Dismantling the employer option . . . and then there were none

There is a well known English nursery rhyme by Mother Goose, about an egg that sat on a wall and had a great fall.  All the king's horses and the all king's men could not put that poor egg back together again.

As we have been following the repeal and replace of the Affordable Care Act (ACA) or aka - Obamacare, the elimination or capping of the employer tax-exclusion on employer sponsored benefit programs, has been brought up again.  This idea has been floating around for the last couple of years as a way to increase revenue and now looked at as one potential revenue funding option in a replacement to the current Affordable Care Act (ACA).

So what is the employer tax - exclusion? Currently employees are NOT taxed on the employer paid portion of their benefits for income and payroll tax purposes. Under this new regulation, the employer paid portion of premiums could end up being considered taxable income.  In addition, the employer could face higher FICA (Federal Insurance Contributions Act) matches, which would be an added financial burden to the employer.  

FICA is made up of the employer and employee both contributing equal shares of Social Security Tax (6.2%); Medicare Tax (1.45%) for a total of 12.4% and 2.9% respectively.  Currently there is a cap on Social Security, so once you have paid this tax on $127,200, you no longer pay the 6.2% Social Security tax.  You can find more information on this and additional taxes HERE.

We are sitting in a precarious situation if we start to look changing or altering the current employer model, as part of the repeal and replace.  The Kaiser Foundation has data showing 156 million Americans covered through employer based plans through the end of 2015.  As of 2017, approximately 175 million Americans receive healthcare through the employer based model.

Remember the risk pools?  The employer based market is heavily involved in helping to balance risk pools by spreading out the costs of the healthy and unhealthy covered employees.

If the employer has no incentive to offer these benefits to their employees, or they end up costing both the employee and the employer more money, the employer could easily have their employees go to the individual marketplace to purchase their coverage by offering a salary increase to the employee to offset some of the costs.  This would mean higher income taxes to the employee.  The costs in the individual market are higher; the choices are lower and employees would lose the benefit of having their employer advocate in coverage disputes.

If Congress decided, instead, to cap the employer-tax exclusion, this would in turn, cause the employer to look at providing less rich benefit to employees, to stay underneath the maximum premium cap so not to trigger a tax.  This would push employees to higher out of pocket costs and possibly shift the cost of the premium from the employer to the employee at a faster rate then we are seeing today.

The employer-sponsored health insurance is a valuable benefit and a keystone to the American worker and a financial foundation for the healthcare system today.  If we attempt to upset this model, while undergoing additional repeal and replacement options, we run the risk of the entire system breaking, just like that egg.  And there is not a king nor a horse strong or powerful enough to be able to pick it up, once the system has fallen off the wall.