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The federal income tax exclusion for employer-sponsored health benefits will help employers and workers cut their tax payments by $296 billion this year — and cost the U.S. Treasury $296 billion in tax revenue.
The employer health benefits tax exclusion is on track to be 5.9% higher this year than in 2025, and that one "tax expenditure" will account for 15% of the $2 trillion 2026 tax expenditure total, according to a tax expenditures list posted along with the Trump administration's budget proposal for 2027.
The second biggest employee benefits tax expenditure — for 401(k) plans and other defined contribution retirement plans — will increase 9.6%, to $156 billion, and amount to 7.7% of the 2026 tax expenditure total.
The federal Office of Management and Budget compiles the tax expenditure list every year to show members of Congress, Executive Branch officials and the general public just how much tax deductions, tax credits and other tax discounts affect federal revenue.
The "years" in the tax expenditure table are "federal fiscal years." Federal fiscal year 2026 started Oct. 1, 2025, and will end Sept. 30, 2026.
The U.S. federal government will generate about $5.5 trillion in tax revenue and other forms of revenue and spend $7.5 trillion, producing a deficit of $2.1 trillion, according to OMB projections.
Employers and benefits groups contend that health benefits tax incentives, retirement benefits tax incentives and other benefits incentives end up saving the federal government, by encouraging employers to offer the kinds of helpful health and retirement programs that are offered by national governments in many rich countries.
But the 2026 employer health and defined contribution retirement plan tax expenditures alone have a value equal to 22% of the 2026 federal budget deficit.
Those and nine other benefits-related expenditures — the tax incentives for defined benefit pension plans, health savings accounts, the workers' compensation benefits, group term life premiums, employer-paid parking, employer-provided educational assistance, accident and disability insurance premiums, employer-provided child care and employer-provided transit passes — will cost $559 billion, or 27% of the value of the 2026 federal budget deficit.
What it means: Employers and employees love benefits tax incentives, and many members of Congress like improving benefits incentives.
But defending existing tax incentives and adding new ones takes work.
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