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W a s h in g t o n R e p o r t
‘Floor,’ ‘cap,’ or ‘exclusion’: Congress must find answer X he tax treatment of employee health benefits rests on the shifting sands of pub lic policy debate. Right now, the issue is a “floor.” Last fall, it was a “cap” or “ceiling.” There once was talk of a “separate cap.” And legislation has been introduced to elimi nate the “exclusion.” What all this means is that the tax treatment of workplace health care coverage is increasingly being debated by Congress and the executive branch. For better understanding of the debate, we offer the following brief dis cussion of the terms. To begin with, there is the nontax ap proach, or current law. All employer con tributions to health insurance plans on behalf of an employee are excluded from the employee’s gross income for tax pur poses, regardless of the cost or extent of the coverage. This is the so-called “exclu sion.” Last fall’s Treasury Department plan, copying Reagan Administration legisla tion ignored by the 98th Congress, pro posed a “cap” on workplace health bene fits. That is, only an initial amount of health coverage would remain taxfree to employees, in this case $70 a month for singles and $175 for families. Employerprovided benefits above this monthly “ceiling” would be treated as taxable in come to the employee. A variation on this theme mentioned by one leading senator during the 98th Con gress but never introduced as legislation was a “separate cap” for dental benefits. That is, a specified amount of such cover age w o u ld re m a in taxfree to the employee. One figure discussed was $40 a month. Thus, the amount of dental coverage above $40 a month would be taxed under the “ separate cap” then being discussed. 380 ■ JADA, Vol. I l l , August 1985
‘Floor’ proposed The Association has objections to both The President’s May 28 tax package pro the “floor” and the “cap,” although the poses a “floor.” The first $300 a year in “floor” would have less of an impact on h e a lth benefits c o n trib u te d by an dental benefits. It is widely acknowl employer to a family health plan ($120 for edged that a “cap” would lead some individual coverage) would be included workers to discard dental and other bene in the employee’s gross income. Every fits to keep their hospital and major medi thing above the “floor” would remain tax- cal packages free of taxation or relatively untaxed. The “floor” w ould increase free to the employee. The other idea is to eliminate the exclu taxes for alm ost a ll w orkers w ith sion, which several bills in the last Con employer-provided benefits but would gress and a leading Democrat proposal in not discriminate against any particular this Congress propose to do. Elimination benefit. At the relatively modest $10 and of the exclusion would subject most or all $25 monthly levels called for by President employer-provided workplace health Reagan, the “floor” would be an easy target for future revenue hunters and benefits to taxation for employees. Lately, the debate has taken a new turn could be raised just as the threshold for to one of “floor” versus “cap.” The more taxpayer deduction of health care ex drastic concept of wiping out the exclu penses has been increased from 1% to 3% sion is not being given serious considera to 5% of adjusted gross income (AGI). tion at the present time, in part because its Pending legislation would increase it to Democrat sponsors are deferring to the 10% of AGI. The best tax treatment of workplace Administration on tax reform for now, al though some Republicans also have sup health benefits—the treatment most bene ported legislation that would repeal the ficial to the health and productivity of American workers and least likely to en exclusion. Sen. Bob Packwood (R-OR), Finance courage greater government involvement Committee chairman and a leading op in health care— is the present tax treat ponent of taxation of employee benefits, ment. Dental prepayment plans, nurtured in has supported the “floor,” saying it repre sents a carefully crafted compromise that the soil of favorable tax policy, have has the best potential of enactment. Sen. grown from coverage of some 6 million David Durenberger (R-MN), a Finance persons in 1968 to around 105 m illion member, says the “floor” is “regressive today. Nor was this an incidental growth. tax policy and just plain lousy health pol The tax “exclusion” was provided for the icy.” He has proposed a $100-$250 a very purpose of encouraging private sec month “cap” for individual and family tor health care services. It has succeeded and is now in danger coverage. of being trapped between a “floor” and a Negotiable provision “ceiling.” While the Administration has proposed T his report was prepared by Mr. Craig Palm er, pub the “floor,” it has been less than ardent in promoting it. Treasury Secretary James lic inform ation counsel, ADA W ashington Office. Baker indicated to the House Ways and Means and Senate Finance Committees his willingness to negotiate this particu lar provision, which the Administration offers primarily as a revenue measure. Some lawmakers, like Rep. Barbara Kennelly (D-CT), warn that neither is an attractive course. “We must not buy into the fight of ‘cap’ versus ‘floor,’ ” she told a US Chamber of Commerce telecon ference. Both have “serious flaws” and divert attention from the private sector health care protection accorded workers by virtue of current tax law, she said. The “floor”-“cap” debate also has di vided labor and business, whose national organizations remain opposed to the taxa tion of employee benefits. Basically, the larger unions with more comprehensive benefits find the “floor” more to their lik ing, an issue that cuts similarly for busi-
W a s h in g t o n R e p o r t
‘Floor,’ ‘cap,’ or ‘exclusion’: Congress must find answer X he tax treatment of employee health benefits rests on the shifting sands of pub lic policy debate. Right now, the issue is a “floor.” Last fall, it was a “cap” or “ceiling.” There once was talk of a “separate cap.” And legislation has been introduced to elimi nate the “exclusion.” What all this means is that the tax treatment of workplace health care coverage is increasingly being debated by Congress and the executive branch. For better understanding of the debate, we offer the following brief dis cussion of the terms. To begin with, there is the nontax ap proach, or current law. All employer con tributions to health insurance plans on behalf of an employee are excluded from the employee’s gross income for tax pur poses, regardless of the cost or extent of the coverage. This is the so-called “exclu sion.” Last fall’s Treasury Department plan, copying Reagan Administration legisla tion ignored by the 98th Congress, pro posed a “cap” on workplace health bene fits. That is, only an initial amount of health coverage would remain taxfree to employees, in this case $70 a month for singles and $175 for families. Employerprovided benefits above this monthly “ceiling” would be treated as taxable in come to the employee. A variation on this theme mentioned by one leading senator during the 98th Con gress but never introduced as legislation was a “separate cap” for dental benefits. That is, a specified amount of such cover age w o u ld re m a in taxfree to the employee. One figure discussed was $40 a month. Thus, the amount of dental coverage above $40 a month would be taxed under the “ separate cap” then being discussed. 380 ■ JADA, Vol. I l l , August 1985
‘Floor’ proposed The Association has objections to both The President’s May 28 tax package pro the “floor” and the “cap,” although the poses a “floor.” The first $300 a year in “floor” would have less of an impact on h e a lth benefits c o n trib u te d by an dental benefits. It is widely acknowl employer to a family health plan ($120 for edged that a “cap” would lead some individual coverage) would be included workers to discard dental and other bene in the employee’s gross income. Every fits to keep their hospital and major medi thing above the “floor” would remain tax- cal packages free of taxation or relatively untaxed. The “floor” w ould increase free to the employee. The other idea is to eliminate the exclu taxes for alm ost a ll w orkers w ith sion, which several bills in the last Con employer-provided benefits but would gress and a leading Democrat proposal in not discriminate against any particular this Congress propose to do. Elimination benefit. At the relatively modest $10 and of the exclusion would subject most or all $25 monthly levels called for by President employer-provided workplace health Reagan, the “floor” would be an easy target for future revenue hunters and benefits to taxation for employees. Lately, the debate has taken a new turn could be raised just as the threshold for to one of “floor” versus “cap.” The more taxpayer deduction of health care ex drastic concept of wiping out the exclu penses has been increased from 1% to 3% sion is not being given serious considera to 5% of adjusted gross income (AGI). tion at the present time, in part because its Pending legislation would increase it to Democrat sponsors are deferring to the 10% of AGI. The best tax treatment of workplace Administration on tax reform for now, al though some Republicans also have sup health benefits—the treatment most bene ported legislation that would repeal the ficial to the health and productivity of American workers and least likely to en exclusion. Sen. Bob Packwood (R-OR), Finance courage greater government involvement Committee chairman and a leading op in health care— is the present tax treat ponent of taxation of employee benefits, ment. Dental prepayment plans, nurtured in has supported the “floor,” saying it repre sents a carefully crafted compromise that the soil of favorable tax policy, have has the best potential of enactment. Sen. grown from coverage of some 6 million David Durenberger (R-MN), a Finance persons in 1968 to around 105 m illion member, says the “floor” is “regressive today. Nor was this an incidental growth. tax policy and just plain lousy health pol The tax “exclusion” was provided for the icy.” He has proposed a $100-$250 a very purpose of encouraging private sec month “cap” for individual and family tor health care services. It has succeeded and is now in danger coverage. of being trapped between a “floor” and a Negotiable provision “ceiling.” While the Administration has proposed T his report was prepared by Mr. Craig Palm er, pub the “floor,” it has been less than ardent in promoting it. Treasury Secretary James lic inform ation counsel, ADA W ashington Office. Baker indicated to the House Ways and Means and Senate Finance Committees his willingness to negotiate this particu lar provision, which the Administration offers primarily as a revenue measure. Some lawmakers, like Rep. Barbara Kennelly (D-CT), warn that neither is an attractive course. “We must not buy into the fight of ‘cap’ versus ‘floor,’ ” she told a US Chamber of Commerce telecon ference. Both have “serious flaws” and divert attention from the private sector health care protection accorded workers by virtue of current tax law, she said. The “floor”-“cap” debate also has di vided labor and business, whose national organizations remain opposed to the taxa tion of employee benefits. Basically, the larger unions with more comprehensive benefits find the “floor” more to their lik ing, an issue that cuts similarly for busi-