If Republicans ever decide that Obamacare is here to stay and they should be doing things to make it work better for more people, they should start by changing and refining the high-cost plan tax (HCPT). Otherwise known as the "Cadillac plan" tax, it is scheduled to go into effect in 2018.
The tax was originally meant to do a couple of things. Most importantly, it would provide about $90 billion for implementing the Affordable Care Act as a whole. But it was also intended to discourage employers from offering premium plans that health economists say drive up healthcare consumption, and thus the costs. The big problem for consumers—besides potentially losing these very, very good plans—is the possibility of losing some other options from their not-so-Cadillac plans. An unintended consequence of this tax is that flexible spending accounts could disappear. Keep reading below to find out why.
The tax applies to benefits worth more than $10,200 for individuals and $27,500 for families beginning in 2018. While the Obama administration contends the tax would apply to only a relatively narrow slice of people — thus, the Cadillac tax nickname — it will hit a growing number of companies because it’s indexed to a relatively slow measure of inflation.
By 2028, more than half of all employers could potentially face the tax, according to a report this week by the nonpartisan Kaiser Family Foundation.
The tax applies not only to traditional health insurance but to a swath of other benefits, including supplemental insurance plans, flexible spending accounts and, potentially, on-site clinics that employers set up for their workers.
Many companies have promoted FSAs as a cost-effective way of paying for things their insurance doesn’t cover. Some businesses use them as an incentive for workers to participate in fitness programs, for instance, promising to contribute to the accounts of those who begin exercise regimens.
They’ve become especially popular with large companies, according to Mercer, a benefits consulting firm. Eighty-eight percent of big companies offer FSAs, it says, with 22 percent of workers participating. They contribute an average $1,291.
The Kaiser study said this week that companies offering FSAs are far more likely to pay the Cadillac tax than those that don’t. Twenty-six percent of employers with FSAs will face the tax in 2018, Kaiser predicts, compared with just 16 percent of companies that don’t offer them.
The accounts could not only trigger the tax, but quickly run up companies’ Cadillac tax bills.
Contributions by employees to their FSAs or health savings accounts could end up tipping the total compensation figures over the limit into the high-tax territory. So FSAs and HSAs are likely to be one of the first things to be jettisoned by companies that offer them. But there are number of other possibilities the Kaiser Family Foundation
study enumerates, and many of them will end up costing the employee (read: consumer) more by offering plans with higher deductibles or more cost-sharing, eliminating covered services, and narrowing the provider network.
At the moment, most of the bipartisan opposition to the Cadillac tax is talking repeal. But there are some tweaks that could be made short of repealing the tax completely. For example, it could be changed so that employees can only make after-tax contributions, and then claim them as deductions on their tax returns. Making changes now could preempt companies from taking harsher actions to limit their own tax liability.
Of course, acting now to fix something that will make the law more unpopular in the future isn't too likely in a Republican-controlled Congress. The Obama administration should be looking for tweaks that could be made without Congressional approval.