Capping the Tax Exclusion for Employment-Based Health Coverage: Implications for Employers and Workers

Obama, this Issue Brief examines the administrative and implementation issues that arise from one of the major reform proposals: Capping the exclusion of employment-based health coverage from workers ’ taxable income. CURRENT TAX TREATMENT—The amount that employers contribute toward workers ’ health coverage is generally excluded, without limit, from workers ’ taxable income. In addition, workers whose employers sponsor flexible spending accounts are able to pay out-of-pocket expenses with pretax dollars. Employers can also make available a premium conversion arrangement, which allows workers to pay their share of the premium for employment-based coverage with pretax dollars. TAX CAP RECOMMENDATIONS—In 2005, a presidential advisory board concluded that limiting the amount of tax-preferred health coverage could lower overall private-sector health spending. The panel recommended a cap on the amount of employment-based health coverage individuals can exclude from their income tax, as a way to reduce health spending. In his 2008 “Call to Action ” for health care reform, Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, states that “Congress should explore ways to restructure the current tax incentives to encourage more efficient spending on health and to target our tax dollars more effectively and fairly.” IMPLEMENTING A TAX CAP—While a tax cap on health coverage sounds simple, for many employers, it coul