It’s looking more and more likely that House Republicans will soon look to cut out the preferential tax treatment of employer-provided health care plans – all to cover the cost of repealing and replacing the Affordable Care Act.

A recently leaked discussion draft of repeal-and-replace legislation suggests taxing the most expensive individual and family plans – those in the 90th percentile – in the employer market.

That provision, which critics are calling a “new tax on the middle class,” would generate the greatest source of new tax revenue for the repeal and replace proposal.

“Clearly, the idea of disrupting the employer market is on the table,” says Garrett Fenton, an attorney in the employee benefits practice of Washington, D.C.-based Miller & Chevalier.

Even before the media got its hands on the discussion draft, the U.S. Chamber of Commerce and the American Benefits Council joined with other trade organizations representing employer interests in cautioning against any proposed health care legislation that by taxes employer-provided benefits by raising revenue.

While the discussion draft offers considerable insight into how Congressional Republicans might repeal and replace the ACA, Fenton says the proposed new tax and other provisions within the 100-plus-page draft are mere ideas that are, more than likely, subject to change.  

“It’s not known when Republicans will be able to introduce legislation, and whether or to what extent the legislation will vary from the leaked draft,” says Fenton.

The draft does not reveal how premiums above the 90th percentile threshold will be taxed.

The nonpartisan Congressional Budget Office has yet to score the draft’s proposals.

Congressional Republicans are under increased pressure to produce a bill by the end of March to replace the ACA — a deadline set by House Speaker Sen. Paul Ryan.

The draft also repeals the ACA’s individual and employer mandates and their associated tax penalties. And it scraps revenue-generating ACA tax provisions, including taxes on medical devices, insurers and higher-earners.

Gone, too, is the ACA’s Cadillac Tax, which was scheduled to enforce taxes on employers’ most comprehensive plans. Unpopular with Republicans and many Democrats on Capitol Hill, the Cadillac Tax would have levied a 40 percent excise tax on plans with premiums greater than $10,200, for individuals, and $27,500, for family plans. In 2015, Congress delayed implementation of the Cadillac Tax until 2020.

According to Steve Friedman, co-chair of the employee benefits practice group at Littler Mendelson, employers had grown to expect that ACA’s Cadillac Tax would never be implemented. The fact that Republicans are now proposing new taxes on health care plans is “unsettling,” he says.

“The problem with the proposals we are seeing is that employers don’t really know where their plans would end up and whether or not they would be subject to new taxes,” Friedman says. “Even if employers wouldn’t be exposed to new taxes immediately, there is the question of whether they would be exposed to taxes in the future. That’s the type of uncertainty the employer community would rather not deal with.”

An old idea

The tax-favored treatment of employer-provided health care plans will be responsible for, by some estimates, $4 trillion in lost tax revenue over the next decade. And according to the Tax Policy Center, tax exclusions on employer plans cost the IRS $260 billion in lost income and payroll tax revenue – the largest expenditure in the tax code.

Lawmakers have previously debated the merits of taxing some portion of the employer-provided health care market.

In 2005, an advisory board to then-President George W. Bush recommended capping some of the tax exclusions on employment-based coverage to encourage participants to more judiciously consume health care. That, in turn, would bend the health care cost curve, which was growing at a record rate.

And in 2008, former Sen. Max Baucus, a Democrat who chaired the Senate Finance Committee and was instrumental in crafting the ACA, also proposed taxing some part of the employer market.

Those ideas led to the ACA’s Cadillac Tax.

A 2013 policy paper from the nonpartisan think tank Urban Institute estimated that a tax on premiums above the 75th percentile of the employer market would generate $264 billion in new revenue from income and payroll taxes over 10 years while preserving 93 percent of the currently available tax subsidies.

About 170 million Americans get their health insurance through employers. There are not yet estimates of how many people and employers would be subject to new taxes under the 90th percentile threshold proposed in the recent discussion draft. Also unknown is whether those new taxes would do enough to offset the tax revenue lost by repealing the ACA.

“It is very difficult, if not impossible, to predict whether the proposed cap on the tax exclusion for employer-sponsored coverage is sufficient to cover the estimated costs of the legislation,” says Fenton. “We understand that Republican lawmakers expect to have some scoring estimates from the CBO within coming weeks.”

The discussion draft’s proposed tax would be implemented in 2019. Fenton says the threshold would be increased annually to account for general inflation.

But indexing a premium tax threshold to general inflation could ultimately expose more employers and individuals to taxation, assuming medical costs and insurance premiums continue to increase faster than general inflation.

“It’s possible that, over time, more and more employers’ coverage may become subject to federal tax under the proposal, even if their coverage is unchanged,” says Fenton.

Employers have historically been extremely resistant to proposals to tax health benefits.

“There is little, if any, indication that employers and interest groups are on board with any limit on the tax exclusion for employer-sponsored coverage,” says Fenton.

In the early days after ACA passage, there were rampant predictions that the law would spur a massive exodus from the employer-provided market. That did not happen.

It was also predicted that the Cadillac Tax would motivate more employers to offer higher-deductible consumer driven plans to avoid new tax exposure.

“The thought was that by imposing an excise tax on high-cost or high-value coverage, employers would have an incentive to move toward lower-cost plans with higher deductibles,” says Fenton.

A similar rationale could apply under the proposed limit on tax exclusions.

“It’s certainly possible that new taxes could incentivize more employers to offer lower-cost plans with higher deductibles,” said Fenton.