How HSAs can help you deal with the coming “Cadillac Tax”

The Affordable Care Act is off to a rocky start. Even setting aside the court challenges and electoral battles, websites have crashed, deadlines have been delayed, and for employers, a key requirement to provide coverage has been pushed back or modified multiple times. Yet the ACA is still law, and regulators, insurers, and employers continue to implement it. While the ACA may not be well, it is certainly alive.

You’re probably focusing on near-term issues for the ACA: ensuring your coverage complies, you’re offering it to the right people, and your IT department is ready.

But your finance people may be focused on something longer-term — the “Cadillac Tax,” which takes effect in 2018. In fact, many forward-thinking employers are planning for the Cadillac Tax. One of the better strategies includes offering a high deductible health plan along with a health savings account.

What is the Cadillac Tax? A refresher:

It’s a tax on “high value” health coverage. Employers will be required to pay a 40% excise tax on the value of any health coverage that is in excess of a financial threshold. For 2018, that threshold is $10,200 for single coverage and $27,500 for non-single coverage. It’s calculated based on all applicable coverage that an employee might have, including health care, dental, vision, FSA contributions, and employer HSA contributions.

Let’s say an employee has applicable family coverage in 2018 that totals $32,500. Under Cadillac Tax rules, the employer (for self-insured coverage) and carriers (for fully insured coverage) would collectively owe $2,000 in Cadillac Tax, (that’s 40% of the $5,000 amount that is over the threshold.).

Questions remain on how this tax may be allocated across different levels of coverage and how the thresholds may vary for certain people. But many employers have determined that come 2018, or within a year or two after that, they’re likely to have a Cadillac Tax problem on their hands.

How HDHPs with HSAs can help

The Cadillac Tax applies to the total value of coverage, whether or not the employer pays for it. So traditional cost-shifting strategies- don’t help employers fend off the Cadillac Tax. The only thing that does work is to offer lower value plans. And HDHPs are generally lower value plans because the participant may pay greater out of pocket expenses before the insurance coverage kicks in.

There are two key benefits for employees. First, HDHP premiums are generally lower than for other types of health plans. Second, HDHP plan participants are generally eligible to contribute to an HSA.  And the HSA is a more attractive savings vehicle for many employees, in that those with family coverage can set aside up to $6,550 this year (plus a $1,000 catch up if they are 55 or older), tax-free*. They can use that money to pay for qualified medical expenses, or they can invest it longer term to help pay for qualified medical expenses in retirement. Employees pay no tax on the earnings or on the distributions if the money is used for qualified medical expenses now, ten years from now, or in retirement.

An HDHP/HSA strategy – don’t wait

Employers tend not to change their benefits programs quickly, and the Cadillac Tax is only three more open enrollments away. It might be tempting to wait, but those who evolve their plan designs now have more time to educate and engage their employees on these programs. Another option: You do not have to replace all your traditional coverage with HDHPs/HSAs.

Many employers are considering a strategy where more generous plans are available, but the employee may be charged a premium that includes the Cadillac Tax (permissible as long as all other requirements are met). As long as they can, these employers will offer one plan, the HDHP/HSA, which falls under the threshold and is available at a lower cost. Other plans may be available, but may have the cost of the Cadillac Tax built into the employee premium rates.

Learn more

The rules are complicated, but the direction is clear. Many employers are looking at HDHPs/HSAs as a way to help their employees save money on healthcare coverage now, and to help pay for qualified medical expenses in the future.

[Additional HSA content for employers can be found at]

Jeff Munn is vice president, Benefits Policy Development, Fidelity Investments

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