Senate Finance Eyeing Health Benefit Tax Changes
The Facts
In May 2009, the leadership of the Senate Finance Committee announced a set of options for financing a mammoth health care reform proposal, including capping the exclusion from income for health insurance, reducing the tax benefits of flexible spending accounts and health savings accounts, and limiting the definition of qualified medical expenses. Under current tax laws, employer contributions towards health insurance and health care for active and retired employees are excluded from an individual’s income and employment taxes. The Senate Finance Committee proposals would limit these tax exclusions in several important ways:
- Place a cap on the income tax exclusion for employer provided health insurance based on various indices, with some proposals phased out for taxpayers with high adjusted gross incomes (AGI)
- Repeal the Code Section 213 deduction for medical expenses in excess of 7.5 percent of AGI
- Eliminate the exclusion from income and employment taxes for contributions made through health flexible spending accounts and health reimbursement arrangements
What’s at Stake
The Congress’ Joint Committee on Taxation estimated that as stand-alone proposals, each of the proposals would result in a reduction in the number of people receiving employer sponsored health insurance in the range of 10 to 12 million people based on a full repeal of the tax exclusions, and in the range of one million people if the tax exclusions for health insurance were to be capped. Of course, the outcome could be different if the tax proposals were included as part of a comprehensive reform of the health care system.
Steps to Consider
Employers should analyze the impact of these proposals on the group health plans they sponsor for employees. Employers should also consider analyzing the effect of these proposed tax changes on additional employee income and employment taxes.
