Human Capital & Careers

Did Bush Set Employee Health-Benefit Ceiling?

Employers might find the Bush tax plan provides a useful benchmark for capping health-benefit spending.
David KatzFebruary 6, 2007

Regardless of the political fate of President Bush’s proposal to revamp the tax code to steer employees away from choosing “expensive, gold-plated” benefit plans, the proposal supplies employers with a benchmark for gauging how much spending on health benefits is too much, experts say.

Under the proposal, which the President made in his state of the union address on January 23, the cost of health insurance would be treated as taxable compensation whether coverage is provided by employers or bought by individuals.

At the same time, there would be standard deductions: families would pay no income or payroll taxes on their first $15,000 of benefits-related compensation, and individuals wouldn’t be taxed on their first $7,500. (As they can now, employers would still be able to deduct health insurance costs as business expenses.)

In a radio address on January 20, President Bush took a swipe at employer-provided benefits, seeming to favor the private purchase of health insurance. “Today, the tax code unfairly penalizes people who do not get health insurance through their job. It unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need,” he said.

To be sure, previous plans to tax employer-provided benefits have failed to gain transaction. Further, President Bush’s plan has received a “frosty reception” on Capitol Hill, according to the Washington Post. Nevertheless, the proposed deduction limits of $15,000 and $7,500 “could be useful, even if it doesn’t pass” as a benchmark for employers, says Ed Pudlowski, a principle for health and welfare programs at Ernst & Young in Dallas.

Citing the President’s contention that 80 percent of employer-provided policies are cheap enough to fall below his proposed limits, Pudlowski agrees that the ceiling is set at a “fairly high level.” Indeed, the Kaiser Family Foundation’s 2006 survey of employer-provider health benefits, which looked at about 3,000 companies, found that average annual premiums for employer-sponsored coverage are $11,480 for a family and $4,242 for an individual employee.

But benefit-plan costs may vary widely among employee groups of different ages and in different locations. While $15,000 might provide for a fairly rich plan for young family in Kansas, it wouldn’t do nearly as well for an older family in New York City, says Ed Kaplan, senior vice president and head of the national health practice of The Segal Company in New York. If he suggested to one such employer client a plan benchmark of $12,000 for family coverage, he added, “they would beat me up.”

In any case, key details of the Bush plan remain unclear. The Administration’s website did not elaborate on what “compensation” might mean or how exactly it might be taxed. For example, does it refer to health insurance premiums or some other gauge of benefits cost? Another question: Once the value of the plan exceeds $7,500 or $15,000, would just the overage be taxed, or would it be the entire value of the plan? The White House did not respond to a request for more detailed information on the plan.