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Tax Reform and Employee Benefits: Possible Responses to Tax Reform
Possible responses to changes in the tax treatment of employment-based health insurance plans:
Taxation of health costs would make employers more careful purchasers of health care services and may make employees seek or demand less health insurance to lower their overall tax liability. Without the favorable tax treatment, many employees, particularly young employees, may forgo health insurance coverage.
Without the tax advantage, lower paid employees with no current tax liability for health insurance may no longer demand health insurance, and some employers may drop this insurance.
Possible increase in the use of flexible benefits plans. Facing taxes on contributions to health insurance plans, employers may find it more advantageous to funnel deductible cash compensation into flexible benefits plans.
For employees, flexible benefits plans could allow them to choose lower cost health plans, thereby lowering their overall tax liability.
Increased use of flexible benefits plans by employers could also give employees expanded health care choice.
Possible responses to changes in the tax treatment of employment-based retirement plans:
Employees would find defined benefit and money purchase plans attractive if they did not feel employers would give them the full value of contributions as added cash if the plans were not offered. Full cash payments would be unlikely.
With other defined contribution plans, where the exclusion for employer contributions would be lost under several proposals, employers may simply give employees some more cash or offer a payroll deduction in order to give employees a group administrative cost advantage.
Will there still be some advantage to maintaining an employee benefit plan if the tax advantage is no longer there? For employers there may be some competitive advantages in attracting and retaining a skilled work force, as well as facilitating work force exit by assuring their employees a retirement income savings pool. For employees there would be the ease and discipline that a payroll deduction saving plan offers.
The bills and proposals on which these responses are based are in development and are current as of this fact sheet's writing. Nothing herein is to be construed as necessarily reflecting the views of the Employee Benefit Research Institute (EBRI) or the Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) or as an attempt to aid or hinder the passage of any bill pending before Congress.
For more information, contact Ken McDonnell, (202) 775-6342; Paul Yakoboski, (202) 775-6329; or Dallas Salisbury, (202) 775-6322.
Source: Dallas Salisbury, "Employee Benefits in a Flat Tax or Consumption Tax
World," EBRI Notes (September 1995): 1-12.
- 401(k) Valuations Published: September 2, 2014 401(k) Balances and Changes Due to Market Volatility
- Data Book Last Updated: February 2013 A comprehensive collection of the most up-to-date benefit information available