Employment-Based Health Benefits and Taxation: Implications of Efforts to Reduce the Deficit and National Debt

July 2011
EBRI Issue Brief #360
Paperback, 24 pp.
PDF, 902 kb
Employee Benefit Research Institute, 2011

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Executive Summary

HEALTH INSURANCE THE BIGGEST TAX EXPENDITURE: The tax preference associated with employment-based health coverage is the largest tax expenditure in the U.S. budget, accounting for $1.1 trillion in foregone tax revenue during 2012?2016. In contrast, retirement plans account for about $700 billion in foregone tax revenue and the mortgage interest deduction accounts for about $600 billion. This makes the tax treatment of health coverage an almost inescapable target.

DEBT COMMISSION TARGETS HEALTH BENEFITS: President Obama’s bipartisan National Commission on Fiscal Responsibility and Reform proposed changes that would achieve $4 trillion in deficit reduction by 2020 and reduce the debt to 30 percent of GDP by 2040. As part of the proposal, the commission would reduce the preferential tax treatment of employment-based health benefits as it applies to workers, first by capping, then freezing, phasing down, and ultimately eliminating them. The Commission does not recommend any changes to the employer deduction as a business expense.

PPACA: The Affordable Care Act changes the playing field in that workers will no longer need to rely on their employer to obtain health coverage. Workers will benefit from a number of insurance market reforms, such as guaranteed issue, modified community rating, subsidies, and increased choice of health plan.

REACTION BY INCOME: If the favorable tax treatment of workers’ health benefits is eliminated, they would face an increase in taxes and some would question the value of keeping the coverage. Lowest-income workers would find the new health exchanges more advantageous than employment-based health benefits , while high-income workers likely would not. For example: For single coverage among policyholders regardless of age at 150 percent of the federal poverty level (FPL) in 2014 would save an average of about $800 by moving from employment-based coverage to a health insurance exchange; workers at 200 percent of FPL would come out about even between employment-based coverage and the insurance exchange; and those above 250 percent of FPL would have to pay more for coverage in the exchange than employment-based coverage if their employer did not give them any portion of the employer share of the premium.

MESSAGE TO EMPLOYERS: The number of workers who might prefer an insurance exchange over employment-based coverage depends upon not only the relative premium in each option and income levels, but the number of workers by income. About 41 percent of workers are in families with income between 133 percent and 400 percent of the federal poverty level, accounting for 65 million workers. Even if only a fraction of these workers preferred an insurance exchange over employment-based coverage, it would send a clear message to employers that millions of workers no longer valued the benefit. If employers found that workers no longer valued the coverage, they might stop offering health coverage. Predicting how this might play out by firm size, industry, worker earnings, geographic region, among other things, is highly uncertain.