For decades, the value of health coverage provided by an employer for an employee and the employee's dependents has generally been excludable from an employee's gross income. In addition, amounts paid by an employee for health coverage may be paid on a pre-tax basis through a cafeteria plan or Section 125 plan sponsored by an employer or other tax-favored vehicles such as health savings accounts (HSAs). On March 20, 2024, the Republican Study Committee's Budget and Spending Task Force released the RSC's Fiscal Year 2025 Budget proposal, which includes a proposal to cap the tax-free amount available for health care expenditures, including amounts paid by both an employer and an employee.

Proposed shift to tax treatment. Under Sections 105 and 106 of the Internal Revenue Code ("Code"), the value of employer provided group health plan benefits are generally excludable from an employee's gross income. Therefore, an employee does not pay Federal income tax (and in most cases state income taxes) on the value of the health coverage provided through employment. In addition, these amounts are not subject to employment taxes, including FICA and Medicare taxes. The RSC's proposal would not subject the full amount paid towards health coverage to these taxes. Instead, the proposal indicates that the amount paid over a cap would lose favorable tax treatment. The proposal does not indicate what the RSC proposes as an appropriate cap.

Example: While additional details are needed to fully analyze the tax impact to an employee of the introduction of a cap on the amount of employer-provided health coverage that may be provided on a tax-free basis, here is an example that provides some context. Let's assume that the full cost of family health coverage – employee, spouse and dependent children – offered by an employer is $1,500 a month or $18,000 a year. The employer pays 80% of the cost of the coverage, and the employee pays 20%. The employee's Federal income tax withholding rate is 15%. Let's also assume that the cap on health expenditures that are not taxable is $1,000 a month. Therefore, the employee has additional taxable income each month of $500.