FSAs Getting Driven Out by Some Companies to Avoid ‘Cadillac’ Tax

By Rita Pyrillis

Nov. 24, 2015

The vast majority of large employers are looking for ways to avoid the so-called “Cadillac” tax on high-value health plans, but workers should also prepare for unwelcome changes, like higher out-of-pocket costs, reduced health benefits and the deterioration of flexible spending accounts, according to a recent study.
In their efforts to avoid paying the 40 percent levy on pricy plans, 19 percent of employers surveyed by the American Health Policy Institute were reducing or eliminating employee contributions to FSAs, and about 13 percent were doing the same with health savings accounts. Flexible savings accounts allow workers to save tax-free dollars for health care expenses not covered by their insurance plan.
“The reduction is unfortunate, but FSAs are part of the calculation of a health plan’s value, which means employers will have to reduce contributions,” said Tevi Troy, the president of the Washington, D.C.-based think tank.
Currently, employees are allowed to contribute $2,550 annually, but in 2018 that could increase to $2,700 because of inflation — an amount that is more than one-fourth of the $10,200 limit on the price of individual coverage under the Affordable Care Act.
In addition to seeing a decline in employer contributions to health savings accounts and an increase in out-of-pocket costs, employees are also unlikely to benefit from any savings realized by employers seeking to reduce health care costs, Troy said.
According to the survey 71 percent of employers would probably not increase wages to offset their reduction in health benefits.
While the term Cadillac tax may conjure images of corporate executives reaping cushy health benefits, middle-class workers who have ordinary plans but live in high-cost areas or have higher than average health care expenditures will also be affected, according to the report. 
That is one reason that opposition to the tax is growing beyond conservative circles, Troy said.
This story was updated Dec. 2, 2015, to correct the amount of money employees are allowed to contribute until 2018.
Rita Pyrillis is a writer based in the Chicago area.

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