News & Information

 

FEATURED PRODUCT

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

Learn More »

CCH® BENEFITS — 03/11/10

Capping Tax Exclusion For Employer-Provided Health Insurance Would Raise Revenues While Minimizing Coverage Disruption: NBER

from Spencer’s Benefits Reports: Capping the tax exclusion for employer-provided health insurance would not only increase federal and state income and payroll tax revenues, it would be much less disruptive to existing insurance arrangements, according to the National Bureau of Economic Research. (NBER). The February 2010 working paper, The Tax Exclusion For Employer-Sponsored Health Insurance, was prepared by Jonathan Gruber, professor at the Massachusetts Institute of Technology Department of Economics, and director of the NBER’s health care program.

The employer-provided health insurance tax-exclusion is the third largest government expenditure on health care but often is not included in the calculation of total government spending on health care, Mr. Gruber noted. In 2009 dollars, the state and federal governments will lose some $263 billion from employer-provided health insurance spending by employers that currently is not taxed as compensation. About 60% of the revenue cost of the exclusion is through federal income taxes and 40% is through federal payroll taxes (Social Security and Medicare taxes). State income tax revenue losses due to the employer-provided health insurance exclusion represents about $30 billion in 2009 dollars.

Although the current employer-provided health insurance system has some benefits, such as pooling and spreading of risks for insurance, it also has a number of problems, including documented increases in overly-generous insurance plans and job lock (workers who will not change jobs or retire for fear of losing their employer-provided health insurance), Mr. Gruber wrote. In addition, the exclusion is highly regressive as both tax rates and employer-provided health insurance spending rise with income and five-sixth of the benefits go to the top half of the wage earners. Consequently, economists have for years advocated for reform of this tax exclusion, he added.

“Repealing or capping the exclusion could result in significant increases in government revenues and an improvement in revenue raising progressivity,” Mr. Gruber wrote. “Yet it also would lead to a significant reduction in insurance coverage. Thus, when considering changes to the tax treatment of employer-provided health insurance, policy-makers may simultaneously wish to examine other policies that affect the availability of non-employer-provided health insurance coverage.”

Removing the employer-provided health insurance exclusion entirely could reduce by 15 million (or 10%) the number of individuals with employer-provided health insurance, but only about 70% of those losing employer-provided health insurance would become uninsured; the other 30% would buy in the individual market or from another source.

Capping the employer-provided health insurance exclusion at the median premium level ($5,176 for single plans and $13,675 for family plans) would raise an estimated $47 billion if the cap were applied to both income and payroll taxes, and an estimated $32 billion if the cap were applied just to income taxes, Mr. Gruber concluded.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.