ACA-Repeal Proponents Consider Taxing Employer Health Benefits

Employer groups push back against concept

By Stephen Miller, CEBS Feb 27, 2017
LIKE SAVE PRINT
Reuse Permissions

Updated on March 7, 2017

Update:
 No Cap on Tax Exclusion in Leadership Bill; Cadillac Tax Kept

On March 6, the long-awaited proposed legislation to repeal and replace the Affordable Care Act (ACA), backed by the House Republican leadership, was introduced. The American Health Care Act would not cap the tax exclusion on employer-provided health care but would leave in place the "Cadillac tax" on high-valued workplace health plans.

See the SHRM Online article 'Cadillac Tax' Remains in GOP Health Care Repeal, Replacement Bill.


As Republicans move to repeal and replace the Affordable Care Act (ACA), policymakers are considering capping the tax exclusion for employer-provided health care as a funding mechanism under an ACA replacement plan. Employer groups are pushing back, hard, against that idea.

A preliminary discussion draft for repeal/replace legislation backed by House Republican leaders began circulating on Feb. 24, although it's dated Feb. 10. The measure—a fiscal year 2017 budget reconciliation bill that could be passed in the Senate by a simple majority—would be funded by capping the tax exclusion for employer-sponsored health care, Politico reports. (According to press reports, the House Ways and Means Committee and the Energy and Commerce Committee will soon debate a revised version of the bill.)

"The draft reconciliation bill reflects the piecemeal repair approach to replacing the ACA, rather than a full repeal," said Tom Hospod, a benefits attorney at Sovos Compliance in Wilmington, Mass, in a blog post. "The bill maintains coverage for preexisting conditions, actuarial value requirements, coverage of children to age 26, nondiscrimination provisions, capping of out-of-pocket expenses and the prohibition on lifetime or annual limits."

End of the Employer Mandate?

The yet-unnamed bill would get rid of the penalties for the "shared responsibility" mandate that requires employers with 50 or more full-time employees or equivalents to provide coverage to full-time employees. Zero penalties would make the employer mandate moot, some believe. Others warn that as long as the mandate technically remains in place as law (assuming it cannot be formally revoked through the budget reconciliation process), large employers that withdraw benefits because no penalty would be triggered could be sued for an ERISA-prohibited reduction in coverage—leaving it to the courts to resolve the matter.

(Update: For perspectives on the future of the employer mandate and related tracking and reporting responsibilities under the House GOP's proposed American Health Care Act, see the SHRM Online article Will the GOP's ACA Replacement End the Employer Mandate and Required Reporting?)

Funding for Tax Credits

Significantly for employers, the measure would eliminate the ACA's subsidies to help those with modest incomes purchase nongroup health policies for themselves and instead offer refundable, age-adjusted tax credits, funded by capping the tax exemption for employer-sponsored health care at the 90th percentile of current premiums. Once a health plan’s premium cost exceeds that 90th percentile, premium value in excess of that threshold would be treated as taxable income to the employee, and also subjected to payroll taxes payable by both the employee and the employer.

"The bill would give up all of the taxes that funded the ACA, yet would provide tax credits, albeit less generous than the ACA's, to millions of additional individuals. The only real revenue in the bill is the tax on generous employer plans," commented Timothy Jost, a professor at the Washington and Lee University School of Law in Lexington, Va., in a Health Affairs blog post. 

The ACA's subsidies are, in theory, funded by a number of taxes, fees and penalties, eventually to include the "Cadillac tax"—the controversial 40 percent excise tax on high-cost employer-provided health coverage, now delayed until 2020. It was expected that a "consensus" ACA replacement plan, to be backed by the Trump administration and congressional GOP leaders, would jettison subsidies and instead offer refundable tax credits to help individuals purchase health coverage on the open market. However these tax credits, like the ACA's subsidies, would require a funding source so that the plan would be revenue-neutral, in budget terms.

The GOP House leadership's 2016 "blueprint" for rolling back the ACA had discussed a tax-exclusion cap as an alternative to the Cadillac tax. The idea was again mentioned, without any specific proposal being made, in an outline for replacing the ACA that House Republican leaders presented to their party's members on Feb. 16, titled Obamacare Repeal and Replace Policy Brief and Resources. The document references earlier proposals, going back to the Bush administration, for the replacement of the preferential tax treatment of job-based insurance with a standard deduction of $7,500 for single filers and $15,000 for families.

Health and Human Services Secretary Tom Price, while serving in Congress as a Republican congressman from Georgia, sponsored the Empowering Patients First Act, a bill that would provide refundable, age-adjusted tax credits for people to buy insurance if they don't have access to coverage through an employer or government program. The measure would derive part of its funding—to offset individual tax credits—from limiting the employer tax exclusion to $8,000 for individual coverage and $20,000 for family coverage, with annual adjustments for inflation.

On Feb. 28 during his weekly press briefing, House Speaker Paul Ryan, R-Wis., said: "We want to end the discrimination in the tax code against people who don't get health care at work and equalize the tax treatment of health care so that everybody—regardless of whether you get health care at work or don't—has an opportunity to get a health care plan that's affordable for you. … That is what we're working on with the administration."

The draft bill now being circulated "could be significantly changed before it is introduced in, or passed by, the House," said Mark Wilson, chief economist at the American Health Policy Institute in Washington, D.C. "The final legislation will also be shaped by estimates from the Congressional Budget Office about how much any repeal and replace bill will cost and what its impact will be on the federal deficit."

Wilson has authored a policy brief that highlights how the draft bill would impact large employers

Politico has reported that a forthcoming revised House leadership bill likely won't allow wealthier individuals to claim the tax credit.

Resistance from Employers

"Legislation that would cap the individual tax exclusion for employer-provided health benefits would be a direct tax increase on middle-class Americans and their families, as well as on the businesses Americans are counting on to create jobs," said a Feb. 13 letter to Gary D. Cohn, director of the administration's National Economic Council, signed by the Society for Human Resource Management (SHRM), the American Benefits Council, the National Business Group on Health and 25 other trade associations.

"As Congress considers repeal and replacement efforts of the ACA, SHRM will continue to urge lawmakers to protect and preserve the employer-sponsored system," said Chatrane Birbal, senior government relations advisor at SHRM.

"We understand that crafting a new health care reform bill is a challenging task, but some things are obvious: reform should not destabilize the successful employer-sponsored system, and it certainly should not do so by taxing employees on their valued coverage," commented American Benefits Council President James A. Klein. To make its case, the council posted the paper Taxing Employer-Sponsored Health Benefits: Myths and Realities.

"Like the Cadillac tax, data show that plans with more women, older workers, and those living in high-cost areas will be hit the hardest by capping the exclusion," said a Feb. 23 statement by the advocacy group Alliance to Fight the 40/Don't Tax My Healthcare. The alliance cited a report released Feb. 23 by HR consultancy Mercer showing that proposed caps of $8,000 for individual coverage/$20,000 for family coverage would disproportionately increase income taxes for middle-income Americans earning from $20,000 to $30,000 per year.

[SHRM members-only toolkit: Managing Health Care Costs]

Limited Options

Others, however, point out that any plan that helps to reimburse the purchase of health care will require a revenue source from somewhere. "The reality is starting to set in that we're going to have to pay for whatever ACA replacement comes about," said Garrett Fenton, an employee benefits attorney with Miller & Chevalier in Washington, D.C., in an interview with SHRM Online.

House Speaker Ryan and other GOP leaders "want to expand health savings accounts, and they want to provide a refundable tax credit, similar to what we have under the ACA but different in a number of ways," Fenton said. "These are things that are going to be very expensive."

He added, "It's sort of pick your poison as to which one is worse—a cap on the exclusion for employer-sponsored coverage or the Cadillac tax."

'It's sort of pick your poison as to which one is worse—a cap on the exclusion for employer-sponsored coverage or the Cadillac tax.'

Of these two options, "both could have similar effects," said Steve Wojcik, vice president of public policy for the National Business Group on Health in Washington, D.C. While the Cadillac tax would be paid by employers but most likely passed on to employees through lower pay, reducing the tax exclusion could treat at least part of employees' health benefits as taxable income.

Given both these negative outcomes, what might Congress do instead to fund the GOP's version of health care reform?

"Congress should look to cut out waste and unnecessary spending [on health care], rather than taxing some people's health benefits to pay for others' coverage," Wojcik said. "It would benefit both groups if Congress made the hard decisions to move faster away from fee-for-service in Medicare, enact comprehensive health care legal reform, step up anti-trust enforcement of health care mergers that drive up prices and reduce competition, and eliminate physician and hospital incentives in Medicare that encourage more expensive treatment options that are not necessarily any better clinically than less expensive options or lower-cost settings."

Sound ideas, perhaps, but not so easily tabulated on a budget ledger as a new tax or a reduced tax exclusion.

"It's a political minefield that they're trying to navigate right now, to figure out a way to get some sort of ACA replacement in place," Fenton said, "and then doing it in a way that will keep the conservative Republicans on board because it won't increase the deficit. But finding a way to pay for it without having too much blowback from the public is a very tough thing to do."

Related SHRM Online Articles:

SHRM Health Care Reform Resource Page

Was this article useful? SHRM offers thousands of tools, templates and other exclusive member benefits, including compliance updates, sample policies, HR expert advice, education discounts, a growing online member community and much more. Join/Renew Now and let SHRM help you work smarter.

LIKE SAVE PRINT
Reuse Permissions

SHRM-CP/SHRM-SCP Exam Late Application Deadline: April 14

Apply Now

Job Finder

Find an HR Job Near You
Post a Job

SPONSOR OFFERS

Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 3,200 companies

Search & Connect