Cadillac Tax Has Employers Weighing Options on FSAs

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By Kristen Ricaurte Knebel

Sept. 21 — Employees might not be enjoying the benefits of health flexible spending accounts much longer if similar accounts, such as health savings accounts, aren't counted under the Cadillac tax, an attorney said.

Earlier this year, the Internal Revenue Service and Treasury Department issued notices 2015-16, giving employers the agencies' general line of thinking on how they will implement the tax in future regulations, but they ran into a “roadblock” when it came to health savings accounts, Alden J. Bianchi, a member at Mintz, Levin, Cohn, Ferris, Glovsky & Popeo PC in Boston, said during a Sept. 21 webcast.

While the Affordable Care Act considers employer and employee pretax contributions to HSAs part of the cost of coverage for Cadillac tax calculation purposes, employers are hoping regulators may exclude the contributions based on positions taken by the Department of Labor in Field Assistance Bulletin 2004-01, he said.

“The DOL has taken the position that HSAs are generally not group health plans, they are simply tax-favored accounts that participants put money aside in,” Bianchi said, and “a lot of commentators have urged the regulators to go much further than that.”

However, it's hard to say where the IRS will land on that issue because there's ambiguity in the statute, he said.

“The statute has an expressed reference to health savings accounts, but they also have a complicating reference to group health plans that opponents of this, or folks who would like this to be exempt from the tax have seized on, but it doesn’t seem to be getting the attention of the regulators,” he said.

There's a lot at stake: If HSAs are excluded from the cost of coverage for purposes of calculating the 40 percent excise tax, then employers would likely move toward health HSAs and throw FSAs out the window, Bianchi said. This would lead toward a shift to more consumer-driven health care, he said.

Another concern getting some attention is the possibility that if an entity other than the employer is the coverage provider, and therefore liable for the excise tax, any reimbursement the provider receives from the employer could be considered taxable income.

Notice 2015-52 directly addressed that issue, saying the IRS anticipates that future regulations will exclude any reimbursement for the excise tax from the cost of applicable coverage.

“There’s going to have to be a tax gross-up that works its way through the system, and that itself is proving to be a daunting issue,” Bianchi said.

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To contact the editor responsible for this story: Phil Kushin at