Employer Health Premium Tax Exclusion In Jeopardy – While the talk of ‘repeal and replace’ go on in congress, business owners and those covered by a group health plan might want to take note of proposals being floated in congress that might affect the tax treatment of those benefits.
As it stands now, premiums paid for employment-based health insurance are excluded from federal income and payroll taxes for the employee, and deductible as a business expense by the company. There are currently several proposals in Washington, DC attempting to cap the exclusion.
How? By limiting the allowable deduction, the government stands to get $264 billion in additional tax dollars according to a recent Forbes Article.
The Health and Human Services (HHS) Secretary Tom Price’s bill caps the exclusion at $8,000 for single coverage and $20,000 for all other coverage.
Paul Ryan’s “A Better Way” proposal does not disclose numbers but prefers a tax cap to the current open-ended system.
In 2017, the tax exclusion will cost the federal government an estimated $260 billion in income and payroll taxes, making it the single largest tax expenditure.
Those who argue for preserving the Open-ended Tax Exclusion have noted in the Forbes article, “The tax exclusion saves workers over $250 billion a year in federal taxes and billions more in avoided state taxes. For the average worker, that reduces the cost of their health coverage by at least 30%.” The exclusion also gives employers an incentive to offer health insurance to employees—which is how about 57% of the under 65 population receives health coverage.
According to a recent NJAHU article, “Proposals that would cap the maximum value of the exclusion or eliminate it altogether would be detrimental to the stability of the employer-based market and would negatively affect many middle-class New Jerseyans who currently benefit from this provision,” explains NJAHU President Toby Stark. In addition, not accounting for regional differences in health premiums will negatively affect high rate areas such as the Northeast much more than they might affect other areas such as the Midwest. Any final law must include a regional component of any imposed exclusion limit.
According to a recent NY Times report, proponents of the tax exclusion cap feel the open-ended nature of the current tax subsidy has likely increased health care costs. Because there is no limit on the amount that may be excluded from income, workers may be encouraged to purchase more comprehensive policies with lower cost sharing and higher tax-free premiums. This makes consumers less sensitive to cost and promotes the use of medical services that might provide little value.
Whatever the final consensus is, I believe there needs to be some balance between open ended tax deductions and capped deductions in a way that allows for regional differences in premium costs, all while maintaining the integrity of the employer based health insurance market.
– James Eckardt is the owner of Peak Advisors, Inc. and a licensed Life/Health/and P&C insurance broker.