Groups Urge IRS to Exclude HSAs from Excise Tax

Business leaders seek exclusion for FSA and HRA contributions as well

By Stephen Miller, CEBS May 26, 2015

updated 8/25/2015

One of the most contentious issues regarding the forthcoming excise tax on high-value health plans (the “Cadillac tax”) is the inclusion of employees’ own health savings account (HSA) contributions, when deferred through a standard payroll-deduction cafeteria plan, as part of the taxable value of the benefit.

The U.S. Treasury Department has said that excluding HSA contributions from the tax would require a statutory change to the Affordable Care Act. However, comment letters submitted to the Internal Revenue Service (IRS) in response to the agency’s request for guidance on implementing the excise tax have taken a different view. The American Bankers Association, for instance, contends that the IRS can issue regulations that exclude employees’ HSA contributions from the taxable threshold without a change in the law.

Wide-Reaching Tax

The nondeductible 40 percent excise tax is to be imposed beginning in January 2018 on employer-sponsored health coverage subject to the employer “shared responsibility” coverage mandate. The mandate applies to organizations with 50 or more full-time employees, or part-time workers whose hours, added together, are equivalent to the hours of full-time employees.

The tax is triggered when the total cost of providing health coverage is in excess of statutory thresholds (in 2018, $10,200 for self-only coverage and $27,500 for nonindividual coverage, subsequently adjusted for inflation based on the consumer price index). The total cost includes annual insurance premiums (whether paid by the employer, by the employees or shared by both), HSA and health flexible spending account (FSA) contributions made by the employer or by employees through pretax salary deferral, plus employer contributions to health reimbursement arrangements (HRAs).

Unlike HSAs and FSAs, only employers are allowed to contribute to HRAs, which are not employee-owned accounts.

Speaking at the Society for Human Resource Management’s (SHRM’s) March 2015 Employment Law & Legislative Conference in Washington, D.C., J. Mark Iwry, senior advisor to the Treasury Secretary and Deputy Assistant Secretary (for retirement and health policy), affirmed that the “Treasury has no discretion to carve out” employee HSA contributions since “Democrats in Congress had specifically made it a point” to include HSAs under the threshold, and altering that would require statutory change.

Many critics contend that if employee pretax contributions are treated as part of the “total value” that could trigger the excise tax, employees could be left with high-deductible health plans no longer linked to HSAs, HRAs or FSAs that promote savings.

The Case of Exclusion

Many organizations, including SHRM, are urging Congress to eliminate the 40 percent excise tax altogether. Advocates of health-related accounts are separately lobbying the IRS and Congress to exclude employee payroll-deferred contributions to HSAs and FSAs from the taxable value threshold under the tax and, beyond that, to exclude employer contributions to HSAs, HRAs and FSAs as well.

Employee contributions to HSAs through payroll deductions are seen, in particular, as appropriate for exclusion from the excise tax. The American Bankers Association in its May 15 comment letter to the IRS stated:

In our view, because of how different HSAs are, the IRS has the necessary discretionary authority to characterize employee contributions to the employee’s HSA, even if facilitated by the employer through Section 106 authority, as ‘excludable’ without also being included in the definition of ‘applicable coverage’ precisely because employers don’t own any of the money in an employee’s HSA. Funds in an HSA are the property of the beneficiary and are nonforfeitable under 26 U.S. Code Section 223 (d)(1)(E).

We respectfully request that IRS exempt employee contributions [to their own HSAs] from the calculation of the excise tax.

Similarly, the ERISA Industry Committee (ERIC), a membership organization of benefit plan sponsors, submitted comments recommending that the IRS and Treasury “narrow the definition of the types of health benefits that are subject to the tax so that add-on benefits and programs that lower the costs of health benefits such as health savings accounts, onsite medical clinics and wellness programs would not be discouraged.”

A comment letter from the Business Roundtable, representing business leaders, urged:

We believe that HSA, HRA, and FSA contributions should not be included in the calculation, regardless of whether the contribution was pre- or post-tax.... If the agency goes forward with the anticipated treatment of employee pre-tax contributions to HSAs, many employer plans that provide for HSA contributions will be subject to the excise tax as early as 2018, unless the employer limits the amount an employee can contribute on a pre-tax basis.

Additionally, the tax on high-cost employer-sponsored plans was designed to lower employer contributions to healthcare benefits and encourage employees to spend healthcare dollars wisely, making overuse of medical care less attractive. Many Business Roundtable members have begun encouraging employees to participate in and contribute to an HSA or FSA to accomplish this goal. To count these monies toward the taxable amount would be disruptive and would go against the spirit and intent of this newly imposed excise tax, and we ask that employer and employee contributions not be included in the calculation.

At Washington, D.C., press briefing on Aug. 11, 2015, Brian Marcotte, president and CEO of the nonprofit National Business Group on Health, said that U.S. employers were taking a “wait and see” approach to the excise tax as regards account-based plans.

“Employers are continuing to adopt high-deductible plans with HSAs and increasing their contributions to employees’ HSAs,” he told SHRM Online. Assuming the tax is not revised to exclude account-based contributions or repealed outright, possible benefit design changes employers might take to avoid trigger the tax—such as limiting their HSA contributions or shifting away from facilitating pretax employee contributions through payroll deferral—“most likely won’t be undertaken until 2017, looking forward to the 2018 plan year,” he noted.

‘Cadillac Tax’ May Lead Employers to Cut FSAs

Flexible spending accounts (FSAs) may dramatically raise exposure to the looming 40 percent excise tax on high-value plans since employees’ own salary-deferred contributions will be counted against the threshold limit, an August 2015 report by Kaiser Family Foundation showed.

The analysis, which assumed annual health plan premium increases of 5 percent, found that just 16 percent of employers would have at least one health plan hitting the $10,200 Cadillac tax threshold for single-only coverage in 2018 if health FSAs were not considered. But 26 percent of employers would exceed that threshold that year if FSAs are included in the analysis.

In 2023, when the tax threshold rises to $11,800 for single-only plans, 22 percent of employers would hit the threshold if FSAs were not factored into the calculation, but 30 percent of employers would if FSAs are considered.

Stephen Miller
, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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