Capping Employer Health Premium Tax Break Could be Hard

January 14, 2009 ( - Implementing a cap on the amount employers can exclude from income for employee health benefits would be difficult and potentially costly to administer, according to a new study.

The Employee Benefit Research Institute (EBRI) said in the report released Wednesday that such a proposal – bandied about in Washington as part of ongoing health-reform discussions – would be particularly vexing for self-insured companies. Those who don’t pay insurance premiums would have to set a “premium equivalent” for each worker in order to comply with the cap in a process that EBRI said would be expensive and could create potential inequities for many workers.

Even with employers using more traditional insurance, complying with a cap would produce results that would vary by company based on the type of plan, the size and demographics of the workforce, and the worker’s home locations.   

Because employer-based health coverage is the most common way Americans get such benefits by far, any change proposals would have “far-reaching implications,” according to the report authored by EBRI researcher Paul Fronstin.

Fronstin asserted that lawmakers should recall the lessons from Section 89 of the Tax Reform Act of 1986, which he said tried to make employee benefits more standard and fair. The researcher said it was repealed by Congress in 1989 in part because the regulations created regulatory burdens that were so complicated and costly as to be unworkable. 

“Similarly, valuation calculations under a health coverage tax cap could become overly burdensome if the lessons from Section 89 are not heeded,” Fronstin wrote.

The report is available  here .