Published reports suggest that the idea of taxing employer-provided health insurance is losing ground, though still on the bargaining table.


Sen. Kent Conrad (D.-N.D.) has noted that such a proposal appears to be unpopular with voters. Indeed, a recent Quinnipiac University poll of 3,063 people found that 63% of the respondents opposed a tax on employer-provided health benefits, while 55% favored limiting tax deductions for families earning more than $250,000 a year.


Paul Dennett, senior vice president of health care reform for the American Benefits Council in Washington, D.C., cautions that treating such coverage as taxable income could spike premiums by 25% to 35% or more, depending on one’s tax brackets.


“Our preference is to finance expanded health care coverage for all Americans as much as possible from savings in the more than $2 trillion a year that we already spend on health care,” according to Dennett, who notes that research suggests a highly efficient system, while difficult to attain, could generate savings of 25% to 30%.


David Janus, a principal with Charlton Consulting Group, Inc. in Rockville, Md., who writes a blog on health care reform, predicts that any final health care reform legislation would be limited in scope to garner enough support and that any benefits taxation more than likely would be confined to those earning $250,000 a year.


But taxing only the plans of highly compensated individuals could prove be a half-baked means of funding universal coverage.


“My sense is that if the tax exclusion is dealt with only on a means test that only impacts a higher income, there just may not be enough revenue given the magnitude of the health reform proposals on the table,” notes Michael Thompson, an actuary and principal of global human resources for PricewaterhouseCoopers LLP health care practice in New York.


Although lawmakers are waist-deep in proposals, which form such a tax would take is still anyone’s guess. Janus, for instance, wonders whether employers will be taxed alongside their employees or lose the tax deduction for that expense.


Thompson wouldn’t be surprised if Congress agrees to incrementally phase in more people over time to avoid any immediate financial hardship associated with taxing health benefits. “One of the devils in the details is how do they index this and exactly how are they going to set it up?” he asks.


Another issue to consider is whether to separate the tax treatment of, say, families with spouses from those with spouses and children and have the latter group shoulder a heavier load. What many employers are likely to do under this scenario is offer options that would generate no or low imputed income and allow employees to buy up more generous coverage on their own nickel, he adds.


Thompson also says employers would need to dream up more equitable ways to establish a tax-favored benefit threshold. “The problem is that it would require a great deal of administration to determine the value of this benefit versus that benchmark plan,” he explains, raising a parallel to the infamous Section 89 proposal that collapsed under its own weight 20 years ago.

Guest blogger Bruce Shutan is a former managing editor of Employee Benefit News and a freelance writer based in Los Angeles.

Register or login for access to this item and much more

All Employee Benefit News content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access