ObamaCare's 'Cadillac Tax' Could Kill Popular HSA Plans

BY JOHN MERLINE

08/12/2015 04:24 PM ET

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Will ObamaCare wreck the one health care reform that is actually doing what it promised? A piece this week on BenefitsPro.com, a site covering the workplace benefits world, suggests the answer is yes.

The article notes that ObamaCare's coming "Cadillac Tax" on employer-provided health plans "could devastate the use of Health Savings Accounts and the ability of employers and employees to realize all their benefits."

HSA plans combine a high deductible health plan with a tax-exempt savings account, into which individuals and employers can contribute money each year. Any interest earned in the HSA belongs to the individual, any money spent out of the account on health care isn't taxed at all, and any funds left at the end of the year roll over to the next.

The idea is to encourage consumers to be more frugal in their use of health care by making them more directly aware of costs and rewarding them for being prudent shoppers.

The popularity of HSA plans is undeniable. Congress authorized these accounts in 2005, and by the end of last year 17 million people had enrolled in one, amassing $24.2 billion in assets, according to a new report from the Employee Benefits Research Institute . Half of companies with 500 or more workers offer an HSA plan today, and two thirds say they're very likely to do so by 2017.

Their success is undeniable as well. The federal government's own national health care spending report credits the rise of these "consumer directed health plans" for contributing to the slowdown in health spending growth over the past several years.

So why will ObamaCare's Cadillac Tax bring this HSA train to a screeching halt?

It imposes a 40% excise tax on employer-provided health insurance premiums above a certain threshold in the law — starting at roughly $10,200 for an individual plan.

While the tax was sold as way to discourage gold-plated plans — thus the name — it will hit 48% of employers when it goes into effect in 2018. And just five years after that, 82% will be affected.

This is a problem for HSAs because the Democrats who drafted the Cadillac Tax decided to count employer and employee contributions to HSAs as part of a plan's premium cost.

Say, for example, a worker's health plan costs $9,200 a year in premiums, and she and her employer kick in $3,000 into an HSA. ObamaCare would say the plan's premium was $12,200 — which is $2,000 above the tax threshold. So that plan would get hit with an $880 — nondeductible — excise tax.

The BenefitsPro article says that those involved in benefit plan design "are already working to address the anticipated impact of the tax by reducing or eliminating their pre-tax contributions (into HSAs) in order to avoid reaching the threshold." As a result, ObamaCare's Cadillac Tax "will undermine the ability of employers to even offer insurance and for individuals to save for their own health care expenses."

If Congress does nothing else on ObamaCare, the Cadillac tax should be eliminated, before it wrecks the only health care reform that's actually doing what it promised.

Follow John Merline on Twitter: @IBD_JMerline.