The Cadillac Tax Battle Rages On: FSAs Falling Victim?

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Cadillac Tax

“Don’t Tax My Benefits,” the battle cry against the 40% levy on benefits exceeding the $10,200 individual and $27,500 family thresholds set to take effect in 2018. Known throughout the industry as the ‘Cadillac Tax,’ the Excise Tax on High Cost Employer-Sponsored Health Coverage was created and agreed upon in 2010 to help fund affordable plans for others taking advantage of the insurance offered under the ACA.

Now, however, there is a fight against the tax coming from both Republican and Democrat lawmakers, labor leaders, employers, and benefits professionals.

Employers are already making modifications to their plans, retooling their offerings to get under the threshold. But one piece of a common benefit offering—flexible spending accounts—has landed on the chopping block, much to the dismay of stakeholders.

This struggle, highlighted by a recent Wall Street Journal article, is heating up.

“The tax threshold takes into account not just the value of premiums, but also other benefits offered by employers—including money put in flexible spending accounts by workers or their employers.

Benefits consultants say that will prompt many employers to limit the amount workers can put in the accounts, commonly called FSAs—or do away with the accounts altogether. Few employers contribute to the accounts, but those that do could stop.

The threat to flexible spending accounts has further stoked efforts by some in Congress to try to repeal the tax. The issue is expected to be taken up this fall.”

A bill to repeal this tax is gaining momentum, led by Representative Joe Courtney, D-Conn.

“As employers seek to avoid the tax—as a significant number plan to do—[they] will first look to trim benefits including FSAs that are counted toward the tax calculation,” said Courtney. “The clear result will be a reduction in the quality of insurance plans offered to employees, and increased out-of-pocket costs for their families.”

Courtney’s bill, with 132 co-sponsors, aims to repeal the tax. Another bill with the same purpose, was penned by Frank Guinta R-N.H., has 80 Republican co-sponsors.

Lawmakers fear that as an FSA is common among large employers, that keeping it will hurt middle class workers who contribute to these accounts. The fight, however, will not be an easy one.

As lawmakers will need to find a way to offset the $80 billion expected to be created by the tax over the next ten years, they also find executive opposition, as President Obama has indicated that any legislation that would weaken the healthcare law would be vetoed.

According to a Kaiser study, If the legislation fails and employers maintain FSAs, 26% of them would have at least one health plan that surpasses the individual threshold in 2018, with the number jumping to 42% in 2028.

But just 16% would exceed the threshold if flexible spending accounts weren’t in place in 2018, based on the analysis that anticipates yearly premium increases of 5%.

“It’s going to be one of the first times employees will be negatively impacted by the Affordable Care Act,” said Katy Spangler, senior vice president of health policy at the American Benefits Council, which leads a campaign to repeal the tax called the Alliance to Fight the 40. “It’s going to discourage employers from making contributions and employees from donating just as more employers are moving to high-deductible plans.”

This battle rages on, but the IRS and Treasury are, until October 1, taking comment on the ‘second notice’ regarding who pays other pertinent information. Learn more about the Second Notice here.

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