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

This paper examines the administrative and implementation issues that arise with capping the exclusion of employment-based health coverage from workers' taxable income, which is likely to be at the center of the upcoming national debate on overhauling the U.S. health coverage system, a top priority of both the new Democratic majority in Congress and President Barack Obama. It first summarizes the current tax treatment of health coverage. It discusses reasons why there is interest in changing the tax treatment of health coverage. It then discusses implementation issues for employers and implications for workers and retirees. Lessons from the repeal of Sec. 89 of the Tax Reform Act of 1986 (TRA '86) are also discussed, since that experience relates to regulations valuing health coverage. This paper only examines capping the tax exclusion of employment-based health coverage from workers' taxable income. It does not examine changing the deductibility of health coverage and health benefits as a business expense for employers. It also does not address tax credits or past proposals to provide a tax break to individuals who purchase health insurance directly from an insurance company. See Fronstin (2006), Fronstin and Salisbury (2007) and the references within those papers for a more detailed treatment of issues related to leveling the tax-treatment playing field between employment-based health benefits and non-group insurance and the impact on pooling and the future of employment-based health coverage. This paper also does not address implementation issues involving the Internal Revenue Service (IRS)