An employer isn’t going to continue a program that saves an employee between 22% and 38% in taxes if the employer has to pay a 40% excise tax on that money. For a family with a $2,600 Health FSA contribution, that means a tax increase of $600 to $900 annually.
By William G. (Bill) Stuart
Director of Strategy and Compliance
March 2, 2017
One aspect of my job that I value most is the opportunity to visit Capitol Hill to speak to members of Congress, their staffs and staff members of Senate and House committees responsible for health and insurance issues. I visited Washington, DC, twice in February to deliver messages from three different organizations with which I’m affiliated.
Here’s a report:
American Bankers Association HSA Council
The HSA Council is composed of about two dozen companies that administer HSAs, hold HSA assets and deliver software, debit card, reporting and servicing solutions to the industry. For more than a decade, lawmakers have counted on the HSA Council to provide statistics and guidance as they review changes to HSA rules.
The key messages that we delivered to members of Congress and staffers:
- The Cadillac Tax represents a serious threat to HSAs and Health FSAs. By counting employer and employee contributions (Health FSA) and elections (HSA) toward the threshold at which the 40% excise tax kicks in, the tax will virtually eliminate Health FSAs and employer contributions to HSAs. The result: a tax hike to the middle class.
- We favor increasing the annual limit to the medical plan’s out-of-pocket maximum, rather than greater of the statutory limit ($3,400 for self-only coverage and $6,750 for family coverage in 2017). Particularly in the nongroup and small-group markets since implementation of the ACA, post-deductible cost-sharing in the form of coinsurance has increased dramatically. Today’s statutory limits are far below the financial exposure that many families face. We don’t support legislation that allows unlimited HSA contributions (proposed by Sen. Rand Paul) or limits of $10,000/$20,000 or more, as these initiatives paint HSAs as tax havens for the wealthy rather than financial protection for middle-class Americans.
- We want to increase the number of Americans enrolled in an HSA-qualified plan who want to open and contribute to an HSA but can’t. This group includes active and former military personnel enrolled in TRICARE (coverage that they can’t drop and pick up again later) or who have received certain care at a VA facility during the last three months, Native Americans who have received non-preventive care through the Indian Health Services during the past three months and workers over age 65 who enrolled in Medicare Part A and remain covered on an HSA-qualified plan. Changes in HSA eligibility rules can eliminate these roadblocks to opening and contributing to HSAs.
- We don’t favor including individual insurance premiums (other than when collecting unemployment benefits or continuing care through COBRA, as the law currently allows) on the list of items eligible for tax-free distributions. HSAs were designed to help individuals manage out-of-pocket medical costs and to enhance consumerism. Increasing the range of premiums eligible for tax-free distribution doesn’t further those aims.
Employers Council of Flexible Compensation
ECFC is a broad coalition of companies that offer Health FSA, HRA and HSA services to millions of American workers. The focus is broader than the HSA Council in that it incorporates the other reimbursement accounts. I was part of a team that met with staff members of eight members of Congress who have introduced legislation or are key players on committees that consider legislation related to these accounts. Our key messages:
- Again, the Cadillac Tax is the enemy of ordinary Americans, who will lose access to Health FSAs and HSAs if elections (Health FSAs) and contributions (HSAs) are included in calculating total premium, as they are under current law. An employer isn’t going to continue a program that saves an employee between 22% and 38% in taxes if the employer has to pay a 40% excise tax on that money. For a family with a $2,600 Health FSA contribution, that means a tax increase of $600 to $900 annually.
- Health FSAs and HSAs are not a tax-evasion device for the wealthy. Many staffers were surprised to learn that the average worker enrolled in a Health FSA or HSA earns between $50,000 and $65,000. And only a handful of individuals make the maximum contribution to their HSAs to maximize tax savings. These accounts help ordinary Americans manage increasing out-of-pocket costs.
- Employers’ Health FSA and HSA programs must undergo annual nondiscrimination testing to make sure that highly-compensated employees don’t benefit disproportionately from the program. Thus, the rules ensure that they remain a program directed at the middle class. Many staffers didn’t understand this testing and the laws’ built-in mechanism to benefit all workers.
- If the Cadillac Tax can’t be repealed (it has been delayed three times and is now scheduled to take effect in 2020), at least remove employees’ Health FSA elections and employer and employee contributions to HSAs from the calculation. It makes no sense to reclassify as “premiums” income that employees voluntarily choose to accept in the form of a benefit rather than as cash. And applying the tax to employer HSA contributions discourages employers from helping employees manage their out-of-pocket costs.
Republican staffers understood our message. In many cases, their bosses have cosponsored legislation to eliminate or modify the tax. On the Democrat side, they understand the issue and have heard from their constituencies – including labor unions – about the destructive impact that the Cadillac Tax will have on union benefits. The only resistance on the Democrat side seems to be over replacing the lost revenue.
National Association of Health Underwriters
NAHU is an organization composed of leading benefits advisors (brokers) throughout the country. It has an active presence in Washington and has provided advice to Congress on a wide range of benefits issues. The message that we delivered to our respective state congressional delegations concerned a broader range of issues than Health FSAs, HSAs and the Cadillac Tax, but was more focused.
Our plea to Congress: Stabilize the nongroup insurance market. This market has suffered since the full implementation of the ACA in 2014. Selection issues (the enrollee population is older, sicker and poorer than the overall population) and restrictions that force insurers to insurers to overcharge young people) have resulted in enormous insurer losses and insurers’ withdrawal from many state exchanges. The Republicans’ threat to repeal the ACA without an adequate replacement has led to further instability, as insurers fear the impact of immediate (however unlikely) elimination of the advance premium tax credits that subsidize premiums for consumers with lower incomes.
In 2017, one-third of counties in the United States had only one insurer participating on the exchange. And only last-minute action prevented one Phoenix-area county from having no insurers offering exchange products. Aetna and Humana, two of the nation’s largest insurers, whose proposed merger was scuttled by the Obama administration, have signaled that they may withdraw from many states’ public exchanges. Without viable private options, residents of these counties simply won’t be able to enroll in medical insurance for 2018.
We urged that Congress take the following steps immediately to stabilize the market before insurers make their final decision in April about participating in public exchanges in 2018:
- Maintain the current advance premium tax credits (“premium subsidies”) for at least two years to assure insurers that a broader range of consumers will be able to purchase insurance.
- Tighten off-cycle enrollments. A number of Americans have become “jumpers and dumpers.” They enroll in coverage off-cycle by claiming a qualifying event (often not verified), receive care and then drop coverage. These individuals don’t want insurance; they merely want someone to pay bills that they know they will incur. Limiting qualifying events and tightening verification will send a clear message to individuals that they can’t count on accessing insurance only when they believe that they need it. Insurers won’t have to pay claims without corresponding premium income.
- Tighten non-payment rules. Insurers must continue to cover individuals when they are in arrears as much as 90 days on premium payments. Savvy consumers have figured out this loophole. They stop paying their premiums after September, then enroll again in January for a new year. This “buy nine, get three free” program costs insurers 25% of the premium income that they depend on to pay claims.
- Allow residents of counties with only one insurer participating in the public exchange to apply their premium subsidies to nongroup products offered outside the exchange. Insurers who don’t offer products in the exchange often sell nongroup insurance directly to consumers. Under current law, though, buyers can apply premium subsidies to insurance only if it’s purchased through the exchange.
- Permit anyone, not just young consumers and those not subject to the individual mandate, to purchase catastrophic insurance. The ACA defined that it considered adequate coverage and barred most consumers from choosing any policy that didn’t offer comprehensive care within certain out-of-pocket cost parameters. This change would allow individuals who want to reduce premiums and purchase care only to cover very high costs to exercise that option.
- Support a hybrid high-risk pool through which insurers can purchase protection against high-cost claimants. Individuals would have access to the same products at the same premiums with the same premium subsidies as any other consumers. Behind the scenes, insurers would identify those with high claims and pre-existing conditions and place them in a pool in which all insurers would share the risk.
A second critical message that we delivered to members of Congress and their staffs is to preserve the employer exclusion. Under federal tax law, employers can offer insurance benefits on a pre-tax basis to employees. This is a good deal for employees (the portions of their premium that both they and their employer pay aren’t taxed as income) and good for employers (they avoid payroll taxes on their contribution to premium and remain motivated to continue to offer group insurance).
There is a move in Congress to repeal the employer exclusion. Some elected officials eye the “tax expenditure” (the potential tax income not collected) and want to bring that revenue into the federal treasury, even though it might mean a $6,000 to $9,000 annual tax increase to a family. Others want to create a new tax benefit that will equalize the tax treatment of insurance purchased through an employer or in the individual market.
Our message: Group insurance works. Unlike the nongroup market, the group market is stable (the covered population reflects the general population, individuals can’t “jump and dump” coverage and no one receives the “buy nine, get three free” special). Politicians need to focus on the segment of the market that isn’t stable without creating new instability in the far larger stable employer-based insurance market.
The day after my colleagues’ and my visits to members of Congress, the Trump administration proposed regulatory changes to stabilize the market that are very similar to our recommendations. NAHU had conducted a two-pronged approach – educating both the administration and Congress – to prompt immediate action.
NAHU has other prescriptions to improve medical insurance, including increasing the flexibility of HSAs, repealing the Health Insurance and Cadillac taxes, repealing medical-loss-ration requirements and allowing small-business tax credits to continue for at least two more years. Those recommendations, though, take a back seat to stabilizing the individual markets.
“Lobbying” is often a four-letter word outside the confines of the District of Columbia. Citizens often think of lobbying as the activity of evil corporations bent on gaining a personal advantage at the expense of ordinary Americans. A key feature of our form of government is that we have the right to petition the government in a variety of ways, including providing our perspective to our elected officials individually and collectively (whether collected as a corporation composed of individual owners or an organization with which we associate freely).
Yes, Benefit Strategies and our colleagues representing other companies in these organizations certainly benefit financially when insurance markets are stable, when employer-based insurance is supported by the tax code and when reimbursement accounts are strengthened. We believe that the products that we sell in a free and competitive market make ordinary Americans’ lives better by helping them manage the increasing cost of medical care. In that sense, our fight is more for the benefit of our customers and partners than it is a self-serving effort.
Importantly, in all of our discussions, members of Congress and staffers praised each of the organizations for sharing our observations and representing millions of voters. Because each of the organizations is nonpartisan, we don’t represent a political threat to Republicans or Democrats (though the statistics and studies that we cite may undermine some officials’ policy positions). They thank us and often ask us to follow up with specific information that helps them understand the practical implications and actual results of legislation on which they must vote (or on which they cast a vote in the past). This sharing of information represents a good partnership and can only improve the final legislation.
What we’re reading
What are your priorities and preferences when you seek medical care? You and your doctor should work as a team to determine the right treatment options for you, given your goals. Patients need to engage in a dialogue with their doctors to tailor treatments to patients’ needs. Read more here.
What risk factors are wellness programs addressing in 2017? Find out here.
The Cato Institute, a free-market think tank that conducts extensive research on health care, recently published a short paper on how to control prescription drug costs. Read its recommendations here.