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Tax Treatment of Employer-Provided Health Coverage

Currently, the value of health insurance coverage provided by employers is not subject to payroll or income taxes.

Recent budget calculations indicate that this is the federal government’s largest tax expenditure, at a cost of more than $1 trillion over the next five years (though this also includes the employer deduction of these costs as a business expense), and the Joint Tax committee has estimated the cost of the tax expenditure for the employee exclusion for health insurance alone at $659 billion for 2010 through 2014.

The congressional panel may seek to cap and/or phase out the health insurance tax exclusion over time and/or based on the employee’s income level. The National Commission for Fiscal Responsibility and Reform (NCFRR) final report proposed instituting a cap at the 75th percentile of health insurance premium levels starting in 2014, with the cap frozen in nominal terms through 2018 and phased out by 2038.

It is noteworthy that no proposals have been floated to limit the employer's deduction for its expenses in providing health coverage, which are currently considered “ordinary and necessary” business expenses under the tax code.

In conjunction with limiting or eliminating the tax exclusion for workers, the panel may also seek to lower the excise tax on employers and insurers for high-cost “Cadillac” plans. The NCFRR final report recommended modifying the tax from its current 40 percent to 12 percent.

Source: National Business Coalition on Health


Posted by Cristie Travis at 1:46 PM

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