April 26, 2015

Will The Employee Benefits’ Tax End Employer-Provided Health Insurance?

Starting in 2018, employers will have to pay a 40 percent excise tax on the employee health insurance benefits they pay that exceed $10,200 for individuals and $27,500 for families. In an article last week, the National Association of Manufacturers (NAM) explored the potential effects of this tax on both employers and employees. (The employee benefits’ tax, which is expected to raise taxes by $87 billion, was passed as part of the Affordable Care Act, President Barack Obama’s 2010 healthcare reform bill.) 

According to NAM, nearly 50 percent of all U.S. employers will have to pay this tax within three years of its implementation. The costs of this tax, NAM said, will mean employers are either forced to reduce existing healthcare benefits, scale back hiring or pay raises or cut back other employee benefits or business investment. 

It is also possible this tax could affect employees with the greatest need for healthcare benefits as well. In a 2013 article, the journal Health Affairs said the high cost of these plans “is not always or fully explained by their unusually generous level of health benefits.” Instead, the high cost is due to employees’ own need for the more generous benefits. Health Affairs said, “Other major reasons for their high costs include the health status, age, and gender of the workforce covered by the plan as well as enrollees’ work industry or the geography (higher medical costs in some regions versus others) represented.” The law is supposed to account for these more generous benefits, but since regulatory guidance has not yet been written, it’s unclear how the Internal Revenue Service will account for it. 

Jonathan Gruber, who helped write the Affordable Care Act, has said the employee benefits’ tax, sometimes called the “Cadillac Tax,” might eventually keep employers from offering health insurance benefits at all. Indeed, he said the ACA’s ultimate aim was to get rid of the tax exemption employers receive for providing health care benefits. According to CNN, “Gruber said the only way those pushing for Obamacare could get rid of the tax subsidy for employer provider health insurance was to tax the more generous, or Cadillac, plans – ‘mislabeling it, calling it a tax on insurance plans rather than a tax on people when we all know it's a tax on people who hold those insurance plans.” Even though employers will pay the tax, Gruber said it is “a tax on people who hold those [generous] insurance plans.” 

Employers and employees should also be aware that the tax does not apply to health insurance premiums alone. As Politico pointed out, “It also applies to health savings and flexible spending accounts, including money workers now sock away tax-free for medical expenses,” supplemental insurance plans and, possibly, on-site medical clinics that companies provide for their employees. 

MSCI will work with the National Association of Manufacturers and other partners to oppose and repeal this tax before it takes effect. The NAM is also working to draft comments that it will submit to the Internal Revenue Service as it shapes potential regulatory guidance. A broad coalition of groups – including labor unions – support repeal of this tax and, according to Politico, repeal is an issue that could gain steam in 2015 and 2016 as implementation draws nearer.