When employers consider what they can do to avoid surpassing the ACA's excise tax on high-cost plans, effective in 2018, they may decide to drop health flexible spending accounts, but it could be tricky.
A recent study by the Kaiser Family Foundation projected that up to one-quarter of health plans will be hit by the Cadillac tax in the first year of implementation. Many of those plans include FSAs, but since those accounts are in the mix for calculating liability for the tax, they could be eliminated to help get plan costs under the excise tax's thresholds, the study said.
The ACA's Cadillac provision imposes a 40 percent excise tax on the portion of a plan that exceeds $10,200 a year for individuals or $27,500 for families. The thresholds will be indexed to inflation after 2018.
“Discussions with our members confirm what the Kaiser Family Foundation reported in a recent paper—health care flexible spending accounts will likely be among the first benefits cut as a result of the 40 percent tax on health benefits,” Katy Spangler, senior vice president for health policy at the American Benefits Council, told Bloomberg BNA Sept. 23.
She went further, saying that employers will eventually need to make other benefit cuts and increase employee cost-sharing in later years as a result of the tax.
Spangler's organization is also part of the Alliance to Fight the 40, a group made up of representatives from the employer community, unions and health insurance companies that are working to get the Cadillac tax repealed.
Not So Fast
John R. Hickman, a partner in Alston & Bird LLP's Atlanta office, took a slightly less drastic view, saying that employers will look at a variety of avenues to keep costs below the Cadillac tax's thresholds.
Some options are increasing employee out-of-pocket costs, putting more of an emphasis on wellness, and reducing or changing spousal benefits.
If those changes don't achieve the intended cost reduction, employers “will monitor and reduce” FSA elections as needed, Hickman told Bloomberg BNA.
He pointed out that employers can change their FSAs from “general purpose” to dental and vision only FSAs. “Offering FSAs under this latter approach will cause the FSA to have no adverse impact on the excise tax,” Hickman said.
Greta E. Cowart, a shareholder with Winstead PC in Dallas, also seemed to think employers would take a more cautious approach to the tax and not consider cutting FSAs unless absolutely necessary.
“Employers are thinking about making adjustments to avoid the Cadillac tax, but no one is making any decisions as large as totally eliminating the health flexible spending account until we have final guidance which definitely requires inclusion of the health flexible spending account,” Cowart told Bloomberg BNA.
The Internal Revenue Service and Treasury Department have released two notices on the ACA's excise tax on high-cost health plans, notices 2015-16 and 2015-52. The notices give employers the agencies' general line of thinking on how they will implement the tax in future regulations.
Cowart said employers are looking at other cost-controlling measures such as using more limited networks or cutting benefits, but FSAs' longtime presence in benefit plans may make it harder to cut them.
“A benefit that is well entrenched may be easy for the government to pick on as a tax cost, but it is more difficult for an employer to take away as an employee relations matter and so many are waiting until we have more concrete guidance,” she said.
Excerpted from a story that ran in Pension & Benefits Daily (09/24/2015).
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