The post below is a guest blog from Dax Hill who serves as Principal, Health & Welfare Consultant for CAI’s employee benefits partner Hill, Chesson & Woody.
With many employers now comfortable with the “pay or play” regulations and 6055/6056 reporting requirements, companies are beginning to shift their focus on the “Cadillac Tax” and are realizing FSA contributions will accumulate to the cost thresholds – potentially leading to increased employer taxes. In 2018, the Cadillac tax imposes a non-deductible 40% excise tax on employers to yearly amounts over $10,200 for plans covering an individual and $27,500 for those plans that cover more than just one person.
A recently released study by the Kaiser Foundation determined that 16% of employers would be subject to the 40% excise tax in 2018 – assuming 5% medical inflation. However, when the Kaiser Foundation included FSA contributions, the percentage of employers that would be responsible for the Cadillac Tax surged from 16% to 26%. Additionally, the study determined that 42% of employers would be impacted by the Cadillac tax by 2028 – which has led to some individuals calling this far reaching tax the “Camry tax” instead.
Employers are already reviewing options to limit the liability associated with the excise tax – including the possibility of eliminating their FSA. This would be unfortunate to employees, since many individuals rely on the pre-tax benefits of the FSAs to help offset healthcare expenses incurred throughout the year. For 2015, an employee can contribute up to $2,550 to their FSA on a pre-tax basis.
Not only will the Cadillac tax be a financial burden, but the coordination and calculation of the excise tax could be overly cumbersome for employers. Among the requirements of the Cadillac tax, the employer will be responsible for determining and notifying each coverage provider’s share of the pro-rata tax along with the IRS. We’ve outlined additional complexities in our most recent Healthcare Reform digest post if you would like more information on the calculation and payment details.
Companies are going to do everything possible stay under the Cadillac Tax thresholds in order to avoid the 40% non-deductible excise tax. If the current regulations stay in place, one of the first employer benefits to go by the wayside will be their FSA – leading to further financial strain for employees.