More Areas of Reform

Are there changes to Health Spending Accounts (HSAs), Flexible Spending Accounts (FSAs) and Archer Medical Spending Accounts (MSAs)?

Yes, there are several:

For FSAs under a cafeteria plan, annual contributions will be limited to $2,500, beginning in 2013; the cap is indexed to the Consumer Price Index – Urban (CPI-U) for subsequent years. There is currently no federal limit and employers set the annual cap.

The FSA definition of qualified medical expenses is the same as those allowed under itemized tax deduction. Previously, employers could be more restrictive than the government as to what qualifies as an acceptable medical expense. This change, effective January 1, 2011, no longer allows coverage of OTC items unless directed by a physician.

The additional tax that applies to early distribution for nonqualified medical expenses before age 65 has gone up: for HSAs, the tax has increased from 10% to 20% and for Archer MSAs, from 15% to 20%.

The threshold of adjusted gross income for deducting medical expenses is raised from 7.5% of adjusted gross income (AGI) to 10%. Those 65 and over can continue to claim 7.5% of AGI through 2016.

What are the details on the so-called ‘Cadillac plan’ excise tax for small businesses?

The federal excise tax, often called the “Cadillac plan tax,” due to take effect in 2018, will apply to insurers and plan administrators in the group and self-insured market. It won’t apply to the individual market except for coverage eligible for the self-employment deduction.

The excise tax is set at 40% of the amount in excess of a threshold premium of $10,200 for single coverage and $27,500 for family coverage. The threshold premium is indexed to the CPI-U plus 1% in 2019 and the CPI-U only for 2020 and after.

There are several caveats: The threshold premium is increased by $1,650 for single coverage and $3,450 for family coverage for retirees age 55 and older and for plans that cover workers in high-risk professions. There is also an adjustment for firms with higher health costs due to the age or gender of employees. Finally, there may be an adjustment to the initial premium threshold if there is unexpected growth in premiums before 2018.

What new rules apply regarding insuring dependents through age 25?

This is a new option that took effect in September 2010. Note that parents are not required to put their children back on their plans—the provision was intended to ensure coverage for young people who, for various reasons, can’t obtain or afford their own insurance. Until 2014, only young people who are not offered coverage by their employer can stay on their parents’ coverage until age 26. Beginning in 2014, this provision applies to all young people, whether or not their employer offers them coverage.

  • The last day a plan can extend coverage is the day before the 26th birthday
  • The employer can extend coverage through the end of the year of the 25th birthday without adverse tax consequences to the employee
  • Employers may not levy a surcharge for extending adult dependent coverage

Note that maternity benefits may be excluded in some cases: If an employer currently offers maternity benefits to dependents, the coverage must now be offered to adults up to age 26. Otherwise, maternity benefits may be excluded for this entire group until 2014, when they become part of the essential benefits package and must be covered.