Taxing Employer-Funded Health Insurance Would Be a Disaster

Congress's drive to repeal and replace the Affordable Care Act has stalled. Now, some lawmakers are shifting their focus to tax reform.

House and Senate leaders hope to drastically lower business and individual rates. To pay for these cuts, they may have to end or limit some deductions and exemptions.

Some legislators and policy wonks have called for ending the "employer exclusion," which exempts employer-sponsored health benefits from income and payroll taxes.  

Such a change would be disastrous. More than 175 million people rely on the employer-sponsored health insurance system for high-quality coverage. Taxing that coverage would force millions of Americans to shoulder more of their health costs on their own—and could cause some employers to quit offering insurance altogether.

The tax exclusion for health benefits encourages employers to provide insurance—and workers to demand it. After all, a dollar of untaxed health benefits is worth more than a dollar of taxed cash wages.

GettyImages-668514552 Madison Tolchin visits Paula Glass, an advanced registered nurse practitioner, for a health checkup at a Planned Parenthood clinic on April 14, 2017 in Wellington, Florida. Joe Raedle/Getty

According to the Kaiser Family Foundation, employers last year covered 80 percent of the premiums for individual employee plans and 70 percent for family plans, on average.

Because employer-sponsored insurance is such a good deal, everyone within a company who is eligible for coverage tends to sign up. So employers' insurance pools are typically balanced, with a mix of young and old workers. That means that insurance companies can predict a company's yearly medical claims with reasonable accuracy.

That predictability prevents huge premium increases. In recent years, premiums for employer-sponsored plans have increased about 6 percent annually.

By contrast, premiums on the individual market exchanges are projected to jump 18 percent next year.

Workplace health plans also help employers attract and retain talent. Eighty-seven percent of workers say that employer-sponsored health insurance is either "very" or "extremely" important when deciding whether to remain in a job or find a new one. Two in three human resources professionals predict that health benefits will increase in importance as a recruiting tool over the next few years.  

Forty percent of workers say they'd prefer new or additional health benefits to a salary increase. Nearly half of workers say they'd quit within a year if their employers stopped offering insurance.

Clearly, the employer-sponsored insurance system is popular—which makes Congress's interest in upending it puzzling.

Earlier this year, lawmakers in both the House and Senate publicly explored taxing the contributions that employers make toward their workers' premiums.

Doing so would saddle employers with massive new costs—and force many to reduce their benefits packages to cut expenses. Some companies might stop providing plans entirely.

Further, there's no guarantee that employers would raise salaries to compensate for dropping health coverage.

Even if companies continued to offer coverage, workers would face much higher costs. They'd have to pay income taxes on the thousands of dollars in health benefits they receive, as if those benefits were a bonus check.

Some in Congress have proposed only taxing benefits whose value exceeds a certain cap. This, they say, would cause taxes to only fall on rich people with generous health plans. As one Congressman claimed, "The Average Joe would not ever see this" tax.

That's simply not true. Over 15 percent of middle-income workers would have to pay such a tax, according to the Urban Institute. Since insurance premiums are increasing steadily, more and more workers' plans would fall prey to the tax each year.

Taxing benefits would likely cause some lower-wage earners to drop their employer-sponsored plans and seek subsidized coverage in the exchange marketplace. Consequently, employers might not have enough participants in their insurance plans, especially young people, to continue offering them. And that would leave everyone to fend for themselves.

Employer-sponsored insurance has been the bedrock of our nation's healthcare system for decades. Lawmakers must continue to resist the temptation to impose new taxes on employer-sponsored benefits.

Janet Trautwein is CEO of the National Association of Health Underwriters.

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