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Your Take: Ending Employer Health Care Tax Deductions

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No one should go without health careIt’s the new year and, given the results of the fiscal cliff negotiations, I thought this item from NPR’s six policies economists love but people hate was worth discussing. Here’s the item:

End the tax deduction companies get for providing health-care to employees. Neither employees nor employers pay taxes on workplace health insurance benefits. That encourages fancier insurance coverage, driving up usage and, therefore, health costs overall. Eliminating the deduction will drive up costs for people with workplace healthcare, but makes the health-care market fairer.

The story goes that many years ago, when wages were fixed, employers started offering health benefits to their employees as a way to increase compensation without increasing actual pay. You pay a little but the employer pays much more but gets a deduction against revenue. The argument in favor of this policy is that it’s important for people to know what they’re getting (which was partially addressed in the health care reform law and now benefits are listed on your paystub, though you don’t pay taxes on it) and that you start avoiding “Cadillac” coverage simply because businesses can write off the cost.

I agree with the first reason – it’s important that people understand what they are getting. I don’t think eliminating the deduction achieves this unless you start making people pay for it themselves. No one likes that.

As for the second, a business offers health insurance because it wants to. The deduction is nice and for corporations it’s a big deduction, corporate tax rates are pretty high, but it’s a matter of what management wants to do with the money. Pay it to shareholders or pay it to employees? If you want to take care of employees to the point of offering them healthcare, then you do it. If you’d rather pay shareholders (which is not any less noble), then do that.

During the fiscal cliff negotiations, there was talk that health care benefits should be taxed. Since it’s considered compensation to the employee, why not tax it? I think that actually achieves the first reason (educating the employee on what they’re getting) without having them take the full brunt of the cost of health care. It might educate people on just how expensive it is and how they might want to take advantage of the preventative services.

What do you think?

(Photo: italintheheart)

{ 13 comments, please add your thoughts now! }

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13 Responses to “Your Take: Ending Employer Health Care Tax Deductions”

  1. RT says:

    Let me explain why this is an awful idea…particularly for those of us who are younger. My wife and I receive our insurance through her employer. The employer pays 90% of the premium and we pay 10%. So we pay about $50 per month per person, while the employer pays about $450 per month.

    We are in our early thirties. Our health insurance group though is averaged over thousands of employees, many of which are older, and thus drive up the cost. The taxes we would have to pay on this plan if it were taxed at 28% would be about $126 per month. We could buy our own policy that is roughly equivalent for that amount.

    So younger workers would end up bearing a much higher tax burden for health insurance, while they help to average down the cost of the policy,..and older workers would end up paying a lower tax burden than what they are actually responsible for since they bring the cost of the policy up.

    The only way something like this could be fair is if each policy was indivualized…but then this would drive up everyones costs as it is the bundling of the group which also helps to bring the cost down.

  2. RT says:

    I should stipulate that the price I listed was each, not combined for the two of us.

  3. freeby50 says:

    This doesn’t seem like a cost control measure. It seems more like a way to force people to make due with less by increasing the costs.

    I don’t buy the argument that people with great health insurance use it too much and therefore cause costs to go up. People don’t get sick more cause they have insurance.

    Rather than making insurance costly for employers they’d be better off scrutinizing what care providers recommend and insurers cover.

  4. freeby50 says:

    RT, in any group plan you already have younger people effectively subsidizing older people. Taxation would only increase the costs for everyone and wouldn’t cause the disparity in costs between young and old.

  5. Jon Cryer says:

    Of course, for retired folks medical insurance premiums are from after-tax dollars. My wife and I pay $1000/month for Medicare and supplement and my former employer kicks in $255/month in addition. And there are no health-care savings accounts for retirees.

  6. ChrisCD says:

    I work for a very small company (less then 10 people). The cost is split about 50/50. The premium is about 1000 a month and it is a high deductible plan ($7000). So it costs about 12K a year for the privilege of paying another $7K. I wouldn’t define having a minimum of $13K personally go out the door a Cadillac plan.

    Not paying taxes on those dollars helps make it affordable, but barely so at the moment.

    I think there are much better places to go after revenue then health care dollars.

    Matter of fact, now that it is mandated, it shouldn’t be taxed for anyone on any of the dollars.

  7. Demi says:

    When I started with my current company 30 years ago, the agreement was they pay 80%, we pay 20% as part of our compensation package. We are in a very large group plan. It was shown as $X dollars on our end of year statements towards you overall compensation when we would sit down with HR to discuss why we should be happy to work for the company. Today, they pay 50% and I pay $50. AND the company stopped having the sit-down-powwow 5 years ago to discuss “how good things are”. We’ve also not gotten a raise in the last 5 years. So in effect if health care does go up, the company can shift the split to 60/40…I get no raise…but in looking at how much health care has gone up…its the extra cost to me in the overall increase, the 10% shifted to me, the increased taxes on that 10% shifted to me, plus the lack of any raise that year. That would be a hell of a tax increase to swallow overall just for health care. I say leave it as is. I’m more for moving our elected officials onto our plans, Medicare, SS, etc all. It will be the only way any public system gets fixed right.

  8. Demi says:

    ChrisCD…same boat eh? I see your point and agree with it hands down. Thank you.

  9. Demi says:

    Oh and where I say they pay 50% and I pay $50…that should be 50% and 50%. My error.

  10. Sadie says:

    At previous employer, employees did not have to pay for their health benefits for many years & yes, we had those annual meetings identifying how much the company was providing to us in the form of benefits in addition to our salary. However in the early 90s cost sharing began with employees having to pay a portion; the meetings also ended.

    As my spouse attained Medicare prior to me, the whole scenario changed. The employer plan was written so as to be terribly confusing to understand whether or not a benefit would be covered or not. The package for Retiree eligible for Medicare was totally different from my under age 65 coverage. Questions abounded!

    Upon my attaining Medicare age I compared both the “options and costs” provided via employer vs. a Medigap Supplement Plan F. With the Medigap Supplement Plan F being more clearly defined for one to fully understand or at least not have as many questions/doubts, we chose to go with the Medigap Supplement coverage. In addition, the employer plan was a bit more costly making it easier to choose the Medigap Supplement Plan F. I have continued the Medigap Supplement for the past 4 years and have been well satisfied.

    Note: I suspect employees place far too much “trust” in their familiar employer insurance rather than investigating what else may be available/better or less costly to them.

  11. Steve says:

    I appreciate different perspectives on employers providing health care. As an employer, I would be cautious to identify health care costs to an employer as a “tax deduction.” A business expense is a business expense – whether it has some tax advantage or not has little bearing on the discussion you raise. And how is it that the President, Congress, and now the Supreme Court requires employers to pay for employee health care or be fined/taxed. How on earth did this happen? Health care costs are completely unknown to most employees. They talk about co-pays and deductibles as if these are the real costs – not truly understanding the cost of sick care. I advocate opening the market and prices so that every person can see what they are buying and completely remove employers from health care. Originally employers provided health care as a benefit to entice employees. Now we’re socializing the process and requiring employers to pay for health care. There is a fundamental problem with this approach and until people understand the real costs, we’re lost.

  12. admiral58 says:

    I think businesses should still have the deductions. They need incentive to maintain great benefits to attract top talent.

  13. Jerry says:

    Insurance is such a sticky topic. I wonder how the new healthcare plan will impact all of this. It might lead many employers to try and dump coverage entirely.


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