Thursday, January 21, 2016

The Tax Favored Status of Employee Benefits (Enjoy it while you can.)

Image from cagle.com
The real impact of the Cadillac Tax is that it begins to chip away at the tax favored status of employee benefits Most of the news coverage I've read seems to have missed this point; and I'm a bit bewildered that this isn't the focus. I know it's been delayed until 2020, but it's still worth pausing now to consider the impact. First, a bit of background...


Employers began providing health insurance to employees in the 1920s. The practice really took off in the 1940s during World War II. In 1954, an IRS ruling excluded the value of employer provided health coverage from all taxable income to the individual employees including social security and Medicare payroll taxes. This shaped the provision of employer provided benefits with few changes until the ACA came along with a provision for a Cadillac Tax. 

It was President Reagan that first proposed eliminating tax exclusions for employer provided benefits. It's an idea that's had bipartisan appeal if not support. The Cadillac Tax is an indirect way of accomplishing this. It was included in the ACA as a tax on providers, so it was palatable and didn’t raise a lot of opposition until the IRS comment letters were released last year. (Evidently, no one cares if insurance companies pay more in taxes.) However, the tax will really be paid by the 60% of Americans that get health insurance through their employers. 

This is an important point to understand because the real revenue from the Cadillac Tax comes from making the value of some of our benefits taxable to us as individuals, not from the actual Cadillac Tax that would be paid by employers. The Cadillac Tax is expected to raise 87 billion. Another 202 billion in tax revenue would come from employers shifting benefit dollars into wages and people losing deductions for health care expenses. For example, if you currently participate in a flexible spending account (FSA) and contribute $2,500 pretax, your employer will likely eliminate your FSA to avoid the Cadillac Tax shifting that $2,500 back into your taxable income. 

This shift would impact employment sectors differently. Union workers, public service and the association community rely heavily on our benefit packages to attract and retain talented staff. If those benefits lose their tax-favored status, what does that do to our ability to attract and retain talent?

We discussed this at the Loudon County Idea Swap on January 7. You can find the notes I put together for the participants here

By picking Tom Price to lead HHS, Trump shows he’s absolutely serious about dismantling ObamacareGiven the election of Trump and the selection of Tom Price to head HHS, it appears we're even more likely to see a proposal to limit the tax exclusion for employer provided health benefits.