Why Your Employer Is Ditching Your Flexible Spending Account

Fear of the Cadillac Health Plan Tax Threatens FSAs

Woman with stretchy money.
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Flexible Spending Accounts have long been favorites of thrifty Americans looking for ways to save on income taxes and more easily manage large health insurance deductibles and cost-sharing expenses. But, the days when many employers offer FSAs to their employees are rapidly drawing to a close. Thanks to the Affordable Care Act’s tax on Cadillac health plans, your employer might ditch your FSA.

I never thought of my flexible spending account as equivalent to a Cadillac Escalade.

It seemed more like a Honda Civic, solidly middle class without a lot of bling or flash. However, flexible spending accounts are affected by the tax on Cadillac health plans anyway, and that might just put them on the endangered species list.

How the Tax on Cadillac Health Plans Affects Your FSA

The Affordable Care Act’s tax on Cadillac health plans, also known as the high-cost-plan tax or HCPT,  was meant to serve two purposes. First, it would help offset the cost of the ACA’s health insurance subsidies. Second, it would incentivize employers and health insurance companies to keep health plan costs in check. Over time, this would slow the rate of health care inflation and slow the rise in health insurance premium costs.

It does this by placing a 40% excise tax on every dollar of your employer-based health plan that exceeds a pre-set limit. For 2018, the first year of the tax, that threshold is $10,200 for single coverage and $27,500 for employee and spouse coverage or employee and family coverage.

Assuming health plans and employers aren’t eager to pay a 40% excise tax, they’ll likely cut benefits, including your FSA, to remain below the threshold.

You’re probably thinking, “No sweat. My health plan doesn’t cost $10,200, and my coverage doesn’t even seem that great. No way will my health benefits be caught up in the Cadillac plan tax.

That tax must only be for Google executives and hedge fund managers.”

Think again.

What Counts Toward the Cadillac Plan Tax Threshold & What Doesn’t

The problem for FSAs lies in which employee benefits count toward the limit and which don’t. These popular benefits are among the things that count toward the limit:

  • Premiums for comprehensive, major-medical health plans—both the portion deducted from your paycheck each month, and the portion your employer pays on your behalf.
  • FSA contributions—both the portion you elect to have deducted pre-tax from each paycheck, and the portion your employer contributes, if any.
  • HSA and HRA contributions made by your employer.

As the value of the items on the above list together begin to approach the threshold of the Cadillac plan tax, you’re likely to see your employer cut back those benefits to stay beneath the threshold.

The benefits listed below don’t count toward the Cadillac plan tax limit, so they probably won’t be cut back due to the tax.

    • Accident insurance.
    • Disability income insurance.
    • Workers compensation insurance.

    Sources:

    IRS Notice 2015-16. http://www.irs.gov/pub/irs-drop/n-15-16.pdf. Accessed 8/25/2015.

    How Many Employers Could Be Affected by the Cadillac Plan Tax? The Henry J Kaiser Family Foundation, http://files.kff.org/attachment/issue-brief-how-many-employers-could-be-affected-by-the-cadillac-plan-tax. Accessed 8/25/2015.

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