Now that the stimulus package has been signed, Congress will be turning its attention to a broad range of healthcare issues, one of which could be unwelcome news for both employers and employees: capping the tax exclusion for employment-based health coverage from workers’ taxable income.

According to a research report from The Employee Benefit Research Institute (EBRI) written by Paul Fronstin, director of the Health Research and Education Program, the likelihood of Congressional action on the tax cap this year is strong; it’s been a policy goal of many Democrats and Republicans that traces back to the Reagan administration, and the government clearly needs the revenue it would bring to federal coffers.

The proposals Congress is looking at raise questions about the cost and challenges to employers — as the sponsors of job-based health benefits — of administrating a change in the tax treatment of health coverage. “On the surface,” the report says, “capping the tax exclusion for health coverage sounds like a straightforward proposition. Employers would be required to report the premium or cost of health coverage on W-2 statements, and workers with coverage valued above the cap would pay taxes on the value of the coverage above the level of the cap. Employers would continue to offer health coverage, and workers would continue to get their coverage through their employer. Workers whose cost for coverage is below the cap would see no changes, while workers whose cost for coverage was above the cap would see a change.”

Changing the way that health coverage is taxed could have far-reaching implications for employment-based health coverage, including not only traditional designs but also the viability of many “consumer-driven” health plan designs that use a combination of flexible spending accounts, health reimbursement arrangements, and health savings accounts, writes Fronstin.

“Whether the cap on the value of the coverage takes the form of a uniform cap or varies by income, as long as employers are required to report the value of coverage on W-2 forms, the implications of such a requirement will vary by employer and will be affected differently whether they purchase health insurance from an insurance company or offer self-insured plans. For self-insured employers, calculating insurance premium costs under a tax cap could be done fairly easily using the Continuation of Benefits Retirement Act (COBRA),” says the report. However, whether self-insured employers would be able to use the least costly method to determine the value of coverage would have to be determined by the law and/or regulators. ###