Under the current tax system, health insurance premiums are exempt from federal income and payroll taxes.This includes the portion that employers pay as well as the portion that employees pay. As a result of this tax break, employer-based health insurance is very attractive.
Now, Congress is considering health care reforms to cap the employer-tax exclusion or to eliminate it completely. The National Association of Health Underwriters opposes this proposal, as do many employers.
The current system saves workers – or costs the government, depending on your point of view – approximately$250 billion in federal taxes each year. According to the Tax Policy Center, however, the advantage is skewed toward higher-earning employees. Furthermore, the policy may have the side effect of encouraging more expensive health insurance policies.
An article appearing in Forbes expresses similar criticisms, stating that the tax break contributes to rapid increases in health care costs, and adds that it also helps to limit wage growth. Employers may be more likely to increase compensation in the form of health benefits rather than wages in order to take advantage of the tax exemption.
Opponents of the proposal to end or cap the tax exemption, including the National Association of HealthUnderwriters, worry that it would be detrimental to the employer-sponsored health care system. More than 175million Americans use employer-sponsored health insurance, which is effective at distributing risk among healthy and unhealthy individuals. Elimination of tax exemption could lead to the degradation of these plans, and employers may lose motivation to act as advocates for their employees in health benefits issues. Capping the tax exemption could result in employers offering less in terms of health benefits, thereby shifting health costs to workers.
What Does It Really Mean?
Business Insurance states that tax reform legislation is unlikely to pass in the immediate future, but bills that would affect the tax exclusion have been introduced. One, H.R. 5284, could include a cap on the tax exclusion.
If the employer tax exclusion is eliminated or capped, businesses will be affected. If the exemptions are not replaced with other incentives, employers will lose the advantage they currently gain from offering highly comprehensive health benefits in order to attract employees. Employers may, as a result, have to rethink their compensation packages. Reducing benefit offerings could upset employees, while keeping benefit offerings the same despite tax exclusion changes would result in higher costs, meaning that employers may be faced with some difficult decisions.
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