Taxing the value of your health benefits is on the table

Following the enactment of health care reform rumors spread that because the value of employer paid health benefits was to be reported on W-2s, the amount would be counted as taxable income. That rumor was not true, but things have changed. In the face of unresolved budget deficits and the downgrade of the US credit rating, all bets are off.

This tax exclusion is the federal government’s largest tax expenditure, costing more than $1 trillion over the next five years (including the employer deduction of these costs as a business expense). However, the Joint Tax committee has estimated the cost of the tax expenditure for the employee exclusion for health insurance alone at $659 billion for 2010 through 2014. This amount now becomes a very tempting target for those charged with cutting budgets and raising revenue.

While it is unlikely the exclusion will be eliminated all at once, some phase out or cap is clearly not out of the question under current circumstances. If this is done without some income tax reform there will be a substantial impact on workers. The value of family health benefits can easily be $10,000 to $12,000 per year or more.

More than that, workers, especially lower-income workers, will find it more attractive to leave employer coverage in favor of the new health insurance exchanges where they will be eligible for government premium subsidies.

It is also not out of the question that the current ability to pay employee premiums on a pre-tax basis will come under scrutiny as part of any tax overhaul.