The value of employer-sponsored health care recently has come under scrutiny from lawmakers as they look for solutions to reduce the federal deficit and alternatives to the Affordable Care Act (ACA). If you’re not a political junkie like me, let me provide some context.
Historically, one of the largest subsidies for health insurance comes from employment-based coverage. That’s because the federal tax system provides preferential treatment for health care coverage that people receive from their employers. Employers’ payments for health coverage are excluded from income and payroll taxes. And, most times, employee contributions are also excluded from income and payroll taxes.
There are many benefits of employer-sponsored health care coverage that Congress and specifically House Speaker Paul Ryan, who has commissioned a Task Force on Health Care Reform, should realize. For starters, the ability to offer health benefits sets an employer apart and can be a strong driver in a retention or recruitment strategy. American workers in today’s climate have an expectation of health care as part of their compensation package (remember the good old days when you were considered to have a professional job if your employer provided health benefits?) and employer-sponsored health benefits costs are pretax deductions. Additionally, flexible spending accounts (FSAs) and health savings accounts (HSAs) provide another savings tool for employees to avoid out-of-pocket expenditures coming from a household budget. These are just a few of the benefits.
While the ACA includes some provisions that should be applauded, as they’ve increased access and coverage, there are some provisions that have had an adverse effect—especially on employers. We’re now beginning to realize the costs associated with the ACA, and, in particular, how our economy has been impacted. Some Americans are now working part time or having their hours cut by employers seeking to avoid providing coverage under the full-time mandate of a 30-hour workweek. Then there’s my favorite topic: the excise tax, or “Cadillac tax,” that was delayed until January 2020. To avoid the anticipated tax, many employers have restructured their health benefits offerings or increased workers' deductibles and co-pays.
When the excise tax goes into effect in 2020, employers will most certainly experience higher deductibles and increased out-of-pocket costs—resulting in employers dropping group health plan coverage. This tax MUST be repealed; at the very least, significant changes must be made to avoid those financial consequences to employees. Some of those changes include eliminating HSAs and FSAs from the calculation; removing the employee portion of premium contributions; and basing inflation on the national health care inflation trend rather than the Consumer Price Index, which was 1.5 percent for 2013.
Tinkering with the tax treatment of employer-sponsored health care is not a great idea, especially since more than 175 million Americans currently enjoy this benefit. Instead of targeting employer-sponsored health benefits, lawmakers should consider other financial options.
Employers and employees should be paying attention to this critical issue. The Task Force on Health Care Reform is on the fringes of recommending some tax implications that can shatter a business, threaten individuals’ financial stability and jobs across the U.S., and put employers between a rock and a hard place!
Originally posted on the SHRM Policy Action Center Blog.