NEW Professional Member Special>>> Save $20 and receive a SHRM tote bag
More companies are recognizing the importance of giving employees the time and space they need to navigate personal loss.
Save $20 on a New Professional Membership and receive a FREE Tote bag when you join SHRM today!
Learn to overcome challenges and meet your 2017 goals through competency-based HR education. Available in-person and virtually.
Expand your influence and learn how to become an effective leader. Join us in Phoenix, AZ | OCTOBER 2 - 4, 2017
Employer groups and unions see 40% excise tax as threat to health benefits
A coalition of business and labor has launched an effort to repeal the looming 40 percent excise tax on high-value health plans, popularly referred to as the “Cadillac tax.”
Alliance to Fight the 40, which held an initial conference call with the media on July 28, 2015, includes private- and public-sector employers, unions, consumer groups, trade associations, insurers, brokers and other organizations.
Starting in 2018, the Affordable Care Act (ACA) will impose a 40 percent nondeductible tax on employer-sponsored coverage above an established value threshold—$10,200 for employee-only and $27,500 for family coverage—which after 2018 will be indexed for inflation. The threshold includes employer- and employee-paid premiums for health plan and wellness program benefits, and even extends,
in the Treasury Department’s view, to employee-paid contributions to health savings accounts when deducted from salaries through a section 125 cafeteria plan. (The American Bankers Association, however, in a May 2015
comment letter contended that the IRS has the authority to exclude employee HSA contributions from the excise tax threshold, and encouraged the IRS to do so.)
“The 40 percent tax hits ordinary plans that are expensive simply because they cover many people with high health costs—women, older and disabled workers, and families with catastrophic health events,” said James A. Klein, president of the American Benefits Council, a trade group that helped organize the coalition. “Protecting employer-sponsored health coverage is not just a union or business or public-sector or private-sector issue,” said Klein. “The 40 percent tax puts at risk the employer-sponsored health system covering over 150 million Americans.”
“This is not a ‘tomorrow is another day’ problem,” Klein added. “Employers are reluctantly compelled, right now, to require employees to bear a larger share of escalating costs in an effort to avoid triggering the tax. Employees are already facing higher deductibles and other cost-sharing requirements. Even with current efforts, studies show that nearly half the health plans nationwide will trigger the tax in 2018 and many more shortly thereafter.”
The Congressional Budget Office “estimates that three quarters of the projected $87 billion revenue will come from employers lowering health costs and making up the difference with higher taxable wages,” Klein noted, adding, “this will be a massive tax hike on working Americans.”
“This has to be a pretty bad deal if you bring business and labor together in a way that often has us at odds,” said D. Taylor, president of the North American labor union UNITE HERE! “We actually would like to put ‘affordable’ back into the Affordable Care Act. The realities of the people we represent, the housekeepers, the cooks, the kitchen workers and crew servers, they fought for years, often giving up wage increases in order to have good health benefits for themselves and their families. Putting a 40 percent tax on the type of people we represent, who generally make under $50,000 on combined salary and benefits, is just absurd.”
Rep. Frank Guinta, R-N.H., who is among those who would like to repeal the Affordable Care Act entirely, said he nevertheless supports bringing before Congress a narrowly tailored bill just to repeal the 40 percent excise tax. “We want it to be as simple as possible,” he said. “We don’t want anyone to have a reason to vote against this; we don’t want to do anything other than give both Republicans and Democrats an opportunity” to repeal the excise tax.
“Unfortunately, the 40 percent tax doesn’t just apply to the health plan,” noted Kate Hull, executive director of the Corporate Health Care Coalition, representing corporations that provide health care benefits. “It also adds in wellness programs and many other tools used by employers to lower costs and incentivize active participation by employees in decisions affecting their own health care. Cost-savings tools such as health savings accounts, flexible spending arrangements, onsite medical clinics and even employee assistance programs are all included under this tax.”
According to a Towers Watson survey, she noted, “roughly half of large employers will hit the tax thresholds in 2018, and this number will continue to rise rapidly.”
Rep. Joe Courtney, D-Conn., pointed out that “2018 is now if you’re negotiating a multiyear labor contract.” Picking up on Hull’s remarks, he added, “The calculation of what is a premium will sweep up the employees’ share, with no tax shelter through health savings accounts. It will also sweep up wellness/prevention provisions, which a lot of employment-based plans are offering all across the country as a way to reduce costs the smart way.”
The excise tax “really undercuts a lot of the mission of the Affordable Care Act by undermining the implementation of really smart health care delivery reform, which at the end of the day is the best way to reduce health care costs,” Courtney said.
Although none were present at the Alliance to Fight the 40 media briefing, the excise tax has defenders as well. For instance, an analysis posted July 24, 2015, on the website of The Brookings Institution, a liberal-leaning Washington, D.C.-based policy institute, offers a counterargument.
What the ‘Cadillac Tax’ Accomplishes--And What Could Be Lost in Repeal, David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy and a Brookings Institution senior fellow, argued: “Repealing the Cadillac tax would be a significant setback to efforts to curtail tax breaks and other policies that, while popular, encourage overuse of the health care system or favor inefficient health care providers.”
He concluded, “Abandoning it would be a worrisome sign that political timidity dooms almost any policy to slow the growth of health care spending.”
Similarly, Alain Enthoven, a health economist and a professor emeritus at the Graduate School of Business at Stanford University, wrote in an Aug. 5, 2015 Health Affair Blog post,
Don’t Repeal the “Cadillac Tax” on High Cost Health Plans: “Provider interests were too powerful to permit a serious cost containment component in the ACA. An outright repeal of the Cadillac Tax would not only undermine the cost containment efforts now underway, but it would be an unmistakable signal that our democracy is not capable of reining in excessive health care costs.”
Notice Addresses Account-Based Plan Contributions
Despite being urged by employers, consumers and others to exclude contributions to health savings accounts (HSAs), health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs) from the excise tax value calculation—especially employee salary-reduction contributions to HSAs and FSAs—the Treasury Dept. and IRS are holding to their position that such contributions will be included under the excise tax’s value threshold.
In February 2015, IRS
Notice 2015-16 held that:
Section 4980I(d)(2)(C) provides for HSAs and Archer MSAs that the cost of applicable coverage “shall be equal to the amount of employer contributions under the arrangement.” For this purpose, employer contributions include salary reduction contributions.
That view was affirmed in IRS
Notice 2015-52, issued on July 30, 2015 with comments being accepted through Oct. 1, 2015. The notice stated, for instance, that:
Treasury and IRS are considering an approach under which contributions to account-based plans would be allocated on a pro-rata basis over the period to which the contribution relates (generally, the plan year), regardless of the timing of the contributions during the period. Treasury and IRS anticipate that this allocation rule would apply to HSAs, Archer MSAs, FSAs, and HRAs that are applicable coverage. For example, if an employer contributes an amount to an HSA for an employee for a plan year, that contribution would be allocated ratably to each calendar month of the plan year, regardless of when the employer actually contributes the amount to the HSA. Similarly, if an employee elects to contribute to an FSA for a plan year, the employee’s total contributions would be allocated ratably to each calendar month of the plan year, even though the entire amount contributed for the plan year would be available to reimburse qualified medical expenses on the first day of the plan year. Comments are requested on this approach as well as alternative approaches.
Notice 2015-52 also proposed that “the cost of applicable coverage of an FSA for any plan year would be the greater of the amount of an employee’s salary reduction or the total reimbursements under the FSA.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Follow me on Twitter.
You have successfully saved this page as a bookmark.
Please confirm that you want to proceed with deleting bookmark.
You have successfully removed bookmark.
Please log in as a SHRM member before saving bookmarks.
Your session has expired. Please log in again before saving bookmarks.
Please purchase a SHRM membership before saving bookmarks.
An error has occurred
Recommended for you
HR Education in a City Near You
SHRM’s HR Vendor Directory contains over 3,200 companies