HSAs Likely to Stay for Cadillac Tax, Officials Say

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Kristen Ricaurte Knebel

Oct. 19 — When it comes to what is and isn't included in the cost of coverage for the Affordable Care Act's Cadillac tax, some have made an argument for excluding pretax contributions to health savings accounts, but government officials aren't buying it.

When asked whether it might be possible to exclude HSAs from the cost of coverage for purposes of the 40 percent excise tax on higher-cost health plans that takes effect in 2018, Kevin P. Knopf, senior technical reviewer for the Internal Revenue Service's Office of Chief Counsel, Health and Welfare Branch of the Tax Exempt and Government Entities Division, quickly shut down that line of thinking.

“I personally continue to believe that HSA contributions” that are excluded under tax code Section 106 are still going to be included in calculating the cost of coverage for the tax “for the foreseeable future,” he said Oct. 19 during a conference hosted by the American Bar Association's Joint Committee on Employee Benefits.

Christa Bierma, an attorney adviser with the Treasury Department's Office of Benefits Tax Counsel, backed up Knopf's assessment, saying that when she has discussed the possibility of excluding HSAs from the cost of coverage to Internal Revenue Service economists, their “heads explode, because they think it would render the statute extremely ineffective.”

‘Clumsy Law.'

Speaking during the same session, Helen H. Morrison, a principal in the national tax department at Ernst & Young in Washington, called the Cadillac tax a “clumsy” part of the ACA, with a lot of issues swirling around it that employers need to get acquainted with.

There were two main policy reasons that the Cadillac tax was devised: to raise revenue and to compensate for some “real inefficiencies and inequities” about the way health coverage is taxed, Morrison said.

The ACA is a costly law and the Cadillac tax was scored by the Congressional Budget Office as raising $87 billion over a 10-year period. However, only 25 percent of that is expected to be raised by direct payments of the tax, Morrison said. In theory, the remaining 75 percent is raised by employers increasing wages or other taxable income once the cost of health care is brought down, she said.

While Morrison said some may disagree that will happen, she said she tends to think employers will increase wages over a period of time.

Regardless, “everyone” thinks that employers will do “whatever it takes” to avoid paying the Cadillac tax, but to do that, they need guidance to get their plans in shape before the tax hits in 2018, Morrison said.

Dodging the Tax 

As for what some are doing to try to prepare for the tax's effective date, employers are undertaking a variety of tactics to try to bring down their cost of coverage and avoid paying the tax, said Kaye L. Pestaina, a principal and senior legal consultant with Mercer LLC.

Larger employers have taken some “longer-term” strategies such as moving toward high-deductible health plans with HSAs in an attempt to reduce overall health plan utilization, she said.

Vendor management is also getting more attention, she said, with employers trying new things such as value-based professional networks and centers of excellence. While these might be strategies that are maintained in the long term to keep costs down, right now they are “experiments,” Pestaina said.

To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at kknebel@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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