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Congress members target employer tax breaks for health care premiums

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While employers have been sweating the Cadillac tax, some health benefits experts say growing congressional sentiment to reduce or eliminate the tax breaks for employer-sponsored health insurance could pose an even greater threat to the group insurance market.

There's “growing energy in Congress about tax reform and tax policy, and with employer-sponsored health care plans and retirement plans being the top two expenditures from a tax basis, it's front and center,” said Tim Prichard, executive vice president and head of the national employee benefits practice at Wells Fargo Insurance Services USA Inc.

“The prospects for sweeping tax reform next year are growing and growing,” said Joel Wood, senior vice president of government affairs at the Council of Insurance Agents & Brokers in Washington. “Any tinkering with the exclusion from taxation for benefit plans would be a wholly unwelcome development with repercussions throughout the entire employer community.”

Though it's unlikely any tax reform legislation will pass this year, bills have been introduced that would affect the employer-sponsored health insurance tax exclusion, which several sources say could prompt some employers to stop offering health coverage to employees.

Most recently, Texas Rep. Pete Sessions and Louisiana Sen. Bill Cassidy, both Republicans, in May introduced H.R. 5284, The World's Greatest Healthcare Plan Act of 2016. The bill would not repeal the Affordable Care Act, but would limit the tax exclusion for employer-sponsored health plans to $2,500 annually per individual plus $1,500 annually for dependents.

Employers would have the option of staying in the current system and retaining existing tax exclusions, but would be subject to the 40% excise tax on the portion of group health plan premiums that exceed $10,200 for single coverage and $27,500 for family coverage.

The excise tax, known as the Cadillac tax, is part of the 2010 health care reform law that has been postponed until 2020, but it's still a major concern for employers.

The Sessions-Cassidy plan would put “a huge burden on employers, a huge new cost in order to maintain their employees on plans, because $2,500 just may not buy you that much,” Mr. Wood said.

Meanwhile, a task force appointed by House Speaker Paul Ryan is expected to unveil a Republican alternative to the Affordable Care Act, which is expected to include a change in the tax-favored status of employer-provided health insurance. Speaker Ryan “has historically been open to the suggestion of somewhat scaling back the employer exception,” Mr. Wood said.

Katy Spangler, senior vice president of health policy at the Washington-based American Benefits Council, said that plan may cap the tax exclusion, but it's unlikely to eliminate it altogether.

Largest federal tax break

Health care is the largest federal tax break, according to the Joint Committee on Taxation, which makes it an obvious starting point for tax reform, sources said. By excluding premiums for employer-sponsored health insurance from income and payroll taxes, the federal government forgoes a massive chunk of revenue each year.

According to a February report by the Congressional Budget Office, that tax exclusion is estimated to cost more than $250 billion in 2016.

But that tax-favored status is a major reason most U.S. residents — 147 million, according to the Kaiser Family Foundation — get their health insurance through their employer.

“Employer-sponsored coverage is coverage that works, and it's valued by employees, and so we would hope that members of Congress would keep that in mind,” said Steve Wojcik, vice president of public policy at the National Business Group on Health in Washington.

Scaling back or eliminating the tax exclusion would make health insurance more expensive for employers and employees, Mr. Wojcik said.

Whether the employers and employees could “absorb that added cost would vary based on the workforce conditions and the general market conditions in the industry,” Mr. Wojcik said. He added that more details are needed on the Sessions-Cassidy plan to determine what the effects would be.

When asked if scaling back the tax exclusion could lead to employers dropping health plans, Mr. Wood said, “Absolutely.”

“In a lot of industry sectors where revenues are not matching heath care expenditure costs, any disincentive is going to lead to many employers dropping their plans,” he said.

Still, he said, reducing the tax exclusion wouldn't be a “death knell” for employer health plans as there are other incentives to offer group health coverage, such as attraction and retention of workers.

By scaling back or eliminating the tax exclusion, “You're talking about more people coming off of health care plans provided by their employers and into different options that are out there now,” such as the public exchanges, which are more “expensive than the group market is and much more volatile,” Mr. Prichard said.

“We would hope the (tax exclusion) would remain intact and continue to be strong incentive” for employers to offer group health insurance, Ms. Spangler said.