Flexible spending accounts have long been a favorite tool among working Americans to help budget for out-of-pocket costs, but new research suggests health care FSAs could be an unintended casualty of health care reform. And the only way to keep them from running out of gas would be if they’re exempted from the Cadillac tax or the tax is completely repealed.

FSA balances are counted as an employer-paid premium toward the 40% excise tax calculation on high-cost employer-provided health plans. The Cadillac tax could affect 25% of U.S. employers when it takes effect in 2018, according to a Kaiser Family Foundation analysis. KFF predicts that as many as 42% of all employers could be affected by 2028 as they seek to reduce their exposure to the tax.

One published report tied this anticipated increase to health care premiums rising faster than the Cadillac tax’s threshold maximums. Larry Levitt, KFF’s SVP, recently told CNBC.com that “virtually every employer will be subject to the Cadillac tax” over time.

Also see: Cadillac tax: A huge car wreck for employers?

Assuming annual premium increases of 5%, the analysis noted that 16% of employers would have at least one health plan exceeding the Cadillac tax threshold for individual coverage in 2018 – a number that rises to 26% if FSAs are included. Aon Hewitt estimates that nearly all large companies offer their employees health care FSAs, with participation ranging from 17% to 20%.

Bill Sweetnam, legislative and technical director of the Employers Council on Flexible Compensation, says the KFF analysis accurately reflects what his group’s members are starting to see when determining where FSAs, health savings accounts and health reimbursement arrangements fit into the Cadillac tax.

“Whether the Kaiser study is accurate or not, I don’t think anyone really knows what the effect is going to be at this point in time,” observes Rob Hayes, a principal with Custom Benefit Administrators and BASIC, a third-party administrator specializing in FSAs.

Also see: Obama administration seeks industry input on Cadillac tax

As 2018 draws closer, he believes more attention probably will be paid to exempting these popular funding vehicles from the Cadillac tax as the issue becomes more of a top priority. Sweetnam says the FSA issue had been flying under the radar of politicians and employers who were preoccupied with other matters, but now it’s starting to garner attention as details of the excise tax become revealed. The Treasury Department and IRS only recently began to address regulations to implement the tax, he adds.

Sweetnam cites an aggressive effort by the Alliance to Fight the 40, a coalition of business and labor leaders, to lobby members of Congress for a complete repeal of the Cadillac tax, which would take care of the FSA problem. But if that campaign should stumble, he believes there could be additional discussions about exempting FSAs, HSAs and HRAs from the tax so that average workers aren’t caught in the crosshairs of a congressional push for revenue.

Also see: A united front against the Cadillac tax

Hayes questions why FSAs are considered employer-paid premiums, describing the IRS view of these accounts as welfare benefit plans as “twisted logic.” If FSAs are not removed from the Cadillac tax calculation, then he has no doubt employers will drop or scale back their FSA to avoid paying the tax.

“No employer is going to pay a 40% tax so their employees can save 25% to 50% [in] personal taxes on FSA contributions,” he says. “Having said this, we do not believe the Cadillac tax will impact very many employers at least for the first few years.”

Bruce Shutan is a Los Angeles-based freelance writer.

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