If you don’t know what the employer tax exclusion is, now is a good time to find out. Why? Simply put, there’s an effort in motion to cap or eliminate it, and if that should happen, it would dramatically affect the employer-based healthcare system (translation: about 169 million Americans) – and not in a good way.

What is the employer tax exclusion?

It’s money that isn’t subject to payroll or income tax. In other words, it’s benefits. When a worker receives a health insurance plan in addition to their take-home pay, the value of that coverage is not taxable, either for the employer or the worker.

According to the National Association of Health Underwriters (NAHU), the exclusion dates from World War II, when wage controls put tight limits on what workers could be paid. To make up the difference, employers began offering benefits packages, because their value was not regulated.

The accidental result was a highly-efficient system, NAHU said, where individuals can get affordable coverage for themselves and their families through the power of group purchasing. Group purchasing takes advantage of economy of scale; it also brings increased negotiating power, driving rates down for everyone in the group.

The employer tax exclusion incentivizes that system. In fact, it’s what makes it possible.

What would happen without it?

If the value of benefits were not excluded from payroll and income tax, workers would have to pay higher taxes. Employers, too, would need to set aside funds to pay the additional taxes. How would this affect the employer-based healthcare system? Let’s take a look.

  • Eliminating the employer tax exclusion would remove employers’ incentive to take an active role in facilitating health coverage for Americans
  • Without an incentive to offer coverage, employers could eliminate health benefits entirely and simply offer a higher salary instead
  • In addition to paying more in income tax, workers would then become responsible to purchase their own health coverage
  • Even if the worker’s raise were equivalent to the value of the health plan they had through their employer, the money they were able to spend on health coverage would not go as far: individuals don’t have the buying power of a large group; the quality and cost-effectiveness of coverage would decline
  • Some individuals would not purchase health coverage for themselves

For more information, refer to this background provided by NAHU.

Whose idea was this?

“The effort to eliminate or cap the employer exclusion is led by Speaker of the House Paul Ryan (R-WI) along with several other conservative allies as part of their healthcare white paper,” said NAHU. (This is the document that proposes a Republican alternative to the Affordable Care Act.) “They contend that eliminating the exclusion would result in Americans having more control over their coverage, reduce job-lock, and result in greater transparency and reduced costs.”

Is there a way to save the exclusion?

NAHU is working with other industry groups to prevent eliminating or capping the employer tax exclusion. To support that effort, contact your senators and representative, tell your employer clients to take action, and share your story.

See this article for details on how to do so. Meanwhile, stay in touch with BeaconPath for further updates on this story.

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