FSA, HRA, HSA, COBRA, Insurance Payments

Cadillac Tax: What the Impending Tax Means for Businesses and Employees

Cadillac TaxIn recent weeks, financial experts have been discussing the Cadillac Tax that applies to health care programs, including pre-tax contributions to HSA accounts. The tax, according to Bruce Japsen of Forbes.com, “was created as part of the Affordable Care Act largely as a way to help fund subsidized benefits to the uninsured under the law. Starting in 2018, employers pay a 40% tax on costs of health plans that are above $10,200 per individual and $27,500 for family coverage.”

It’s apparent why so many people have weighed in as the implications of the Cadillac Tax have far-reaching effects.

Glen Hoffman, DataPath Vice President, shares his thoughts on the impending tax and how it could affect businesses and employees:

“There are a few things to consider with the Cadillac Tax. Though it doesn’t go into effect until 2018, employers only have a few more years to bend the cost curve. They can no longer wait to see if Congress will resolve the issue by repealing the tax, especially given that the Supreme Court recently upheld the law. A Towers Watson survey found that 73% of companies are very or somewhat concerned they will trigger the tax, and the analysis revealed that 48% are likely to trigger the tax in 2018.

In the meantime, employer cost shifting will continue, incentivized by the upcoming tax. Some cost shifting will result in employees being pushed to higher deductible health plans. However, just shifting premium cost to employees is not enough, since the excise tax considers both employer and employee payments. If the tax isn’t repealed, we will likely see an accelerated adoption of high deductible/low cost health plans.

Although this may be positive for HSAs and banks, there is no guarantee. According to HealthAffairs.org, employers are looking to reduce benefits and contributions to stay under the tax threshold. This means there would be fewer dollars available to deposit into a HSA or to fund HRA/FSAs. Employers are beginning to react by working around these challenges, which could have unintended consequences.

For instance, how employers direct benefit dollars to FSAs, HRAs, and HSAs will likely be affected. FSAs may be hit hardest because even though these accounts are mostly funded by salary reductions, contributions to a FSA are considered employer contributions and would be included in the tax calculation. A post-tax contribution to an HSA can still give account owners a tax deduction, although it’s not realized until they file their income tax returns. It’s conceivable that the tax benefit of participating in an FSA could be reduced because contributions will need to be reduced to stay below the excise tax threshold. Fewer tax deductions means lower take-home pay.”

These are some of the things to keep in mind when you hear about the Cadillac Tax. As we get closer to 2018, and if Congress doesn’t legislate a change in the law, the effects could touch many lives. DataPath, creator of the HSAToday administrative web-based solution, will keep a close eye on this issue and provide updates as they come.

Easily administer FSAs, HRAs, HSAs, COBRA and more!