United States Capitol Building

Employer Exclusion





ISSUE SUMMARY:

Congress is considering healthcare reform proposals that would eliminate or place a cap on the employer-tax exclusion for health insurance. NABIP is very concerned about these proposals as they would undermine the employer-sponsored health insurance system that provides coverage for more than 175 million Americans. Eliminating the exclusion would eliminate most of the advantages of employer-sponsored insurance, while capping it would degrade the benefit and serve as a tax increase for middle-class Americans.

ACTIVE LEGISLATION:

  • There is no active legislation on this issue.

ACTION NEEDED:

NABIP opposes any efforts that would eliminate or cap the employer-tax exclusion for health insurance. While various pieces of legislation are currently pending in Congress that address the exclusion, NABIP is asking all members to urge their federal legislators to oppose any efforts that would eliminate or place a cap on the employer tax exclusion.

TAKE ACTION:

  • There are no active Operation Shouts on this issue.

BACKGROUND:

More than 175 million Americans currently receive their health insurance through employer-sponsored insurance. The employer-based system is highly efficient at providing American workers and their families with affordable coverage options through group purchasing and its associated economies of scale by spreading risk and avoiding adverse selection. The success of this system is possible because of the preferential tax treatment of employer-sponsored insurance coverage, where employer-paid contributions for an employee’s health insurance are excluded from that employee’s compensation for income and payroll tax purposes. However, some members of Congress are considering proposals that would cap the maximum value of the exclusion or eliminate it altogether.

NABIP is very concerned about the potential impact of eliminating or capping the employer tax exclusion for health insurance. Eliminating the exclusion would eliminate most of the benefits of employer-sponsored insurance. Employers and individuals would lose many group purchasing efficiencies, and there would no longer be a potent means for spreading risk among healthy and unhealthy individuals. Workers would be less likely to have their employer as an advocate in coverage disputes, and employers would be less likely to involve themselves in matters of quality assessment and innovation for their employees. Employers could also suffer in terms of worker productivity and labor costs because employer-sponsored insurance leads to far more workers purchasing health insurance than they would on their own.

Further, eliminating the exclusion could result in employers having little incentive to offer insurance to their employees, as employers continuing to sponsor insurance would face higher FICA matches to the value of the plan, and employees would face increased income taxes. The likely result would be less-generous benefit plans. Employers choosing to no longer offer coverage but instead to increase salaries to assist their employees purchasing plans on the individual market would similarly face increased FICA matches and employees increased taxes. Given these increased taxes, the remaining increased salary would be less than the amount of the plan, resulting in less-valuable coverage than the employee previously received.

Alternatively, capping the exclusion for employees would degrade the benefit and serve as a tax increase for middle-class Americans. Similar to the Cadillac/excise tax, employers would be incentivized to only sponsor insurance to their employees that would fall below the value of the cap in order to avoid paying any increased taxes. This could result in a race to the bottom for employers to offer coverage that wouldn’t meet the cap’s thresholds. As healthcare costs continue to increase, employers may be forced to increasingly shift costs onto employees in the form of higher deductibles and out-of-pocket expenses.

The employer exclusion tax benefit makes employer-sponsored health insurance a valuable benefit for workers. NABIP is very concerned about any proposal that would cap or eliminate the exclusion; we urge Congress to maintain the system that has worked for Americans for decades, and preserve employer-sponsored health insurance through the continuation of the employer exclusion.

TALKING POINTS:

  • More than 175 million Americans currently receive their health insurance through employer-sponsored insurance.
  • The employer-based system is highly efficient at providing American workers and their families with affordable coverage options through group purchasing and its associated economies of scale by spreading risk and avoiding adverse selection.
  • Eliminating the exclusion would eliminate most of the benefits of employer-sponsored insurance, including the means for spreading risk among healthy and unhealthy individuals and group purchasing efficiencies.
  • Capping the exclusion for employees would devalue the benefit and result in a significant tax increase for middle-class Americans. Employers would be incented to only offer coverage to their employees that would fall below the value of the cap in order to avoid paying any increased taxes, potentially resulting in a race to the bottom for employers to offer coverage that wouldn’t meet the cap’s thresholds and further shifting costs onto employees.

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