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December 2016  Volume 14, Number 12        

health benefits

Tax Reform Proposal Would Undermine Health System

Various proposals in Congress would eliminate or cap the employer tax exclusion for health insurance. Now’s the time to make your voice heard!

It’s the largest subsidy in the tax code. Proposals in Congress that would eliminate or place a cap on the employer tax exclusion for employee health insurance would seriously harm the employer-sponsored health insurance system, the National Association of Health Underwriters (NAHU) contends. “Eliminating the exclusion would also eliminate most of the advantages of employer-sponsored insurance while capping it would degrade the benefit and serve as a tax increase for middle-class Americans,” NAHU says.

The employer-based health insurance system helps provide workers and their families with affordable coverage through group purchasing and economies of scale by spreading risk. More than 175 million Americans receive health insurance through the employer-based system.

Currently, premiums for employer-sponsored health insurance plans are excluded from federal income and payroll taxes. This tax exclusion saves employees more than $250 billion a year in federal taxes, and additional billions in state taxes. This reduces the average worker’s cost of health coverage by about 30 percent.

“Eliminating the exclusion would eliminate most of the benefits of employer-sponsored insurance,” NAHU says. “Employers and individuals would lose many group purchasing efficiencies, and there would no longer be a potent means for spreading risk among healthy and unhealthy individuals and maintaining stable coverage. Workers would be less likely to have their employer as an advocate in coverage disputes, and employers would be less likely to involve themselves in matters of quality assessment and innovation for their employees. Employers need a healthy workforce and the uncertainty of employee coverage could affect worker productivity.”

Tax Exclusion = Incentive for Employers

The tax exclusion serves as an incentive for employers to offer insurance to their employees. Likewise, eliminating the exclusion would reduce this incentive because employers would face increased income taxes.

“The likely result would be less generous benefit plans,” NAHU says. “Employers choosing to no longer sponsor insurance but instead to increase salaries to assist their employees in purchasing plans on the individual market would similarly face increased FICA matches and the employees would face increased taxes. Given these increased taxes, the remaining salary would be less than the amount of the plan, resulting in less-valuable coverage than the employee previously received.

“Alternatively, capping the exclusion for employees would degrade the benefit and serve as a tax increase for middle-class Americans. Similar to the Cadillac/excise tax, employers would be incentivized to not offer coverage to their employees who would fall below the value of the cap in order to avoid paying any increased taxes. This could result in a race to the bottom for employers to offer coverage that wouldn’t meet the cap’s thresholds. As healthcare costs continue to increase, employers may be forced to increasingly shift costs onto employees in the form of higher copayments and deductibles,” says NAHU.

Cadillac Tax Battle Continues

The proposals to eliminate or cap the employer tax exclusion for employee health benefits come as the battle over the Cadillac tax continues on Capitol Hill. Authors of the Affordable Care Act created the so-called Cadillac tax to help pay for the Affordable Care Act’s subsidies. This excise tax would affect the most expensive health insurance plans. However, with inflation, many plans, including some union plans, will fall under the tax’s definition of “high-cost health plan” shortly.

“It’s hard to find fans of the tax these days,” Dan Diamond wrote in a Politico story. “Its implementation has been delayed until 2020, and Hillary Clinton has come out against it. Donald Trump, who favors repealing the whole [Patient Protection and Affordable Care Act] law, is also against it. If the Cadillac tax does get rolled back, that will re-open one of the [Affordable Care Act’s] peskiest policy fights. As…[a recent] event pointed up, economists generally agree to curb the employer exclusion—somehow—but considerably disagree over the form that would take and the a deductibles and out-of-pocket expenses.”

Arguments for Change

In his Forbes article, “Capping the Tax Exclusion Will Not Destroy Employer Health Insurance,” Joseph Antos, the Wilson H. Taylor Scholar in healthcare and retirement policy at the American Enterprise Institute, wrote that the tax exclusion fuels the rapid growth of health spending and contributes to stagnating wage growth.

“The exclusion can be restructured to promote better health insurance choices that lead to more efficient, higher value care,” Antos wrote. “Such reforms can make the subsidy fairer without eliminating the financial incentive employers have to offer health coverage to their employees.”

How to Get Involved

NAHU is concerned about any proposal that would cap or eliminate the exclusion and is urging insurance agents, brokers and employers to take action.

“We urge Congress to maintain the system that has worked for Americans for decades, and preserve employer-sponsored health coverage through the continuation of the employer exclusion,” the NAHU says. “Over the coming weeks, as Congress discusses various healthcare reform proposals, we want to be sure that they hear directly from agents, brokers and employers about the value of the employer tax exclusion.”

Employers will be most directly impacted by the elimination or cap of the employer tax exclusion. They can get involved by contacting their senators and representatives to ask them to oppose the elimination or cap of the employer tax exclusion of health insurance in any healthcare reform legislative proposals.

For more information on the benefits of group health coverage, please contact us.

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In this issue:

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Tax Reform Proposal Would Undermine Health System

Why Life Insurance Is a Smart Investment

Asthma and Allergies: How Companies Can Breathe Easier

Sales of Long-Term Care Insurance Policies Rising



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