What Happens if Congress Taxes Employee Benefits?
As our government leaders continue to grapple with the prospects of healthcare reform and the financial aspects surrounding it, one related issue has emerged to grab the attention of employers all over the country – the taxation of employee health benefits. Plans to overhaul our healthcare system are expected to cost over $1 trillion over 10 years, and Congress is looking at capping, reducing or perhaps even eliminating the tax break on employer-provided health benefits in order to cover much of the cost. While President Obama has said that he is firmly opposed to the idea, his top political advisor recently declined to rule out the possibility that the White House would agree to some form of taxation on health benefits. Concurrently, lawmakers are frantically seeking a viable tax plan to push through Congress despite the political opposition already in movement. But what would a tax on employee benefits look like if it were to come to fruition? Here’s a glimpse of what employers could expect:
Capping the Benefit Tax Break
Congress could move to put a limit on tax-free benefits, and then tax employees on the portion of their benefits that exceed the limit. Depending on where that limit is set, such a cap could generate anywhere from $41 billion to over $1 trillion in 10 years, according to the Tax Policy Center. But even if one uses national premium averages as a benchmark, determining a set limit will be extraordinarily difficult given that insurance premiums differ all over the country due to varying demographics, employer sizes and health characteristics.
Taxing Benefits for More Affluent Employees
Another option would be to select a limit for tax-free benefits, but then apply the tax to employees with higher incomes or more expensive benefits. Tax exclusions could either be dropped for employees who earn more than a particular amount or phased out as income increases. However, this option would not create as much revenue as the straight cap. Even if the threshold was set at individuals earning more than $100,000 and families earning over $200,000, this plan would only generate $162 billion over 10 years.
Changing the Tax Exemption to a Tax Credit or Deduction
One idea that has a limited amount of bipartisan support is that of a benefits tax credit set forth in the proposed Healthy Americans Act (SB 391) introduced by Senators Ron Wyden (D-OR) and Robert Bennett (R-UT). In addition to creating a universal healthcare system supported by both private and public contributions, this legislation would provide for a tax deduction to counter-balance a tax on benefits. More specifically, while benefits would still be taxed, the bill would allow a standard deduction of $6,025 for individuals and $15,210 for families, plus $2,000 per child. A republican version would provide a straight refundable tax credit of $2,290 for individuals and $5,710 for families that can also be applied to premium costs or medical care costs.
While any of these options could provide a means to funding the healthcare reform initiatives that are being proposed, the concept of taxing employer-provided benefits is not widely supported among the general public, and lawmakers are sure to face strong opposition if they push forward with any of these proposals. Regardless, employers should be aware of the potential changes that are being kicked around on Capitol Hill – because they may indeed shape the employee benefits landscape sooner rather than later.
For more information on this topic, please click on the links below:
How Congress Might Tax Your Health Benefits
Battle #1: Taxing Healthcare Benefits
Congress Plans to Eliminate Health Insurance Tax Break
White House Won’t Rule Out Benefits Tax
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Important Notice: Hill, Chesson & Woody does not engage in the practice of law, accounting, or medicine. Therefore, the contents of this communication should not be regarded as a substitute for legal, tax, or medical advice.
July 2, 2009
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