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PSCA Executive Reports

January 31, 2018

Health and Welfare Provisions in Tax Reform

1. Indexing for Health FSA, HSA, and Cadillac Tax Dollar Thresholds is Changed from CPI-U to Chained CPI-U

  • Prior Law –The dollar thresholds for employee contributions to health flexible spending arrangements (“FSAs”), contributions to health savings accounts (“HSAs”), and the 40% excise tax on high cost coverage (the “Cadillac Tax”) were adjusted annually for inflation based on the consumer price index (“CPI-U”). 
  • What Changed – The dollar thresholds are adjusted annually for inflation based on “Chained CPI-U” rather than CPI-U. Chained CPI-U is expected to result in relatively reduced inflation adjustments compared to CPI-U. This means that the dollar thresholds will likely increase at a slower rate than under prior law.
  • When – Unclear, but it appears to be effective beginning in 2018.

2. Employers May Claim a Tax Credit for Certain Paid Family and Medical Leave Provided to Employees

  • Prior Law – Employers could not take a tax credit for compensation paid to employees during family and medical leave.
  • What Changed – Employers that pay employees during family and medical leave and meet certain requirements may temporarily claim a tax credit of 12.5% of the amount of wages paid for 12 weeks, increased by .25% for each percentage point by which the rate of payment exceeds 50% (not to exceed 25% of the wages paid). To qualify for the credit, the employer generally must have a leave policy that allows all qualifying full-time employees at least 2 weeks of annual family and medical leave and pay at least 50% of the wages normally paid to the employee during the leave (and have commensurate policies for part-time employees). Certain types of leave, such as leave paid by a state or local government or required by state or local law, are not considered family and medical leave for this purpose. 
  • A qualifying employee is one who has been employed for at least a year and, for the preceding year, had compensation less than $72,000 (for 2018) – i.e., 60% of the Code section 414(q) compensation threshold for highly compensated employees.
  • When – 2018 and 2019.

3. No Individual Mandate Penalties

  • Current Law – Most individuals must have minimum essential coverage (“MEC”) or be subject to a penalty.
  • What Changed – The penalty for not having MEC is reduced to zero.
  • When – Beginning in 2019.

4. Medical Expense Deduction is Reduced from 10% to 7.5% of AGI for 2017 and 2018

  • Prior Law – Individuals could deduct medical expenses to the extent the expenses exceed 10% of adjusted gross income (“AGI”). 
  • What Changed – The 10% threshold is temporarily reduced to 7.5%.
  • When – 2017 and 2018.

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