5 Facts About the Tax Exemption for Employer-Sponsored Insurance

As Senate Republicans workshop their own healthcare reform bill, The Wall Street Journal has reported that they are considering removing the tax exemption for employer-sponsored health insurance plans. Such a proposal would likely face strong opposition. So what is the exemption and what would be the benefit of removing it?

Here are 5 facts about the tax exclusion on employer health insurance.

1. The exclusion is law

WSJ reported that under tax law, “compensation in the form of health insurance isn’t treated as income for workers.” So the value of the insurance isn’t subject to taxes. According to the Tax Policy Center, the exclusion lowers the after-tax cost of insurance.

2. Lost revenues

In a column for The New York Times, Joseph Antos, PhD, of American Enterprise Institute, called the exemption the “largest tax break in the federal tax code” and a “stealth subsidy.” The exemption results in lost revenues for the federal government of roughly $250 billion annually, which would be more than enough to provide health insurance to the remaining uninsured in the country.

3. Congress has considered removing it before

The House of Representatives ultimately did not include removing the tax exemption in the American Health Care Act, but it had been considered. In their version, the bill would limit the amount companies could exclude.

4. There is a lot of opposition

Unsurprisingly, employers are strongly opposed to the idea of removing the tax exemption. In a podcast with The Wharton School at the University of Pennsylvania, Katherine Hempstead, PhD, from the Robert Wood Johnson Foundation, explained that employers use health insurance to recruit new employees and they “are uncomfortable about transitioning to a phase where they are not the providers of those benefits.”

5. The impact on workers

Antos argues that the exemption “distorts how workers are paid” since employers contribute to the health insurance premium instead of raising salaries. In the podcast with Hempstead, Robert Field, PhD, MPH, JD, of Drexel University, cast doubt on the idea that worker wages would increase all that much. He thought it unlikely that employers would really give all the money they would have paid to the insurance company to workers instead. Plus, now employees would have to pay taxes on those wage increases.