Senate Panel to Review Controversial Changes to Employer-Provided Health Insurance Tax Deductions

By Staff Report

May. 19, 2009

The Senate Finance Committee will discuss controversial options that include curbing the tax-favored status of employer-provided health care coverage, wiping out health care flexible spending accounts and placing new restrictions on health spending accounts when it meets Wednesday, May 20.

The policy options include several potential ways to modify the tax treatment of employer-provided coverage to “eliminate inconsistencies and discourage wasteful health care spending,” according to a committee summary of options being considered to raise revenue to expand coverage.

Several options relate to current tax law in which employees are not taxed on premiums or claims paid by their employers. The tax-free status encourages employers to offer overly generous plans that result in the overuse of services, driving up costs, the summary says.

Options to deal with that issue include capping the cost of coverage that would be excluded from employees’ taxable income or basing the amount of the tax exclusion on employees’ incomes.

Similar proposals were made during the early years of the Reagan administration in the 1980s.

However, employers at the time fiercely opposed the ideas, citing the administrative complexity of trying to value the coverage, while union groups fought the proposals, charging they would be unfair to employees living in areas of the country with high health care costs and would impose new taxes on workers.

Other issues to be discussed at Wednesday’s Senate Finance Committee meeting include limiting contributions to FSAs or wiping them out entirely. Nearly all major employers now offer FSAs, which allow employees to make pretax contributions to pay for uncovered health care-related expenses.

On HSAs, policy options to be discussed include reducing the maximum contributions permitted, doubling to 20 percent from 10 percent the tax penalty imposed on distributions used to pay for nonmedical expenses, and requiring certification from an employer or an independent third party that distributions were used to pay medical expenses.

The House of Representatives several years ago approved requiring certification of distributions, but the Senate took no action.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail

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