March 31, 2017

In This Issue
NAHU’s Response to AHCA Abandonment and the Future of Healthcare Reform
Congressional Republicans Move on to Tax Reform, NAHU Vows to Protect the Employer Exclusion
NAHU Submits Comments on the Fiduciary Rule
Register Now for the Live from NAHU! Webinar on April 11 with NAHU CEO Janet Trautwein
This Week’s Podcast Discusses the Next Steps for Health Reform Following the Fall of the AHCA
NAHU Education Foundation’s Operation Engage – THANK YOU!
HUPAC Roundup
What We’re Reading
E-mail the Editor
Visit the NAHU Website
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Congressional Republicans Move on to Tax Reform, NAHU Vows to Protect the Employer Exclusion

Following the decision to cancel the planned vote on the American Health Care Act (AHCA), the White House and congressional Republicans indicated their intention to move on to their next legislative agenda item, reforming the tax code. President Trump has suggested that major tax reforms would be made this year and has called for comprehensive tax reform, including a plan that would reduce corporate taxes from 35% to 15%-20%. NAHU is actively monitoring these proposals as many leading Republicans in Congress have called for major changes to the employer exclusion for health insurance, which if capped could be used as a primary pay-for to offset the loss in revenue for reducing the corporate tax rate.

Tax reform could be advanced through a separate reconciliation package, as health reform was attempted earlier this month. The Congressional Budget Act permits only one reconciliation vehicle per budget resolution, but because Congress didn’t pass a budget for fiscal year (FY) 2017 in 2016, they will be able to advance both a FY 2017 and FY 2018 budget and reconciliation packages this year. The FY 2017 budget was passed in January, paving the way for the reconciliation vehicle to be used for healthcare, and Congress is expected to pass a FY 2018 budget later this spring that would establish instructions for using reconciliation on tax reform. This is the first time in the 43-year history of the Congressional Budget Act that Congress would pass two budget resolutions in the same year.

The White House has signaled that following the congressional failure on health reform, they will be taking the lead on tax reform. Treasury Secretary Steven Mnuchin and Director of the National Economic Council Gary Cohn are expected to be the primary leads from the administration. The White House has not yet provided indication on specifics of which policies they will be advancing in any package, but with the demise of the AHCA, the tax reform package will need to make changes without the offsets that were expected to be passed in the healthcare package, including nearly $1 trillion in ACA tax reforms. And like the healthcare package, there remain significant disagreements among Republicans over several key issues, such as a proposed border adjustability tax, interest deductibility, and the overall size and impact of the tax package.

Many Republicans in Congress, led by House Speaker Paul Ryan (R-WI), have called for significant changes to the employer exclusion. Last year’s Republican blueprint document, “A Better Way,” called for a cap on the exclusion and the first iteration of the AHCA reconciliation bill (which was not officially filed) called for a cap based at 90% of the plan’s actuarial value that would be taxable for income and payroll purposes. That proposal was ultimately pulled in the final version of the AHCA. Republicans contend that modifying the exclusion would result in Americans having more control over their coverage, reduce job-lock, and result in greater transparency and reduced costs.

NAHU is very concerned about plans that would make significant changes to the exclusion as it forms the basis of the employer-based insurance system that provides coverage to upwards of 175 million Americans. The exclusion allows an employer’s contributions to an employee’s health insurance to be excluded from that employee’s compensation for income and payroll tax purposes. Proposals that modify the exclusion could push individuals from group coverage into the individual market, which would be ripe for adverse selection, leading to higher insurer losses participating in these markets. Insurers would likely offset these losses by reducing provider networks and increasing cost-sharing.

Modifying the exclusion would be highly regressive and could result in a significant tax increase on middle-class Americans and would devalue this important benefit, significantly increase costs for coverage, and result in more restrictive plan offerings. This could force many to drop employer-sponsored insurance, including dependent coverage, while others would be incentivized to only offer coverage that would fall below the value of the cap in order to avoid paying any increased taxes, potentially resulting in a race to the bottom for employers to sponsor insurance that wouldn’t meet the cap’s thresholds and further shifting costs onto employees. Many of the inherent problems with the Cadillac/excise tax would exist for modifying the employer exclusion.

Employer-sponsored plans are much more likely to have a mix of health risks and generally the volume of individuals in the group allows the costs associated with higher risks to be spread over that mixed population of high and low risks. Efforts that would undermine the exclusion could result in consumers moving to the individual market, reducing the means for spreading risk among healthy and unhealthy individuals. The healthiest would be more likely to opt-out of coverage, leaving the most unhealthy covered. Employers still offering health insurance could be faced with difficulty meeting participation requirements and ever-increasing rates in a potential death-spiral as only the sickest remain insured.

Additionally, moving from a group insurance marketplace to an individualized marketplace would cause considerable strain on the enrollment process. Group plans are highly efficient at seamlessly enrolling millions into coverage, and without these group plans agents and brokers would be faced with enrolling upwards of 170 million Americans individually into plans. The ACA has demonstrated the challenges of enrolling as few as 13 million consumers onto the federal and state marketplaces. Increasing enrollment in the individual market by more than 10-fold would be significantly more expensive, time consuming and chaotic.

Ahead of the tax reform debate, a group of 23 Democratic senators sent a letter to Senate Majority Leader Mitch McConnell (R-KY), House Speaker Paul Ryan, Senate Finance Chairman Orrin Hatch (R-UT), and House Ways and Means Chairman Kevin Brady (R-TX) expressing their concerns about proposals to modify the exclusion. The letter notes that modifying the exclusion would result in a significant tax increase on the middle-class while also significantly reducing healthcare coverage. It further notes that changing the exclusion “could force employers to scale back insurance coverage for employees and could have unintended consequences.”

NAHU has long echoed the concerns expressed in this letter and will continue to advocate on behalf of agents and your employer clients to preserve this system that has proven highly efficient at providing Americans with affordable coverage options for decades.

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