Tax reform offers new opportunities – and risks – for employer-sponsored health plans
Republican lawmakers, whose efforts to repeal and replace ACA collapsed last week, will have another shot at rolling back Obamacare as part of their upcoming tax reform efforts — a move that could open up employer-based plans to new tax breaks, but could also potentially spur new costs.
Industry officials said that even with the Senate’s fight to repeal the Affordable Care Act now dead, there still is a slate of opportunities to make key changes that would benefit employers. Those could include a rollback of the Cadillac tax on high-cost health plans and other ACA taxes that impact employers indirectly. Lawmakers could also use tax reform to once again target the employer mandate and to push through changes that would expand the use of health savings accounts.
But, experts noted, a broader discussion around taxes could open the door for lawmakers to reexamine the tax exclusion on employer-based health plans.
Marc Short, the White House’s legislative director, said on Monday that he hopes to move tax reform through Congress this fall. It’s unclear which, if any, healthcare provisions will make it into a broader legislative package of tax reforms at this early stage, but there are ample potential starting points.
One of the biggest priorities for employers remains the removal of the Cadillac tax.
“The big issue that has played out that directly affects employers was, and continues to be, the Cadillac tax,” says Michael Thompson, president and chief executive of the National Alliance of Healthcare Purchaser Coalitions. “The tax is both unfair and very significant in the context of many employers, so I think that fight will continue.”
The Senate passed, with limited Democratic support, an amendment to repeal the excise tax on employers as part of its late-night voting session last Thursday, which was tied to overhauling the ACA.
No final bill was approved and so the amendment will not move forward, but supporters say the vote suggests there could be an appetite for removing the tax at a later date. The measure was introduced by Sen. Dean Heller, R-Nev., and it passed by a vote of 52-48. The House and Senate had both called for delaying the Cadillac tax in prior bills.
“My amendment’s passage sends a message that Congress is serious about lowering costs for all Americans and it’s a positive step toward improving healthcare for Nevadans and Americans around the country,” Heller said in a statement.
However, experts noted, tax discussions could lead to a reexamination of the tax exclusion on employer-based health plans. House lawmakers included a cap on the exclusion set at the 90th percentile of current premiums in a draft bill that was leaked earlier this year, though neither the final House bill, nor the plans debated in the Senate, ultimately included the measure.
The issue is one, however, that could return in the context of tax reform.
“The biggest source of tax revenue today is in fact the employer exclusion, and certainly employers are vulnerable to that being included this time around in the tax discussions,” Thompson says.
The exclusion — which exempts employer-paid premiums from both federal income and payroll taxes — cost the government an estimated $250 billion in fiscal year 2016, according the Congressional Budget Office. Employers groups and others have been urging lawmakers not to cap the exclusion at any level.
“That was ultimately not included in what the House considered or what the Senate considered, and clearly Congress was intentional about that decision to not include the cap in healthcare reform, and so I would hope that decision would extend to tax reform,” says Kathryn Spangler, senior vice president of health policy at the American Benefits Council.
Observers noted that other taxes imposed under Obamacare also could come up for debate again as part of a broader tax discussion, including those levied on medical devices, health insurers and prescription drugs. Although the taxes are not directed specifically at employers, experts say those costs can be passed on to businesses and workers.
“To the extent that the other ACA taxes [beyond the Cadillac tax] are passed through to employers and employees, we would support getting rid of them as well — or delaying them as long as possible – because they only add to our costs,” says Steve Wojcik, vice president of public policy at the National Business Group on Health.
It’s also possible that lawmakers could again try to reform the rules governing tax-advantaged health savings accounts and flexible spending accounts as part of the upcoming debate. The House and Senate healthcare proposals both included some changes, such as raising contribution limits for HSAs, that could be renewed in that context.
“It’s very encouraging on that level and I’m hopeful that [the language] will remain in plans going forward,” says John Young, senior vice president of consumerism and strategy at Alegeus, a healthcare solutions provider.
Industry officials say they would also welcome additional reforms, such as a provision that would permit high-deductible plans to cover medications for certain chronic conditions before a deductible is met. Typically, pre-deductible preventative care is covered, but not much else.
It’s also technically possible that lawmakers could use the tax debate to continue to try and eliminate the individual and employer mandates under the ACA, although such a move could derail efforts to win bipartisan support for any final tax bill. Critics have warned that doing so could raise the number of uninsured and drive up premium costs.
Still, removing the employer mandate would likely simplify the regulatory demands placed on businesses, even those that would likely keep offering coverage to their workers.
“A lot of our members are large employers and they offered coverage before the ACA was passed and a great majority of them would continue to offer it, but I think the employer mandate overlaid a lot of complexities into what they would have to offer – employers have to meet a value test as well as an affordability test,” Spangler says. “A lot of that got really complicated for employers.”