Will the tax exclusions on employer-provided health insurance beused to pay for tax cuts?

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Next week, the White House is expected to release the firstdetails on what tax reform will look like and how it will bepaid for.

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Lawmakers are reportedly targeting several exemptions in theexisting tax code to offset lower individual and corporate tax rates. Those tax cuts are expected to costup to $2 trillion.

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Eliminating the deductibility of state and local taxes, cappingdeductions on mortgage interest, and limiting pre-tax contributionsto workplace retirement plans are among therevenue sources being considered to pay for lower rates.

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Related: Existing scoring of lost tax revenue on401(k)s is short-sighted

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But to date, the treatment of employer-provided health carebenefits has been conspicuously absent from public conversations ontax reform.

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According to U.S. Census data, roughly 178 million privatesector workers and their families get health care insurance throughthe employer market.

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Workplace plans cover more Americans than any other segment ofthe private or public insurance market. Premiums are of courseexcluded from payroll and income taxes.

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That comes with a hefty price tag. According to new numbers fromthe Congressional Budget Office, foregone revenue on health carebenefits will cost the U.S. Treasury $3.9 trillion between 2018 and2027-- by far the largest expenditure in the tax code.

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“It’s a really big pot of money,” said Katie Spangler, seniorvice president of health policy at the American Benefits Council,which advocates for large sponsors of employee benefits plans.

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Which is precisely why Spangler and others are uneasy over thefuture of group policies ahead of the reform debate.

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Related: GOP contemplating shift to all-Roth 401(k)system

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Tax breaks on group market have been under scrutiny for years.Most recently, Congressional Republicans targeted the exclusions topay for replacing the Affordable Care Act.

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Last spring, a leaked discussion draft of proposed legislationincluded a tax on the 90th percentile ofemployer-provided benefits.

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That provision was promptly scrubbed from Republicans’ reformefforts, thanks in no small part to the aggressive front that ABCand other benefits advocates waged on Capitol Hill.

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Joel Wood, senior vice president for government affairs at theCouncil of Insurance Agents and Brokers, said the CIAB “raisedhell” in the weeks after the discussion draft was leaked.

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But this time around, the implications of tax reform on employerbenefits are different, largely because of Republicans’ failure tomake good on years of promises to repeal and replace Obamacare,which has intensified pressure to deliver on tax reform, thinksWood.

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Few policy experts doubt that tax reform will be a heavy lift.Congress will first have to pass a budget resolution, which will inpart determine the cost of reform.

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Lawmakers will then have to determine whether to pursue fullreform of the code or simply cut rates, and whether they intend topay for reform or cuts—all big “ifs” in Woods’ mind.

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But he breaks from the consensus of policy experts who doubtreform can be pushed through on the White House’s aggressivetimetable. Treasury Secretary Steven Mnuchin has pledged to push abill through by the end of the year.

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“Republican leaders believe there is an existential politicalthreat to the party if they don’t get tax reform done,” saidWood.

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That reality has benefits advocates on high alert. “With taxreform, if you are not at the table you are on the menu—I won’tbreathe easy until the process plays out,” added Wood.

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Notwithstanding his unease, Wood says he has real hope that thetax preferences for both employers and individuals will survive thereform process.

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Last August, Wood and other benefits advocates met with HouseSpeaker Paul Ryan, R-WI. Ryan told the group that the option oftapping the exclusions has already been litigated under health carereform efforts, according to Wood’s account.

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“I breathed much easier when he said that,” explained Wood. “I’mincreasingly confident group benefits won’t be used as a pay for.But we still have to be vigilant. The Speaker’s views werecomforting. But a lot has transpired between then and now.”

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Middle-class tax increase

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The tax preferences on the employer market have critics amongthe most prominent Republican lawmakers.

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Speaker Ryan has advanced proposals that would scale back theexemption. So have Rep. Kevin Brady, R-TX, and Sen. Orin Hatch,R-UT, both of whom chair the committees that will oversee reform intheir respective chambers.

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When he was in Congress, Secretary of Health and Human ServicesTom Price proposed capping the exclusion at $8,000 for individualpremiums and $20,000 for family premiums.

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The ABC’s Spangler said Price’s numbers were used to argue thatthe caps would amount to a tax increase on the middle class.

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“The Price model would equate to a 23 percent tax increase onfamilies making between $20,000 and $30,000, and a 10 percentincrease on families making less than $100,000,” said Spangler,citing data from Mercer.

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The White House has proposed doubling the standard deduction formiddle-class wage earners.

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Spangler says that may not be enough to cover new taxes onpremiums. “I don’t see how that would offset a tax on healthpolicies,” said Spangler, who was a senior staffer on the SenateCommittee on Health, Education, Labor and Pensions from 2005 to2012.

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“And I don’t see how they can lower rates enough to neutralizenew taxes on health benefits,” she added.

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Spangler doesn’t expect next week’s proposal from the WhiteHouse will include new caps on employer plans.

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But her experience writing legislation on the HELP Committeeleaves her fearing that lawmakers will tap health benefits at theeleventh hour to push a bill through.

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“The exclusion would have taken Republican votes away on healthcare reform, so I don’t expect it to be a part of earlydiscussions,” said Spangler. “Where I get more anxious is if theyget really close to passing reform, and they are a little short onfunding or votes, they go after the exclusions.”

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Potential impact on brokers

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If Congress does fund tax reform with lower exclusions on groupplans, it will be the agents, brokers, and consultants who willhave to deliver the news to employers and participants.

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“That doesn’t sit well with our agent members,” said DianeBoyle, senior vice president of government relations at theNational Association of Insurance and Financial Advisors.

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Reducing employers’ tax incentive to offer health care comeswith the risk that some employers will drop plans, and opt to incurmandate penalties under the ACA, said Boyle.

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A lot of health care economists would be fine with that. Bothleft and right-leaning policy experts have argued the group marketcreates consumption inefficiencies that drive up the overall costof health care.

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But Boyle thinks the prospect of forcing participants in thegroup market to the individual market is perilous.

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“Some argue everyone should be purchasing policies on their ownin the individual market, but amid all of the uncertainty, what wedo know is the group market is much more stable than the individualmarket, which was shaky even before the ACA,” said Boyle.

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The guidance individuals get from agents and brokers in thegroup market may not be available in the individual market.

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The ACA limits broker compensation on individual plans—somestates have out-right banned it.

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That raises the question of whether brokers would have theincentive and ability to absorb a potential exodus from group plansto the individual market.

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“Agents and brokers want to help people, but when they’re askedto spend several hours with a client that they aren’t compensatedfor, you can’t make that up in volume,” explained Boyle.

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“At some point the math doesn’t work,” she added. “We would havereal concerns over that potential under tax reform.”

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Potential impact on employers

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Whether or not new taxes on group plans would drive employersout of the market is an unknown that lawmakers will have tobalance.

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Paul Fronstin, director of health research at the EmployeeBenefits Research Institute, says he has put the question toemployers in blunt terms: If the benefit is taxed, why do youcare?

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“Employers are mixed,” said Fronstin. “Some say it would affectthem, some say it wouldn’t. I think they’re struggling with what itwould mean for them.”

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If participants’ benefits are taxed, they may potentially askfor wage increases to cover the cost. In a tight labor market,employers may be forced to oblige.

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“A lot of what employers do is a function of the labor market.With unemployment at 4 percent, it would be easier for a lot ofworkers to ask for a raise,” said Fronstin.

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The ABC’s Spangler said she has raised the potential impact onthe group market with the CBO.

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“There is a tipping point,” said Spangler. “At some point, ifthe tax exclusion and employer mandate is not balanced right, youcould see employers drop coverage.”

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She too has put the question directly to employers: Wouldcapping the exclusion on group policies affect the decision tooffer coverage?

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“Some members have said they will reconsider whether or not tooffer benefits if the tax treatment is changed,” said Spangler.

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