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Taxing Health Insurance Benefits

Being an employer of about 20 full-time staff in three states makes me look at health care reform differently than most people do. My dilemma: If Congress raises the cost of health benefits to me and to my employees, is it fair for me to insist that everyone be covered?

Palisades Hudson currently pays the full health insurance cost for every full-time employee who wants it. If an employee chooses to cover a spouse or dependent, the employee pays the difference between the individual rate and the family rate, using pre-tax payroll deductions. Premiums paid by the company are not part of the employee’s taxable income.

That soon may change. In the search for perhaps $1 trillion to pay for its reforms, Congress is considering limiting or eliminating the tax-favored treatment of employer-paid health premiums. Employees would pay income tax on some or all of their benefits, and both employers and employees would owe Social Security and Medicare taxes on those benefits, too.

It costs $500 to $700 per month for employee-only coverage under our plans. Family coverage costs $1,600 to $1,800 per month. Like most small companies, we have been seeing our insurance costs increase by about 15% annually for the past several years. There is no denying that this is a burdensome expense for the company. It is even harder, however, on employees who have to pay more than $1,000 every month to cover their families. It helps somewhat that this is paid with before-tax earnings.

Fortunately, we can carry the burden because our business generates a lot of revenue per employee. This allows us to attract a very stable and highly talented staff, and they stick around. Our clients appreciate the staff’s continuity and abilities. Our health insurance, though expensive, is good business.

A change in the tax law could change my thinking on this. I feel justified in essentially forcing insurance on everyone at Palisades Hudson because I bear the cost, not the employees. If they now must pay part of the premium via higher taxes, I think fairness dictates that they have more choices about the coverage.

But we are a small business. We can offer only a limited array of options to our workers. If employees have to pay for their coverage, I might very well end the company-paid plans entirely and simply increase everybody’s pay. They can then buy their own insurance. My contribution probably will not keep pace with the rising cost of insurance because other businesses, with which we must compete, will view insurance as a problem for households rather than employers. As a result, our employees may gradually have to trade down their insurance coverage for something less secure.

Even more concerning is the possibility that individual employees may not be able to purchase insurance at all, or that there may be exclusions for pre-existing conditions. This would be a terrible drawback to the new system. Fortunately, Congress is at least considering requirements that would force insurance companies to cover all applicants. We will have to wait to see how this is resolved.

When all is said and done, the revenue from taxing employer-provided health benefits may well be a mirage. We currently tax employer-provided housing (in most cases) and tax return preparation. As a result, very few employers offer such benefits. Taxing health insurance will eliminate the incentives for companies to provide it. Businesses will just pay what they choose to pay, and employees may or may not (absent new legal mandates) buy their own coverage.

I don’t see how this gets us closer to providing or paying for universal health insurance.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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