After-Tax HSAs a Strategy for Avoiding Excise Tax

Health plan costs that may trigger the excise tax on high-cost plans under the Patient Protection and Affordable Care Act (ACA) do not just include the basic cost of coverage, notes Tracy Watts, Washington, D.C.-based U.S. leader for health care reform for Mercer. They include the cost of onsite clinics, as well as pre-tax contributions made to health reimbursement accounts (HRAs), flexible spending accounts (FSAs) and health savings accounts (HSAs).                

Speaking to attendees of a Mercer webcast, Watts shared that a recent survey by Mercer found, if employers made no changes to their plans, considering basic plan costs only, 31% will trigger the excise tax in 2018, and 51% will trigger it by 2022. “This is before you add other components,” she said.

To date, the most popular strategies employers have been using to try to avoid triggering the 40% tax are adding or increasing enrollment in consumer-driven health plans (CDHPs) and changing plan design to shift costs to employees.

Joe Kra, a Mercer actuary based in New York, said there are several things to consider to reduce basic health plan costs, including revisiting actuarial methodologies such as plan pooling and tier ratios; changing plan design, for example, covered benefits, copays and deductibles; using health management or efficient provider networks; and reconsidering the tax treatment or limits of account contributions.

Joe Badalamenti, an actuary based in Chicago who leads consulting engagement for Mercer, explained that offering an FSA with a non-high-deductible health plan (non-HDHP) or an HSA with an HDHP, both funded with pre-tax contributions, increases employers’ exposure to triggering the excise tax. The underlying plan costs would have to be lowered to avoid doing so.

Employers could reduce contributions to or eliminate these accounts, convert pre-tax contributions to after-tax, have employees independently fund a tax-preferred HSA, or convert the FSA to a dental and vision-only FSA. Employers with non-HDHP health benefits could also switch to an HDHP and use the after-tax HSA strategy.

Using the after-tax HSA strategy and increasing employee compensation can result in offering the same value to employees, Badalamenti added. For example, if an employee makes $50,000 per year and contributes $2,000 pre-tax to an HSA, the employee’s taxable compensation is $48,000 per year. If the employee contributes $2,000 after-tax to an HSA, his taxable compensation is $50,000, but he gets and above-the-line tax deduction of $2,000.

Kra further explained that if an employer offers a preferred-provider organization (PPO) plan that costs $12,000, it could switch to an HDHP that costs $10,000, adjust employee compensation by $2,000 and allow post-tax HSA contributions of $2,000 outside of the plan. “Net, employees are still getting $12,000 worth of value, with no taxable income,” he said.

Kra noted that compensation changes aren’t so simple; if employers give additional compensation to employees participating in the plan and to those not participating, employers overall costs go up, but if they don’t give it to those not participating, it doesn’t seem right. Also, will the employer give more to those with families? “It will require a number of iterations to find a path that may work,” he said.

Jay Savan, a Mercer consultant in Atlanta, added that participants will need to become mindful of how to maximize their benefits as employers change their offerings, so a new strategy will require more education effort. “Today, most employers do not facilitate post-tax contributions to HSAs. It will require not only an operational switch, but they will need to help employees understand what it means,” he said.

In addition, employers that make HSA contributions (seed, wellness incentive, etc.) may be subject to rigid HSA comparability rules, according to Savan.

However, he noted that overall, a post-tax HSA strategy can really be advantageous to employees who save in the accounts up to the time of retirement and do not spend them all.

Badalamenti told webcast attendees that there will come a point where even a minimum value plan will exceed the threshold for triggering the ACA excise tax, even without some kind of account added on because health plan costs increase at a greater rate than the indexing on the threshold for triggering the tax. “But, there is nothing to stop an employer from offering a plan that is not minimum value with a post-tax HSA,” he said.

Finally, Watts said private exchanges provide a platform to efficiently execute the post-HSA strategy discussed. In addition, Mercer has found with its Mercer Marketplace private exchange that given choice and decision support, most employees buy down on health insurance.

“Employers want to think about their total rewards strategy, and want to adjust benefits in a way that will still deliver value to participants. If they reduce medical benefits, it will affect their employment value proposition and the ability to attract and retain workers,” she concluded.