Many HSAs could trigger Cadillac tax

Benefits Pro reports:

“As more organizations study the Cadillac tax’s implications, it’s becoming clearer that even plans more along the lines of a Ford Focus could trigger the payment. And while there’s growing opposition to the tax, with pressure on the Obama administration to alter or scrap it, currently it remains a looming reality.

The American Bankers’ Association set out to investigate what the tax’s effect on health savings accounts might be. What the research forecast was that nearly a quarter of existing health savings account plans would trigger the tax as it currently is written — but that just 3 percent would actually have to pay the tax in 2018.

The association’s lead researcher admitted that the findings of how many plans might be technically liable weren’t what he’d expected, and they set off alarm bells. Still, HSAs may be somewhat cushioned from the tax — and that cushion could buy plan administrator time to adjust on their end and hope for political salvation from the halls of Congress.

Todd Berkley, a consultant, authored the study. His team attempted to address these questions: “Will the average HSA plan be affected by the tax and if so, when? Will higher cost HSAs be affected sooner? What if shocks to the system grow health premium costs faster than expected?” Data processed came from industry information on current HSA premiums, the distribution of current premium levels across the market, current health premium growth rates, and factored in inflation. The output was compared to the trigger points of the Cadillac tax rules.

Berkley observes that confusion reins around the Cadillac tax, that speculation is running wild and that interpretations of the impact are myriad, often assuming a gloom-and-doom scenario. Even given this, he said he was surprised by the implications of the research.

“We initially set out to prove that HSA plans would steer clear of the tax, but were dismayed to find some plans will be hit right away if payroll contributions are counted,” said Todd Berkley, president of HSA Consulting Services, the author of the study.  “While many HSA plans will likely be a safe haven for now, like the AMT, this tax will eventually affect every plan in America, including HSA plans.”

Plans with certain features could immediately be liable for the tax, the study suggested.

“Though our study shows that many HSA-qualified plans are expected to remain under the initial Cadillac Tax threshold, employers in expensive states or with expensive plans may incur tax liability right away, in 2018,” said Kevin McKechnie, executive director of ABA’s HSA Council. “The tax is calculated monthly, so employers who contribute large amounts in one month to help employees seed accounts may need to spread contributions over the course of a plan year in order to avoid the tax.”

However, that doesn’t mean employers should scrap the HSA in favor of some other type of plan, especially if their current plan has been effective. Altering a plan may be a better approach, in part because such plans will be able to avoid paying the tax for a considerable time.

“The analysis found that regulatory uncertainty is causing employers with plan costs close to the Excise Tax threshold to eliminate payroll contributions to HSAs in order to avoid incurring excise tax liability, even though many HSA-qualified plans will likely avoid the tax for years,” the study stated.

“A comparison of average industry data from America’s Health Insurance Plans and the Kaiser Family Foundation suggests that employer plans falling into the range established by these benchmarks delay liability of the tax, in some cases for years, simply because the cost of the HSA plans do not reach the threshold. Our analysis showed that employees in up to 23 percent of plans could be affected in 2018, but less than 3 percent would likely make the monthly level maximum contribution needed to exceed the limit in that year.”

The study’s results include a chart designed to help HSA plan managers determine whether they would venture into Cadillac tax territory come 2018 with their current plans, as well as information to assist in determining plan design changes that wouldn’t trigger the tax.