Employees Would Pay Taxes On High-Value Health Plans Under Republican’s Obamacare Alternative

Business groups liked a lot of what they saw in the 37-page House Republican prescription for replacing the Affordable Care Act.

The plan would repeal Obamacare’s various taxes, including surcharges on higher-income Americans and new taxes on health insurance companies and medical device manufacturers. It would get rid of the Affordable Care Act’s individual and employer mandates. Small businesses could pool their purchasing power through association health plans, which would be exempt from state coverage mandates. Individuals could shop for insurance across state lines, and the use of health savings accounts would be expanded. Caps would be imposed on non-economic damages in medical malpractice lawsuits.

All of these ideas were welcomed by many business groups, but there was one proposal that wasn’t received warmly: Putting a cap on the value of health benefits that can be provided tax-free to employees.

Letting employees receive an unlimited amount of health benefits without being taxed on its value helps drive up health care costs, Republicans contend. Democrats made a similar argument when they included a tax on high-value health plans in the Affordable Care Act. Republicans contend their proposal differs from Obamacare’s so-called Cadillac tax, and that the cap on how much health coverage could be offered tax-free to employees would affect “only the most generous plans.”

Some business groups don’t see much of a difference, however, between this proposal and the Cadillac tax.

“We oppose them both,” said Neil Trautwein, vice president for health policy for the National Retail Federation.

Capping the employee exclusion from taxable income for employer-provided health coverage “will amount to a tax on a portion of their benefits, thus reducing their total compensation,” he said. “Given that employers are in no position to compensate with higher wages, unhappy employees are a result. Any human resource manager can readily testify as to how sensitive employees are to the slightest change in benefits.”

Once health insurance is no longer mandated for individuals, employees “will become even more resistant to increases in their share of the cost of employer-sponsored benefits,” Trautwein said. “Younger, healthier employees may choose to drop their coverage all together rather than pay more taxes.”

Other business groups weren’t as blunt, but it was clear they weren’t wild about this proposal, especially since 175 million Americans now get health insurance coverage through their employers.

The National Coalition on Benefits, comprised of trade associations representing both large corporations and small businesses, urged Congress “to carefully review the proposal and evaluate the effect on employees and their families in proposing changes to the tax treatment of employer-sponsored health benefits. This review should ensure that such changes do not impede the ability of employers to offer coverage and for employees to afford this coverage.”

The House Republican plan isn’t going anywhere as long as President Barack Obama is in office, but it does provide an indication of what could happen if the GOP retains control of Congress and Donald Trump wins the presidential election.

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