greater participation in plans with narrow networks than previously projected.


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