Will capping the tax exclusion kill employer health insurance?

Despite opposition from unions and employers, one industry professional says it’s possible to reform the tax break for group health without destroying the market

Insurance News

By Lyle Adriano

With issues still surrounding the tax exemption on employer health insurance and the pending Cadillac tax remaining a contentious point, one industry expert believes he has a solution that offers “better health insurance choices and greater fairness to low-income Americans.” 

An industry expert—Joseph Antos, Wilson H. Taylor Scholar in healthcare and retirement policy at the American Enterprise Institute—ran a special feature on Forbes this week, detailing how the current exclusion system is flawed and why it needs to be replaced.

Antos enumerated a number of structural factors as to why the current form of the tax exclusion is flawed:
  • The exemption caused a shift in compensation, encouraging employers to offer greater and untaxed health benefits over taxable cash wages. In the period from 1999 to 2015, the average employer contribution for family coverage almost tripled, whereas wage rates only increased by half. When faced by such a conundrum, many workers preferred to sacrifice their health benefits for higher cash wages.
  • As the exemption reduces taxable income, it benefits employees in higher tax brackets more than those who are not. A study conducted by the Joint Committee on Taxation revealed that the average savings for tax filers with incomes less than $30,000 was about $1,650, yet those with incomes over $200,000 had $4,580 in average savings.
Antos stressed that the tax break needs to be changed to make the subsidy fairer without eliminating the incentive it gives to employers.

He also noted that the alternative to the exemption, the Patient Protection and Affordable Care Act—which imposes an annual 40% excise tax on plans that exceed certain thresholds, effective 2018—is not adequate enough to address the issue. He stressed that the “Cadillac tax” would only force employees to pay more for medical services, since: A.) plans that exceed the thresholds will pay the tax, but will impose higher premiums on workers, and B.) plans could alternatively cut back their benefits through increasing cost-sharing requirements and narrowing provider networks to avoid the tax, but could force patients to seek additional services at their own expense.

Antos proposes a “three-part policy” as the best possible compromise, which “would repeal the Cadillac tax, limit the amount of the tax exclusion, and provide a tax credit to workers who choose to buy their insurance on the open market.”

Keep up with the latest news and events

Join our mailing list, it’s free!