Now that some of the bigger issues related to healthcare reform have simmered down, attention is turning to provisions of the ACA that go into effect in 2018. Clients have begun asking about the impact to their Health Savings Account (“HSA”) programs of an excise tax on high cost health care under Section 4980I of the Internal Revenue Code (the “Code”), which was added by Section 9001 of the ACA (commonly referred to as the “Cadillac Tax”).
The good news; it appears HSA-qualifying health plans are not going to trigger this tax, given that they are relatively low-cost plans. Although, there is uncertainty about HSA contributions and their effect on the tax.
What is the Cadillac Tax?
The Cadillac Tax is an excise tax on “high cost” employer-sponsored health coverage, provided for in Code Section 4980I.
When is it effective?
January 1, 2018.
How is the Cadillac Tax calculated?
The Cadillac Tax imposes a 40% excise tax on an employee’s “excess benefit.” An “excess benefit” is the value of “applicable employer-sponsored coverage” that is in excess of a specified dollar limit. Essentially, for 2018, that dollar limit is expected to be at least $10,200 for single coverage and $27,500 for family coverage. These amounts will be indexed for inflation for 2019 and subsequent years.
With premium trends slowing in the past couple of years, how big of an impact will the Cadillac Tax have?
It’s hard to speculate just how many plans will be affected by the tax. The past few years have seen annual healthcare cost trends in the mid-to-low single digits, reversing many years of double digit growth. Regional trends could be higher, as could those for your company. As of 2014, the average annual family premium has not yet reached $17,000 and, as of 2018, the Cadillac Tax will affect family plans that are higher than an expected $27,500 annually. For individual plans, the average premium sits at about $6,000 today and the tax kicks in at $10,200 in 2018. It remains to be seen how premium rates will trend and how many plans will reach the Cadillac Tax limits.
What is counted in determining the value of “applicable employer-sponsored coverage?”
The cost of coverage is calculated based on all “applicable employer-sponsored coverage” (defined in Code Section 4980I(d)) that an employee might have, including but not limited to:
- The full premium for accident and health coverage provided by the employer, which includes the portion of the premium paid by both the employer and the employee.
- Employer and employee salary reduction health flexible spending account (“FSA”) contributions.
- Employer HSA contributions, which, as discussed in more detail below, may include employee payroll deduction contributions if the IRS adopts a broad interpretation.
Specifically excluded from “applicable employer-sponsored coverage” is coverage under long-term care insurance, accident and disability benefits, and liability insurance, among other things.
Who pays the tax?
Under Code Section 4980I(c), the tax is assessed against “coverage providers.” Who the “coverage provider” is depends on the type of benefit involved:
- In the case of fully insured health plans, “coverage providers” are the health insurance issuer.
- For self-insured plans and FSAs, “coverage providers” are the entity administering the plan (for example, the third party administrator [TPA])
- For HSAs, the “coverage provider” is the employer making the contribution.
But it’s still up to the employer to calculate the tax, and the employer could incur tax penalties for failing to do so.
Will employer or employee HSA contributions be included in the calculation?
Code Section 4980I(d)(2)(C) states: “In the case of applicable employer-sponsored coverage consisting of
coverage under an arrangement under which the employer makes contributions [to HSAs]. . . , the cost of coverage shall be equal to the amount of employer contributions under the arrangement.” (Emphasis added.)
In other words, employer contributions to HSAs are included in calculating the cost of coverage. It is unclear, however, what counts as “employer contributions.” Do “employer contributions” include employer seeding contributions (e.g., employer contributes $500 to each employee’s HSA), wellness contributions, employee pre-tax payroll contributions made through a cafeteria plan, and/or employee after-tax payroll contributions?
It appears that employer seeding contributions will likely count in the calculation. Wellness contributions could also be seen as an employer contribution that counts. The impact of employee payroll contributions is less clear:
- Some industry groups have speculated that employees’ pre-tax HSA contributions are like FSA contributions and therefore should be included in calculating the tax.
- Other industry groups have speculated that employee HSA contributions should not be included in calculating the tax because, unlike FSA contributions, employee HSA contributions can be made outside of payroll and deducted on an individual’s tax return. Additionally, under the ACA, only employer HSA contributions — and not employee HSA contributions — are counted when calculating Actuarial Value and Minimum Value of HSA-qualifying health plans. It seems that if only employer HSA contributions are taken into account in other provisions of the ACA, the same principle should apply here.
How might the Cadillac Tax affect employer HSA programs?
At this time it’s still unclear. A few thoughts on this:
- It seems that the lower premium typically seen with HSA-qualified health plans should not exceed the Cadillac Tax thresholds, meaning it’s unlikely that an employer will be hit with the tax for any employee due to the HSA-qualifying health plan alone. For this reason, the Cadillac Tax could lead more employers to less expensive health plan options, like HSA-qualifying health plans, to stay under the limits and avoid the tax. Such a move could result in more individuals being HSA eligible, thus increasing HSA enrollment and use.
- However, more guidance is needed on how employer HSA contributions will factor into the Cadillac Tax calculation. As explained above, the effect of HSA contributions on the calculation of the cost of coverage will depend on the definition of “employer contributions.” For example, employer HSA contributions will be less likely to trigger the tax if only employer seeding and wellness contributions — and not employee payroll contributions — are counted in figuring the cost of coverage. Further guidance is needed in this area.
When can we expect more guidance on the Cadillac Tax?
It is hard to say for certain. Regulations have not been issued yet on the Cadillac Tax; to date we only have the statute to assess. We anticipate that regulations or other regulatory guidance will be issued in the next two years, though it is difficult to gauge the timeline in light of upcoming elections and ongoing legal challenges to the ACA. We will keep you posted as new developments occur.