Employer-Sponsored Healthcare Tax Exclusion | Position Paper

KEEP EMPLOYER-PROVIDED HEALTH COVERAGE TAX-FREE

BACKGROUND

More than half of all Americans — nearly 180 million individuals and their families — receive their health coverage through their employer. The current tax treatment of employer-sponsored health insurance exempts employer- and employee-paid premiums from federal income and payroll taxes. This tax treatment lowers most participating workers’ tax bills and their real, after-tax cost of health insurance. Plus, it provides employers with the ability to offer comprehensive medical coverage.

According to the Congressional Budget Report’s (CBO) latest report on options to reduce the federal deficit, the employer-sponsored insurance tax exclusion “encourages firms to offer health coverage with lower cost sharing (such as plans without a deductible), more covered services, and broader provider networks.”2

Small, family-owned, and mid-size businesses as well as national and international corporations, public-sector organizations, and unions see the value in offering comprehensive health benefits to their employees. They spend more on benefits than they do on any other expense besides payroll.

THE ISSUE

For every $1 of tax expenditure — the individual income tax and employment taxes not imposed on wages for the cost of their employer-sponsored coverage — employers invest $5.36 in health benefits.3 Eliminating or reducing the $1 provided by the federal government would shift additional costs onto employers, employees and their families through income and employment taxes. This change would undermine health coverage, reduce healthcare purchasing power and stifle healthcare investment.

OUR POSITION

The Council is deeply concerned about proposals that jeopardize the affordability and accessibility of health coverage and urges Congress to reject any legislation that raises taxes on employer-provided healthcare coverage. Instead, Congress should focus on solutions that increase market competition and arm employers and employees with the information they need to make decisions about their healthcare coverage, including:

• Explicitly clarifying that the transparency requirements included in the Surprise Billing Act enacted in December 2020 as part of The Consolidated Appropriations Act — that amend ERISA to bar a group health plan fiduciary from contracting with service providers unless those service providers have fully disclosed any revenue they will receive that relates to the Plan — apply to pharmacy benefit managers (PBMs) and third party administrators (TPAs) that service the plan.
• Codifying the Transparency in Coverage rules and ensuring that machine-readable file health plan data is accessible and accurate.

For example, group health plans should share a summary of rate and payment information, such as the description of pricing methodologies used to calculate the payment rate for each item or service. Any requirements should not overburden self-insured employers from an administrative or compliance perspective.

• Providing fiduciaries with the authority to audit claims data, including using the data for network analysis, to drive informed decision-making about their service providers and the reasonableness of their compensation for servicing a group health plan.

WHAT HAPPENS IF EMPLOYER-PROVIDED HEALTH COVERAGE DOES NOT REMAIN TAX FREE?

• Premium costs could rise: If companies feel pressured financially by the removal of the tax exclusion to either lessen their investments or forgo investing in their employees’ health coverage altogether, employers will have to consider passing on higher premiums to employees as well as reconsider if and how they offer resources to help employees navigate their healthcare.
• Benefits may be less generous: It is unclear how insurers would adjust coverage for those who retain employer-provided health insurance. To reduce premiums, they may change the scope of benefits, patient cost-sharing, the breadth of the network or prices negotiated with providers.2
• The employer-sponsored insurance market will shrink: CBO estimates that removing the tax exclusion will result in at least two million fewer people receiving health insurance through their employer. While some may purchase coverage on the individual insurance market or enroll in Medicaid, at least one million people will remain uninsured.2 Shrinking the size of the employer-sponsored insurance market will diminish the purchasing power of employers, who already pay on average 253% of what Medicare pays for the same service.4
• Adverse selection will increase: Healthier workers will forgo coverage if given a choice between increased premium costs and lack of health insurance, according to CBO.2
• Employees in certain locations will have less access to affordable healthcare: The cost of healthcare services often varies significantly based on geography. If employees are taxed on the cost of their health coverage, there would be a disproportionate impact on Americans living in parts of the country where costs are higher. In turn, employers operating in multiple locations would have an increased incentive to limit operations in high-cost areas to keep healthcare costs low. Employers may also be discouraged from hiring workers expected to have higher healthcare costs, according to CBO.2
• Employees may not seek out care if they have to pay more out-of-pocket: The amount of care people receive could decrease if those enrolled in plans on the employer-sponsored market must pay higher out-ofpocket costs, causing them to seek out care less frequently.5

ABOUT US

The Council of Insurance Agents & Brokers is the premier association for the top regional, national and international commercial insurance and employee benefits brokerage firms worldwide. Council members are market leaders who annually place 90 percent of U.S. commercial property/casualty premiums, and 70 percent of all employee benefits business in the U.S.

KEY CONTACTS

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