Preserving Employee Health Care Savings and Coverage Options, Supporting Their Life Needs, and Enhancing Choice
HEALTH CARE:
Tax-Advantaged Health Accounts Are Important for Consumers:
A majority of employers currently sponsor consumer-directed health accounts for their employees. ECFC
member companies assist in the administration of such arrangements for over 35 million employees.
Approximately 103.5 million Americans benefit from consumer- directed health accounts, which include
Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement
Arrangements (HRAs).i
Many more employers are moving toward higher deductible health plans or plans that increase the
amount of cost sharing borne by employees.ii In addition, employers are taking action to reduce the
costs of their health coverage, yet protect employees from higher out of pocket costs by moving to
account-based, consumer-directed arrangements.iii Consequently, consumer-directed benefit
arrangements, such as FSAs, HRAs and HSAs, are of increasing importance to American workers and their
families.
These tools provide a means of budgeting for increased out-of-pocket health care costs and help many
Americans pay for critical health care procedures that otherwise they may forego. According to a 2014
survey conducted by Visa, Inc., 43 percent of the responders said they would probably/definitely cut
back on medicines and treatments if they didn’t have an FSA.iv The type of treatments they would cut
back on, in order of most to least, includes: doctor visits, vision, dental, over-the-counter (OTC)
medicines, prescriptions, and sick doctor visits. The study also indicated that the cut-backs are higher for
people in lower to middle income brackets compared to those in higher income brackets.
Participants in Consumer Directed Health Accounts are more likely to exhibit cost-conscious behaviors
and participate in wellness programs.v Companies reported seeing continued enrollment in these
accounts along with an average cost trend of only 2 percent over that period.vi
Users of FSAs and HSAs are middle class families. On average, ECFC member data indicates their average
household income is roughly $57,000 per year, which is less than 300% of the federal poverty level (FPL).
For comparison, when the ACA was passed, income-based subsidies were made available on the
exchanges to any family of four earning less than 400% of FPL.vii The Visa study indicates similar income
levels.
ECFC Recommendation:
Legislation to expand employee’s HSA and FSA options has already been introduced and some pieces
were incorporated into current health care efforts. We encourage support of Health Savings Act of
2017, H.R. 1175 and S. 403.
Employee Contributions to Tax-Advantaged Health Care Accounts Should be Protected and the Excise
Tax Repealed:
The Affordable Care Act (ACA) created a new excise tax, commonly referred to as the Cadillac Tax, on
certain high-end health care plans. The tax is 40% of the value of a plan exceeding value of $10,200 for
an individual and $27,500 for a family (actual thresholds will be updated when tax takes effect).
Although originally designed to take effect in 2018, Congress created a two-year delay now making its
implementation date 2020. During that process, Congress also made the tax payments deductible for
employers. Although the delay provided some relief, the marketplace has already started to prepare for
the tax and it will negatively impact the offering of HSAs and FSAs.
In particular, the statute is being interpreted to require the contributions made by individuals into
their HSAs and FSAs to be deemed as if they were provided by the employer for purposes of
calculating the tax. Since employers do not control amounts elected by employees, HSA and FSA
contributions could push amounts over the excise tax thresholds resulting in employers limiting or
eliminating employees’ ability to participate.
Impact of the Tax on the Marketplace:
Based on the initial 2018 implementation date, preliminary analysis showed that 48 percent of
employers were likely to trigger the tax when it took effect, and 82 percent could hit the threshold by
2023.viii Instead of having a tax that discourages overly generous health benefits, the tax will actually hit
the majority of employer sponsored health plans that average Americans receive.
According to an American Health Policy Institute survey using data of large employers collected in
2015, the excise tax is already having, and will continue to have, a significant impact:
• Almost 90 percent of large employers are taking steps to try to prevent their company from
having a plan that triggers the excise tax;
• Over 30 percent of large employers said they would have at least one plan impacted by the
excise tax;
• Almost half of the employers that did not have plans hitting the excise tax in 2018 said they
would have a plan that would be impacted by 2023;
• Among employers who are going to reduce the values of their plans as a result of the excise
tax, 71 percent of employers said that they probably would not provide a corresponding
wage increase; 16 percent said they would.ix
According to Internal Revenue Service (IRS) Notice 2015-16, the tax applies to employee contributions
to FSAs and HSAs. Including these contributions in the tax calculation will undermine the very options
created to make health care more affordable, manageable, and predictable for American families. In an
effort to avoid hitting the tax threshold, employers will be less likely to offer such benefits, which help
employees pay for their increasing share of out- of-pocket healthcare costs.
With regard to HSAs and FSAs, the American Health Policy Institute survey found:
• Almost 19 percent of large employers were already curtailing or eliminating employee
contributions to FSAs in order to avoid triggering the excise tax;
• Almost 13 percent were already curtailing or eliminating employee contributions to HSAs.
ECFC Recommendation:
It is clear that the excise tax will have an adverse impact on millions of American businesses and
consumers. Although the tax has been delayed two years, the marketplace is reacting now in anticipation
of the tax and preparing for 2020. Action must be taken now to counteract the unintended consequence
of this provision. Consumer directed arrangements such as FSAs, and HSAs help keep healthcare costs
down and allow middle class families to save for and manage their health care bills. The tax should be
repealed given its impact on consumers, employers and all consumer directed arrangements.
Legislation to repeal the excise tax has already been introduced in the House of Representatives and the
Senate and has bipartisan support. We encourage support of the Middle Class Health Benefits Tax
Repeal Act of 2017, H.R. 173 and S. 58.
Employer Contributions to Employee Health Plans Should be Preserved and the Tax Exclusion for
Employer-provided Health Coverage Should Not be Capped:
The tax exclusion for employer-provided health coverage is an important tax benefit for employees and it
provides the foundation for consumer-directed health accounts offered by employers. This exclusion
exempts employer-provided health coverage from both income taxes and employment taxes. With this
exclusion, the employer-paid portion of health coverage (such as premiums for health insurance or
coverage under a self-insured health plan) is not taxed and the employee’s portion paid by salary
reduction through a cafeteria plan is also not taxed. Similarly, any contributions an employer makes to a
consumer-directed health account that only reimburses employees for qualified health costs (such as an
HRA, FSA or HSA) is not taxed. The health care aspects of employer-provided wellness programs are also
not taxed due to the exclusion. Finally, employee contributions to an FSA or an HSA through a cafeteria
plan are not taxed due to the exclusion. While an employee can deduct a contribution to an HSA on his or
her income tax return if the employer does not offer a cafeteria plan, that HSA contribution will still be
subject to employment taxes.
Without the exclusion, the costs of health care costs for coverage to hard working employees would
increase as they will lose the tax benefits currently provided by FSAs, HSAs and HRAs. Employers will no
longer incur the costs of establishing consumer-directed plans if there is no tax benefit to employees to
participate in these plans. In addition, any cap created on the exclusion could include contributions made
by employees to their accounts. Individuals and families rely on these accounts to save for and manage
their health care expenses and the ability to deduct them from their taxes allows them to invest in the
preventative care they need and still continue to fulfill their other financial obligations
Employees who participate in consumer-directed health account have a real appreciation of the costs of
health care, since it is the dollars in their accounts that are used purchase health care. If the goal is to
make people more cognizant of health care costs and become better consumers of health care,
eliminating consumer-directed health accounts by eliminating or capping the exclusion makes little sense.
Recommendation:
Proposals have been advanced which would eliminate or place a cap on the tax exclusion for employerprovided health coverage. ECFC’s membership strongly objects to those proposals. ECFC believes that
any cap of the employer exclusion is bad for employees and will result in employers curtailing the
maintenance of consumer-directed health accounts, particularly those accounts funded through
employee salary deductions through a cafeteria plan.
CHILD CARE:
Increase dependent care FSA contribution amounts and apply an inflation adjuster.
Dependent care FSAs are pre-tax dollars individuals set aside to offset work-related dependent care costs.
The statutory $5,000 contribution limit was set more than 20 years ago and has never been adjusted for
inflation. The amount falls far below dependent care costs in most parts of the nation. In fact, the average
annual cost for center-based care for an infant was higher than a year’s in-state tuition and related fees at
a four-year public college in 24 states and Washington, D.Cx.
Recommendation: Congress should enact legislation to increase the cap to $10,000 in 2017, and adjust
that amount on an annual basis for inflation by the Consumer Price Index. ECFC urges support of H.R. 782,
the Family Care Savings Act.
Increase the amount of compensation that can be disregarded when conducting the average benefits
test for a dependent care FSA.
IRC Section 129 requires that average benefits provided to employees not highly compensated be at least
55% of the average benefits provided to highly compensated employees. For benefits provided through a
salary reduction agreement, a plan may disregard any employees with compensation less than $25,000.
This provision worked well originally because employees earning less than $25,000 typically elect the child
care tax credit, rather than a salary reduction arrangement.
Recommendation: When Congress increased the child care tax credit to $6,000, the $25,000 amount in
Section 129 was not adjusted, causing many dependent care FSAs to fail the average benefit test.
Congress should increase the amount in Section 129 to $30,000 to restore the original balance of the
law. ECFC urges support of H.R. 1959, the Child and Dependent Care FSA Enhancement Act.
COMMUTING BENEFITS:
Tax Treatment of Employer Contributions for Employee’s Commuting Costs Should be Preserved:
As efforts to reform the tax code move forward, Congress should preserve the tax treatment of the
current commuter benefit. The Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently
established parity between employer-provided parking and mass transit benefits. For more than 25 years,
Congress has provided employers the opportunity to offer their employees, either tax-free subsidies or on
salary reduction basis, commuting expenses, including mass transit, van pools, and commuter
parking. This allows employers to help their workforce get to the workplace by the most efficient manner
possible, enhancing productivity and helping relieve one of the major costs associated with working.
This middle-class benefit helps working Americans cover what is often their second largest household
expense – transportation, particularly transportation related to work. Eliminating or decreasing the mass
transit benefit effectively raises taxes on millions of middle class working families who are accustomed to
budgeting for this important benefit that helps them meet the rising costs of commuting. Suburban
families who commute into cities have the highest commuting costs.
When considering the cost to government of continuing the current commuter benefit, the Committee
should consider other savings to the government outside of the tax code by incentivizing employees to
use public transit. A study conducted by the non-profit Transit Center found that when commuter
benefits are offered in the workplace, 18 percent of employees alter their commuting from single
occupancy vehicles to public transit – a significant modal shift. The transit benefit saves the government
money by reducing the need for federal spending on roads, bridges, and the accompanying infrastructure
– increasing transit ridership means that less people will be driving and less federal funding is needed to
repair, replace, and expand our nation’s vital roadways. Increased utilization of mass transit also reduces
road congestion, vehicle emissions, and dependence on foreign sources of energy. When commuters use
the nation’s mass transit system it helps support self-reliance on the part of mass transit systems which
otherwise must rely on government subsidies.
i
FSA counts extrapolated from U.S. Census Bureau statistics on number of employed, number of employers who offer FSAs, average enrollment
statistics, and Visa research (conducted by C+R Research, July 2012). HRA statistics based on “U.S. Consumer-Driven Healthcare: Health Benefit
Account Market Sizing,” Aite Group, November, 2013. HSA statistics from “2014 Year-End Devenir HSA Research Report,” February, 2015
(http://www.devenir.com/research/2014-year-end-devenir-hsa- market-research-report/). These counts aggregated and multiplied by 2.35, (HHS
PCORI fee multiplier that determines the average number of lives covered under the plan for the plan year [169 Treas. Reg. §§ 46.43761(c)(2)(iv)(B) and (C)]. Updated with Mercer 2016 report.
ii
National Business Group on Health, “Large Employers’ 2015 Health Plan Design Survey”, August 13, 2014. According to this survey 42 percent of
employers are increasing employee cost-sharing.
iii
National Business Group on Health, “Large Employers’ 2015 Health Plan Design Survey”, August 13, 2014. According to this survey, 57 percent
of employers are implementing or expanding account-based consumer-directed arrangements.
iv
Visa Annual Consumer Survey on Behaviors, Perceptions, and Attitudes of FSAs, 2014.
v
2014 Health Care Changes Ahead Survey Report”, Towers Watson, September, 2014.
http://www.towerswatson.com/enUS/Press/2014/09/nearly-half-us-employers-to-hit-health-care-cadillac-tax-in-2018-with-82-percent-by- 2023
vi
Findings from the 2014 EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey”, Employee Benefit Research Institute,
December, 2014.
vii
Identified a large sample size (4M) of employees that are actively using FSA, HRA, and HSA type accounts. Appended HH income by zipcode to
the sample size using an industry data analytics company that derives HH income from a multitude of aggregated consumer sources such as public
records, real estate sources, current census data, and USPS zip code data base.
viii
2014 Health Care Changes Ahead Survey Report”, Towers Watson, September, 2014.
http://www.towerswatson.com/enUS/Press/2014/09/nearly-half-us-employers-to-hit-health-care-cadillac-tax-in-2018-with-82-percent-by- 2023
ix
Tevi D. Troy and D. Mark Wilson, ACA Excise Tax: Cutting Family Budgets, Not Health Care Budgets, American Health Policy Institute, 2015.
x
2014 Health Care Changes Ahead Survey Report”, Towers Watson, September, 2014.
http://www.towerswatson.com/enUS/Press/2014/09/nearly-half-us-employers-to-hit-health-care-cadillac-tax-in-2018-with-82-percent-by- 2023