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Tax Policy

Why Employers Care

From the tax deductibility of employer-provided health benefits to cafeteria plan regulations and tax-advantaged health accounts, tax policy plays a critical role for employers in offering employee health coverage.

Without the current unlimited deductibility of employer-provided health coverage, both employers and employees will pay a larger portion of ever-increasing health care costs, jeopardizing the affordability of these programs. And tax-advantaged health accounts help employers to make their employees and retirees better health care consumers, an important step towards holding down health care expenses. IRS regulations governing these accounts, as well as rules governing cafeteria plans, impact health plan operations, which can drive up employer administration costs.

The Patient Protection and Affordable Care Act (Affordable Care Act) made some changes to the taxation of employer-sponsored health care. Beginning January 1st, 2011 employees can no longer use flexible spending accounts (FSAs), health reimbursement arrangements (HRAs) or health savings accounts (HSAs) to purchase over-the-counter (OTC) medications, unless prescribed by a physician. In addition, the Affordable Care Act also prohibits limits the contributions that individuals can make to the Health FSAs to $2500 per plan year. Congress is currently considering legislation that would repeal the provision in the Affordable Care Act which bans people from using health accounts to purchase OTC products. The Business Group sent support letters for the legislation.

Beginning in 2013, the federal government began taxing employers' Retiree Drug Subsidy reimbursements. Employers must account for this tax in their 1st Quarter 2010 earnings reports. Additionally beginning in 2013, the federal government will begin taxing all earned income for individuals and families earning $200,000/250,000 or above at .9%. In addition, the federal government will impose an additional 3.8% Medicare surtax on the lesser of investment and other "unearned" income (such as interest, dividends, royalties, business income (other than businesses in which the taxpayer materially, personally participates), capital gains and other net gains from the sale of property, rent, and other investment income) or modified adjusted gross income. Beginning in 2018, the federal government will impose a 40% Cadillac tax on the value of plans over $10,200 Individual/$27,500 Family. For more information on these provisions, please visit our health reform toolkit below.

A recent U.S. Supreme Court ruling on the Defense of Marriage Act has implications for employers. The ruling basically states that same-sex married couples should have the same benefits and rights that opposite-sex married couples have under federal law, including the same tax status for employer-sponsored benefits. However, the ruling does not guarantee such benefits and rights for other types of same-sex partnerships that states and plans may recognize, such as domestic partnerships and civil unions. In addition, some states may not recognize the tax exclusion for the value of benefits provided to same-sex spouses.

The Business Group testified before the Senate Finance Committee Roundtable in May of 2009 on how to finance health care reform and continue to protect the current favorable tax status of employer-sponsored coverage.

What Can Employers Do?

Employers can keep up with current developments and advocate for effective tax policy by taking the following actions:

  • Joining with other employers and industry organizations in representing employer positions on Capitol Hill and to various government agencies;
  • Submitting recommendations on proposed tax regulations;
  • Writing to Congressional members regarding proposed tax legislation;
  • Providing statements and/or testimony on the employer impact of tax policy decisions;
  • Meeting with Congressional and Administration staff on health benefit tax issues.

Relevant Tools and Resources Include:

Page last updated: January 29, 2014

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