Unions, business groups warn Congress against touching group health tax rules

Congress has not talked about tinkering with the group health tax exclusion, and it had better not start, the groups warn.

The U.S. Capitol rotunda in Washington. Credit: Diego M. Radzinschi/ALM

Insurers, employers and unions have not seen much sign of group health tax rule change fever, but they are mobilizing to prevent any possibility of a return of that way of thinking now.

The organizations joined together to protect the federal income tax exclusion for money spent on employer-sponsored health benefits by writing a letter supporting the exclusion to the Democratic and Republican leaders of Congress.

“Congress must protect the foundation and affordability of American health care coverage by keeping employer-provided health care coverage tax free,” the organizations said, in a line highlighted with boldface type, in the letter.

Employers spend an extra $5.36 on health benefits for every $1 in tax savings they get, the groups said.

The groups addressed the letter to Senate Majority Leader Chuck Schumer and House Minority Leader Nancy Pelosi, who are Democrats, and to House Speaker Mike Johnson and Senate Minority Leader Mitch McConnell, who are Republicans.

The list of organizations signing the letter ranged from AHIP to Wisconsin Manufacturers & Commerce, and the labor unions on the list included the International Brotherhood of Teamsters and Unite Here.

In addition to those organizations, and many financial services organizations, such as the National Association of Insurance and Financial Advisors, the letter writing team attracted the patient advocacy groups such as the Arthritis Foundation and ICAN, the International Cancer Advocacy Network.

Related: Think tank with Republican ties proposes employer health tax exclusion limit

Federal budget analysts have long sighed over the federal income tax revenue lost to the group health tax exclusion. It now costs about $350 billion per year.

Many economists contend that the exclusion extorts the health insurance and health care markets and is partly to blame for U.S. patients’ lack of interest in the underlying cost of care.

Members of Congress put a provision shrinking the exclusion in the two-bill package that created the Affordable Care Act. The so-called “Cadillac plan tax” would have imposed a 40% excise tax on the cost of health benefits packages with a value that exceeded a specified limit.

Employer groups and labor groups joined together to fight the tax, and Congress never let the tax take effect, Congress permanently repealed the tax in 2019.

But fear about the return of the Cadillac plan tax or something similar has lingered.

In 2020, shortly after Congress had axed the Cadillac plan tax and before Janet Trautwein retired from her post as head of the group now known as the National Association of Benefits and Insurance Professionals, she emphasized her fear of increased efforts to take away the tax exclusion.

This year, health policy specialists suggested in a paper for the Paragon Health Institute that the group health tax exclusion does far less harm to the U.S. health care market than the existence of Medicare and Medicaid. But they recommended that members of Congress think about capping the exclusion at 125% of the national average cost of health coverage as part of a serious, comprehensive tax reform effort.

America’s Health Insurance Plans, one of the big groups for health insurers, tried to prepare for action on the group health tax rules earlier this year, by backing a NORC survey on consumers’ thinking about employer-sponsored coverage.

The survey team found that 89% of the 3,852 adults who took the survey said their plan has a provider network that includes convenient options and 82% said they have access to high-quality providers through their plan’s network.

The signatories

Here’s a complete list of the organizations that signed the letter backing the current group health tax exclusion.

Recommended Stories