Tax exclusion cap hard to administer, says EBRI

For many employers, especially self-insured employers, administering a cap on the tax exclusion for employer-based health coverage would be difficult, according to a detailed study published yesterday by the Employee Benefit Research Institute in Washington. In 2005, a presidential advisory board recommended a cap on the amount of coverage individuals could exclude from their income tax as a way to reduce health spending. Under the advisory board’s proposal, workers with coverage valued above the cap would pay taxes on the amount over the cap. Workers could choose a less costly health plan to avoid the tax on premiums above the cap. Changing the tax treatment of employment-based health coverage has been discussed as far back as President Reagan’s administration, and it came up often in the recent presidential campaign. Currently, payments made by employers for their employee’s health insurance generally are excluded from workers’ taxable income, and many workers pay out-of-pocket expenses with pretax dollars from flexible spending accounts. Capping the exclusion would result in wide variations among employers based on the type of health plan benefit, the size and demographics of their work force and where workers lived, the study found. About one-half of employees in firms that offer health coverage work for employers that offer only one plan. For self-insured employers, who pay health care claims directly and who employ 45% of workers, a cap would be especially difficult to administer, because employers would have to arrive at a “premium equivalent” for each worker. That would be costly for employers and could create fairness and tax issues for many workers, the study concluded.