David Merzel of Kaufman, Rossin & Co. writes a guest blog for NetMinder about the effects of a possible tax on health benefits.
If Congress decides to start taxing employer-provided healthcare benefits as a way to raise revenue and tame the federal deficit, it could prove costly to U.S. workers, insurers and even providers.
Employees often overlook the tax-free benefits of receiving all or part of their healthcare benefits paid by their employer. This has been referred to as the biggest tax break allowed in the U.S., far surpassing favorites like the mortgage interest deduction, charitable contributions and many other itemized deductions.
The past reaction to similar taxes has been for taxpayers to cut spending on purchases of discretionary items, such as certain healthcare benefits. In fact, recent research by the Employee Benefit Research Institute shows that more than half of U.S. workers would either drop coverage or shop around for a less costly plan should the government tax health benefits.
Dental and vision insurance have long been thought of as added perks and not as essential as primary health care insurance. If health benefits become taxable, workers might drop these additional types of coverage or they may cut back on or delay dental and vision check-ups and services, which would in turn affect insurers’ and providers’ bottom lines.
How much would a tax on employer-based health coverage cost the average taxpayer? Let’s look at an average U.S. family of four using the following annual assumptions. The premium amounts listed below represent the employer contribution, based on an employer paying 70% of the total insurance premiums and the employee paying 30%:
|Effective tax rate||15%|
|Tax on healthcare benefits||$1,709|
* [Median U.S. household income—U.S. Census Bureau]
** [Kaiser Family Foundation and Health Research & Educational Trust survey]
*** [2012 Dental Benefits Report: Premium and Benefit Utilization Trends—National Association of Dental Plans]
**** [Average composite annual premium for typical insured vision plan—OptumInsight]
It’s easy to see that with a total additional tax burden of more than $1,700, optional benefits such as dental and vision coverage may be on the chopping block for the average American. The result is a taxpayer with reduced benefits and one more obstacle for dental and vision insurers and providers, who are already feeling the pain from consolidation and price pressure.
David Merzel, EA, is an accounting principal at Kaufman, Rossin & Co., one of the top CPA firms in the country. He is a New York State licensed CPA and a federally licensed IRS Enrolled Agent. David can be reached at firstname.lastname@example.org.