Keep Employer-Provided Health Coverage Tax-Free | 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 (ESI) 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. It also enables employers — from small, family-owned businesses to unions and multinational corporations — to offer comprehensive medical coverage.

Although The Council achieved a significant win in the One Big Beautiful Bill Act (OBBBA) by working with Congress to preserve ESI’s tax treatment, this issue will remain under threat for the foreseeable future.

ESI markets are facing increased political pressure in Washington, with rising costs driving a narrative that employer-sponsored coverage is unaffordable for employers and consumers alike. As the country confronts mounting debt concerns, the tax treatment of ESI enjoyed by both employers and employees will continue to be scrutinized. At the same time, elected officials in both parties are increasingly demonizing insurers and brokers as contributors to rising healthcare costs.

Limiting the tax benefits for ESI would undermine the quality and availability of care for millions of Americans without addressing the true drivers of rising healthcare costs, including pricing transparency challenges and insufficient market competition.

STATE OF PLAY

As healthcare costs continue to rise, The Council is observing increasing attacks on private health insurance from Members of Congress in both parties. On one hand, moderate Democrats who have traditionally supported private insurance are becoming more open to government-controlled healthcare proposals. Members continue to hear from constituents about the need to lower healthcare costs.

The expiration of enhanced Affordable Care Act (ACA) premium tax credits, combined with political pressure from constituents, is making these Members more receptive to alternative healthcare options. The Council actively pushes back on these proposals as they arise.

On the other hand, some Republicans — while generally supportive of private insurance — have criticized health insurance companies over high costs and subsidies they claim distort the market. In January 2026, President Trump released a healthcare proposal calling on Congress to lower healthcare costs by reducing drug prices and insurance premiums while “holding big insurance companies accountable.”

Affordability will be the top issue in Congressional campaigns during the 2026 midterm elections, with rising insurance premiums at the center of voter concerns. While The Council secured an important victory in the OBBBA to preserve ESI’s current tax treatment, continued pressure from rising healthcare costs poses ongoing threats to that tax treatment.

OUR POSITION

The Council is deeply concerned about proposals that jeopardize the affordability and accessibility of health coverage.

The Council continues to work with Congress to oppose legislation that raises taxes on employer-provided healthcare and to push back against government-controlled healthcare proposals — including state-level public option bills — that would crowd out the private market and limit employer and employee choice.

What Happens if Employer-Provided Health Coverage Does Not Remain Tax Free?

If Congress repeals or caps the current tax treatment of ESI, employers would struggle to sustain benefits programs, employee healthcare costs would rise, and the long-term viability of the employer-sponsored insurance system would be jeopardized. Similarly, if government insurance programs interfere with market dynamics or artificial price caps are imposed, consumers are likely to lose access to comprehensive coverage as plan designs become more limited.

• Employee health care costs will rise: Because employer contributions are excluded from the employee’s income and payroll taxes, the after-tax price of employer-provided healthcare is less compared to paying for it out of pocket.If employer contributions are taxed like wages, employees will face a tax increase due to additional income tax plus payroll taxes on the value of the benefit and would make healthcare coverage more expensive for employees.Further, 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: The tax benefits for employer-provided healthcare encourage employers to provide comprehensive healthcare benefits. If removed, 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.
• The employer-sponsored insurance market will shrink: The Congressional Budget Office (CBO) estimates that removing the tax exclusion will result in at least two million fewer people receiving health insurance through their employer.3 While some may purchase coverage on the individual insurance market or enroll in Medicaid, CBO estimates at least one million people will remain uninsured. 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.
• 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.
• 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.
• 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 pay higher out-of-pocket costs, causing them to seek out care less frequently.