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Taxes

FSA Friday with Sean - 1/26/18 - How the Cadillac Tax affects your healthcare

While this week's news centered around the government shutdown, the deal that ended it had an unexpected wrinkle that will affect consumer healthcare for the foreseeable future.

On Monday, President Trump signed a bill to fund the government for another three weeks. In this bill was a provision to delay the effective date of a targeted tax on high-cost, employer-sponsored health plans (the "Cadillac Tax") until 2022.

What's a "Cadillac" Tax?

Let's back up a bit. The Cadillac Tax was an attempt by the Affordable Care Act (ACA) to solve a tax subsidy issue that dates back to World War II called Employer Sponsored Insurance (ESI). The point of the Cadillac Tax was to address the impact of ESI, raise additional revenue to fund the Affordable Care Act, and encourage employers to go for more cost-effective healthcare options.

According to Forbes, ESI is a tax subsidy that was a result of wage freezes that took place during WWII, and ESI was a means for employers to use tax-free funds to cover the cost of generous health plans. However, as wages grew and ESI remained in place, this created long-term issues for the American healthcare system.

First, ESI only benefits those enrolled in employer-sponsored healthcare coverage, which accounts for about half of all Americans.

Furthermore, the ESI makes it cost-effective for employers to move more money into healthcare benefits rather than wage increases. In terms of compensation, it became cheaper for employers to provide additional healthcare benefits, as opposed to more pay.

So, the Cadillac Tax was created as a deterrent for employers who offer high-cost health plans, with the idea that more money would be available to cover uninsured individuals. This would make the most expensive plans - which some argued would lead to overuse/abuse of medical care benefits - to be less desirable to employers.

The ACA proposed an additional tax on high-cost health plans -- the "Cadillacs" of their industry. This tax adds 40% additional tax on the value of health insurance coverage they offer. This is determined by these thresholds: $10,200 for individual plans and $27,500 for families. In other words, this is the total cost of the healthcare plans, including vision and dental benefits.

The tax, which applies to health plans including FSAs, HSAs and HRAs, was originally set to begin in 2018 and had been delayed until 2022.

Why is the Cadillac Tax delayed?

While the Cadillac Tax seemed like a good idea on paper, Congress failed to implement the tax several times since the ACA passed. The main issue is that this tax is tied to general inflation -- which simply refers to the price of goods and services in an economy over time -- as opposed to medical inflation, which is roughly 2-3x lower.

Healthcare spending typically outpaces general inflation, so this could inevitably lead to a larger amount of healthcare plans being subject to the Cadillac Tax. Because of this, employers are already faced with tough decisions about whether to continue to provide the same standard of healthcare coverage, according to the Society for Human Resource Management.

Modern Healthcare reports that US employers have begun to implement healthcare changes if the Cadillac Tax ever goes into effect. A shift to high-deductible health plans (HDHPs) has been a leading trend with about 24% of workers in employer plans enrolled in a high-deductible option.

HDHPs are the only types of plans that are offer a health savings account (HSA) option, which could be contributing factor to their explosive growth. HSA enrollment has surged in 2017 to 21 million total accounts, a 16% increase year-over-year, according to research firm Devenir.

The Cadillac Tax has been a major sticking point in the world of consumer healthcare for years, and while it could see legislative changes in the future, this debate will most likely have to wait until its new implementation date in 2022.

If you're interested in diving deeper into this topic, you can read the full text of the bill to get a better idea of what it entails.

And of course, for the latest info about your health and financial wellness, be sure to follow our Learning Center, Facebook, Instagram and Twitter pages.

Basics

Notifying your employees of PPACA coverage

If you're scratching your head about Patient Protection and Affordable Care Act (PPACA or ACA) provisions affecting your business, you're likely not the only one. Starting October 1, open enrollment begins for the Jan. 1, 2014 PPACA mandated Health Insurance Marketplace, previously known as the Exchange. All employers must notify their existing employees of this Marketplace no later than October 1, 2013, regardless of open enrollment or employer coverage. As of October 1, any new employee should be given the notice immediately upon hire.

Why do I need to notify my employees of upcoming PPACA changes?

According to the Fair Labor Standards Act (FLSA) that's part of PPACA, all employees must be notified of coverage options available to them in the Marketplace. Notices must be provided to new hires within 14 days of their start date.

What should I include in the notice?

According to the Department of Labor (DOL), a written notice should be given to all employees:

1. "Informing the employee of the existence of the Marketplace (referred to in the statute as the Exchange) including a description of the services provided by the Marketplace, and the manner in which the employee may contact the Marketplace to request assistance;

2. If the employer plan's share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, that the employee may be eligible for a premium tax credit under section 36B of the Internal Revenue Code (the Code) ift he employee purchases a qualifed health plan through the Marketplace; and

3. If the employee purchases a qualifed health plan through the Marketplae, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a porition of such contribution may be exluable from income for Federal income tax purposes."

The notice should go out to each individual employee whether this employee works full-time or part-time. It should be written in a way that is understandable to the "average employee," the DOL added.

When should I notify my employees by?

IMPORTANT: If you are an employer subject to FLSA and haven't notified your employees about the Health Insurance Marketplace, you must do so prior to October 1. The notification applies even if your employees are already covered by a company health plan and regardless of your open enrollment date.

The DOL has provided a model notice to help you understand what should be communicated to your employees.

FSAstore.com reviews and provides guidance on any new regulations issued. Visit our blog frequently to keep up-to-date on the latest impacts of PPACA.