Opinion

A Compromise on the Cadillac Tax: Exempt Employee Contributions

Last Friday, the House of Representatives passed the Restoring Americans’ Healthcare Freedom Reconciliation Act, a bill that, among other things, repeals the controversial “Cadillac Tax.” While many lawmakers on both sides agree that the Cadillac Tax is problematic, the reconciliation bill’s rollback of other pieces of the ACA (or, depending on your political disposition, its rollback of not enough of the ACA) puts it on an inevitable path towards failure. Whether the bill meets its end in the Senate, or at the hand of the President’s veto pen, Congress will have failed to find compromise over the Cadillac Tax.

But rather than retreating to partisan corners on this issue, legislators should try to reach a sensible solution that actually works towards ensuring that American employees are still able to access important health benefits. That compromise can be reached by exempting the contributions that employees make to their health benefits accounts from the Cadillac Tax, so that they can continue to save for their healthcare needs.

If these exemptions are not made (or if the Cadillac Tax is not repealed in full), starting in 2018, American employees will feel a significant blow to their health benefits. Since employers will be facing a 40 percent non-deductible tax on high cost health benefits, they will stop offering their employees Flexible Spending Accounts and Health Spending Accounts. To put that into perspective: Currently, an employee earning $50,000 a year and contributing $1,000 to their FSA or HSA is not taxed on those $1,000, so their taxable income is $49,000 and they have the full $1,000 to pay for health expenses. If we don’t exempt FSAs and HSAs from the Cadillac Tax, employees won’t be able to make a pretax contribution to their health benefits accounts, and that person earning $50,000 will need to find money elsewhere in order to have the same $1,000 available to pay for healthcare costs.

Furthermore, employees’ ability to adequately contribute to their health benefits accounts is an issue that is fundamentally relevant to the middle class in particular. The median household income for an FSA participant is $57,080, and for an HSA participant it is $57,660.[i]

If we do not exempt these accounts from the Cadillac Tax, we will not only make it more difficult for employees to access health benefits, but we will further the strain on the national healthcare system by placing a unique burden on middle class employees.

This week, members of the Employers Council on Flexible Compensation, which represents thousands of employers and millions of individual employees around the country, will be visiting with Members of Congress on Capitol Hill. As legislators continue to argue over Obamacare, and as the issue of repealing the Cadillac Tax continues to stalemate, visiting ECFC members will be asking their representatives to consider exemption as the workable solution.

Average Americans need these exemptions to protect their health savings and to safeguard against unexpected healthcare costs that inevitably arise. These savings are vital to individual employees and to our collective healthcare system overall. And, importantly, Congress can actually agree upon these exemptions, turn argument into action, and protect the millions of Americans who rely on FSAs and HSAs to manage their healthcare costs.

 

Bill Sweetnam is the Legislative and Technical Director for the Employers Council on Flexible Compensation. He has also served as the Benefits Tax Counsel for the U.S. Department of the Treasury, and as Tax Counsel for the Senate Finance Committee.

 

[1] The ECFC identified a large sample size (approx. 4 million) of employees who are actively using FSA, HRA, and HSA-type accounts, and appended household income by zip code to the sample size using an industry data analytics company that derives household income from a multitude of aggregated consumer sources such as public records, real estate sources, current census data and a USPS zip code database.

 

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