$179 for a Cadillac?!

There have been a lot of numbers bandied about surrounding the Senate Finance Committee health insurance reform bill.  One of the big issues, going forward, will be the idea of a 35% tax on so called Cadillac health plans.  While in principle the idea sounds good, tax the carte blanche plans of corporate executives, the reality falls well short. According to the bill as written, the luxury tax will kick in at $21,000 for families and $8,000 for individuals.  Again this looks okay until you delve deeper.

First of all realize that these limits don’t actually apply until 2013.  Expecting that the cost of health insurance premiums continues to rise at the 8.7% average per year it has maintained over the last ten years (1999-2009) a $5731 policy today would qualify as a Cadillac in 2013.  Even if we hope that increases hold to the 6.1% average we have seen for the last five years (2004-2009) any policy in excess of $6313 today will be subject to the tax in 2013.  And this is the sunny scenario.

The quick calculations above make the faulty assumption that your only medical benefit is health insurance.  If you are like most Americans you have a Flexible Spending Account (FSA) or some other form of health savings account through your employer.  Congratulations, that qualifies as a medical benefit and has to be included in the $8000 Cadillac limit.  Although there are no federal limits on how much you can contribute to a Health Care FSA most employers (FSAs are administered by your employer) limit your contribution to either $2500 or $5000 per year.  $35% of eligible employees contributed an average of $1235 each to their HC FSA in 2005[1].  Ignoring for a moment the effect of increased deductibles and movement from traditional health insurance to cafeteria plans in the last four years that $1235 contribution in 2013 dollars translates into a Cadillac limit of $4846 today.  But we’re not done yet folks.

Employers who offer Health Care Flexible Spending Accounts generally also offer Dependant Care Flexible Spending Accounts (DC FSA).  While limits on HC FSA are open ended, a DC FSA is rigidly limited by the IRS.  You are allowed to contribute $5,000 per family, or $2,500 per individual filing separately, which can be used to pay for medical expenses for minor children or aged parents.  As you may have guessed by now this is also a medical benefit subject to the Cadillac limit.  Assuming you, as an individual, make the maximum contribution to your DC FSA of $2500 your allowed health insurance premium drops again.  Contributing the average amount to your personal HC FSA ($1235) and the IRS limit to your DC FSA ($2500) would mean any health insurance plan costing more than $3055 in 2009 would subject you to the Cadillac Tax in 2013.

Now let’s be frank.  While a $1235 HC FSA contribution may have seemed adequate in 2005 that is just not the case these days.  Deductibles, co-pays and out of pocket limits have all increased in the last four years as companies and individuals have struggled to keep insurance affordable.  I see no reason why this will magically change before 2013 and nothing in the Baucus bill that would bring about that change. So with out-of-pocket expenses increasing it seems reasonable for individuals to “max out” their HC FSA contribution.  Even allowing for a reasonably low employer limit ($2500) this has a significant impact on what you can pay for insurance before hitting the $8000 limit.  With HC FSA ($2500) and DC FSA ($2500) contributions your remaining limit before hitting the Cadillac Tax is $2149 (2009 dollars).  $2149 translates to $179.07 per month.  That includes both your personal contribution as well as what your employer kicks in every month.

If Senator Baucus wants to increase, drastically, the number of medical bankruptcies he is definitely going about it the right way.

[1]  Flexible Spending Accounts, Employee Benefit Research Institute: 21 September 2009