Posts Tagged ‘cadillac tax’

Cadillac Tax May Force Employers To Eliminate FSAs

Thursday, September 17th, 2015

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.

What does the future hold for Flexible Spending Accounts (FSAs) and why ask this question now?FSA

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.

Employers Need To Be Prepared For The Cadillac Tax

Tuesday, November 18th, 2014

The post below is a guest blog from Mike Beck who serves as Principal, Health & Welfare Consultant for CAI’s employee benefits partner Hill, Chesson & Woody.

cadillac taxWhile most employers are focused on managing through 2015 and the upcoming employer mandate, the Cadillac Tax will present another significant challenge for many in 2018 and deserves attention.

The Cadillac Tax is an excise tax on health coverage deemed to be high cost.  The tax begins in 2018, and levies a 40 percent excise on the value of health insurance benefits exceeding the threshold of $10,200 for individual coverage and $27,500 for family coverage (indexed to inflation) on an annual basis. The thresholds increase for individuals in high-risk professions e.g. police officers/fireman and for employers that have a disproportionately older population.

While these thresholds seem high for some, when most evaluate their current premium and apply three years of  a trend increase to it, it is easy to see how in  2018 many employers will be  close to hitting or even exceeding the thresholds.  Industry estimates show that nearly 50% of employers will be impacted in 2018.  Making matters worse, it is not just the cost of health insurance that goes into the calculation.  Employer or employee contributions to a health flexible spending accounts must be included as well as employer contributions health savings accounts and health reimbursement accounts (HRAs).

The outcome is that employers will likely have to reduce the value of the plan they are offering, reduce the limit of their Flexible Spending Account, and eliminate any employer contributions to an H.S.A. or a combination of these tactics in an effort to avoid the tax.

The tax will apply to employers regardless of plan funding (fully insured or self insured) and is scheduled to begin in 2018 and go into perpetuity.  The tax is non deductible for employers so many employers may experience an increased tax burden due to the loss of deductibility.  The Congressional Budget Office estimates the tax will raise $80 billion between 2014 and 2023.

Employer reaction has been mixed with many taking a wait and see attitude and delaying a decision as long as possible.  In a recent survey of 333 large employers by the National Business Coalition on Health and the Benz Corp, according to the results, “the Cadillac Tax is currently not driving major benefit change.”  Of the employers surveyed, 30 percent have not made any decisions around their course of action with 46 percent of employers keeping benefit coverage the same.

Since the inception of the Affordable Care Act (ACA) there has been wide talk that the Cadillac Tax would be repealed.  Pundits proclaimed that large employers and unions would not stand for it.  As the ACA marches on, the Cadillac Tax is becoming more and more of a reality.  Congress is counting on the tax to be a major source of revenue so repealing the Tax could be unlikely.  There is a possibility that the Cadillac Tax could be redesigned or some form of compromise reached.  The long term impact to employees will most likely be reduced benefits and higher out of pocket costs which may create morale and retention issues.

Employers need to plan now and estimate what the potential costs of the Cadillac Tax to be for their organization and determine a strategy moving forward.