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Tax reform bill, or new ACA repeal effort, could tax employer health coverage
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The tax exclusion for employer-provided health benefits will stay in Congress's crosshairs, Washington watchers predict.
As part of efforts to reform the tax code—or under a back-from-the-dead effort to repeal and replace the Affordable Care Act (ACA)—employers could be taxed on group health benefits provided to workers, or employees could be taxed on benefits they've received.
Health policy experts tackled these questions on March 30 at the Health Business Agenda 2017 conference in Washington, D.C. The annual confab is sponsored by the nonprofit National Business Group on Health, an employers association.
'Where the Money Is'
"Employer health care contributions are going to be part of this debate, whether it's tax reform or health care reform," said J.D. Piro, senior vice president at consultancy Aon Hewitt in New York City. The tax exclusion for employer-provided health coverage is the biggest tax preference in the Internal Revenue Code, he explained, and is estimated to reduce government revenues by nearly $700 billion annually. "Why tax health care benefits?" he asked. "Why rob banks? As [bank robber] Willie Sutton said, that's where the money is."
With regard to the ACA's
"Cadillac tax"—a 40 percent excise tax on workplace health plans, kicking in above certain dollar-value thresholds—"there is not a constituency for making the Cadillac tax work; there is a constituency to get rid of it," Piro noted. Still, it remains "a tax that everybody has to plan for."
Another consideration, he said, is that the Cadillac tax "will be on the table [as a bargaining chip] in terms of taxing employee health care benefits more broadly, which has been part of every tax debate."
Because both employer and employee pretax contributions to health savings accounts (HSAs) are counted as part of a plan's value in reaching the Cadillac tax thresholds—$10,200 for individual coverage and $27,500 for families, indexed for inflation—employers are concerned that the tax, unless revised or repealed, will undermine their ability to fund HSAs and similar accounts.
"Economists say that the tax exclusion [for employer-provided health care] is a primary driver of cost. One way to deal with the cost issue is to give people a sense of ownership of their health care dollars" through HSAs, Piro said. "The Cadillac tax works against that because it would tax employees' HSA contributions as employer contributions."
He added, "If you want to give people a sense of ownership of their health care, not taxing HSA contributions is a way to do it."
A Cloudy Outlook
Until Congress changes the law, the IRS will continue to work on implementing the Cadillac tax, now set to take effect in 2020, said Robert Neis, benefits tax counsel at the U.S. Department of the Treasury in Washington, D.C.
At the same time, he noted, "We are keeping a very close eye on the legislative activity. We don't want to put a lot of hours and scarce resources into developing a lot of guidance that may be irrelevant in a few weeks, or put out proposed rules that [employers] might want to hire very expensive lawyers to comment on, if [the Cadillac tax] isn't going to go forward. So we're keeping an eye on the situation, monitoring it day by day, like you are, and making decisions as circumstances develop."
[SHRM members-only HR Q&A:
Will an employee be taxed when the employer reports the cost of health benefits on his or her W-2 form?]
Cadillac Tax vs. Capping the Tax Exclusion
An early draft of the GOP leadership's proposal to repeal and replace the ACA
included a cap on the employer tax exclusion for health benefits, a move that the Society for Human Resource Management and other employer groups strongly opposed, just as they are against the Cadillac tax and advocate for its repeal.
A tax-exclusion cap could be more difficult to calculate than the Cadillac tax, Neis said. "The cost to an employer of providing health care is something that actually can be determined; the cost or value of the health care that each individual employee gets is a much more difficult calculation to make."
Particularly for self-insured plans, "there are a lot of different ways of allocating the cost of health coverage to employees," Neis said. Under proposals to limit the tax exclusion for health benefits, "basically, the employer would have to calculate its own tax, which is something that the Treasury Department and the IRS will always be a little uncomfortable with."
Of even greater concern, he added, would be determining the amount of tax that an employee would have to pay on benefits received.
"When we put the responsibility for that calculation in the hands of the employer, I find that much more troubling," Neis said. "If the employer makes a mistake in calculating the employer's own tax, then the employer deals with the consequences of that. If the employer makes a mistake in calculating the amount the employee has to add to their taxable income, that I think is really problematic."
He added, "I'm not saying they're insurmountable difficulties, but I think that they present an entirely new set of issues."
Employers Oppose Taxing Health Benefits
Employers throughout the U.S. overwhelmingly oppose taxing employer-provided health care benefits, according to
survey findings published last month by Lockton, a benefits brokerage and consultancy based in Kansas City, Mo.
The survey of more than 800 employers found that 92 percent are against any policy that would tax workers, their families and employers on a portion of health plan premiums. In addition:
Myths vs. Facts on Employer-Sponsored Healthcare Coverage, The ERISA Industry Committee (via the Washington Examiner), April 2017
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