Back To Top

DBS Digest

Navigating employee benefits in an ever-changing regulatory landscape.

A looming crisis for the employer exclusion?

At Diversified Benefit Services (Diversified), we understand the role that employer-provided health care plays in the financial security of our clients/participants and their families. As a leading third-party administrator of employee benefits, Diversified is always wary of public policy initiatives that would jeopardize the affordability and accessibility of that coverage.

Recently, over 70 organizations (a diverse group of employers, patient advocacy groups and other health care stakeholders) urged Congressional leaders to reject legislative proposals that would tax employer-provided health care coverage. The letter comes in response to a budget proposal released by the Republican Study Committee that would, among other health policy changes, cap the employer tax exclusion at an unspecified level. Additionally, a research paper issued by the Paragon Institute, a conservative DC think tank, echoed the call for a broad range of healthcare reforms along with capping the exclusion at 125% of the (national) average value of employer-sponsored plans.

The tax exclusion for employer-provided health coverage* is an important tax benefit for employees and it provides the foundation for consumer driven health plans offered by employers. This exclusion exempts employer-provided health coverage from both income taxes and employment taxes. With this exclusion, the employer-paid portion of health coverage (such as premiums) is not taxed and the employee’s portion paid by salary reduction through a cafeteria plan is also not taxed.

Why Maintaining the Tax Exclusion is Crucial

  1. Promotes Health Equality: Tax-free employer-provided health coverage allows for more equitable access to health services, ensuring that employees receive the care they need regardless of where they live or work.
  2. Enhances Employee Satisfaction: Workers place tremendous value on their health benefits and are highly satisfied with the coverage they receive from their employers. This translates into higher productivity and morale within the workplace.
  3. Economic Benefits: For each dollar in tax expenditures, employers spend between four to five dollars on health benefits, underscoring the argument that the exclusion delivers value for the federal government and represents a significant economic advantage for employers/employees.
  4. Substantial Return on Investment: This coverage plays a pivotal role in talent attraction and retention, benefiting the broader economy by promoting a healthier and more stable workforce.

As Congress prepares for a major tax policy debate next year, there is concern that the tax exclusion for employer-provided healthcare benefits could once again be a target. The White House Office of Management and Budget estimates that forgone revenue from the tax “expenditure” for employer-provided healthcare – the largest in the tax code – will amount to nearly $3.5 trillion through 2033.

Diversified remains committed to supporting policies that protect and enhance employer-provided health coverage. As advocates for maintaining the tax-free status of employer-provided health coverage, we join the voices – including that of Wisconsin Manufacturers & Commerce – urging Congress to preserve this critical component of the American health care system. By doing so, we continue to do our small part to support the health, wealth and well-being of middle class American workers.

*Enacted as part of The Stabilization Act of 1942 (aka “The Inflation Control Act”)