The Tax Man Cometh - Taxing Health Insurance Plans
And Raising Income and Payroll Taxes by Limiting Flexible Spending Contributions
The Senate Finance Committee’s modified chairman’s mark imposes a high cost health insurance plan tax of 40% on plans over$8,000 for individuals and $21,000 for families. But these thresholds are not indexed for insurance premium inflation which will eventually subject all plans to the tax.
A recent JEC study examines the effects of the high cost plans tax, revealing the hidden impacts of the insurance plan tax provisions in the modified mark. The full study is available at : https://www.jec.senate.gov/republicans/public/_files/TheTaxManComethSeptember302009.pdf.
Highlights of the study include:
1) All plans would eventually be subject to the tax of 40% because it is not indexed to premium inflation.
2) The stated tax rate of 40% could translate into an effective tax rate of 67%.
3) The $2,500 cap on FSAs means an immediate tax increase for those who currently contribute more than the cap (e.g., a family with a taxable income of $66,000 that currently contributes $5,000 to a FSA would face a federal income tax increase of $625 and a payroll tax increase of $191).
4) The FSA cap is not indexed for any sort of inflation, causing the real value of FSA contributions to fall from $2,500 to $1,700 within the first ten years of the cap.
5) Since an FSA contribution counts toward meeting the threshold for high cost plans, having an FSA subjects a plan to the high cost plan tax much sooner.
Additionally, the chairman’s mark relies on the disparity between medical inflation and the inflation indexing provided in the mark (CPI-U + 1%) to provide the necessary revenue streams to finance the proposal, without which a huge source of revenue used to pay for the mark is lost. And while the taxes on high-cost plans allow the mark to claim it is bending the cost curve, it is a backdoor approach to capping the benefits exclusion, designed to disguise the tax from consumers by imposing it on insurers and employers. Keep in mind taxes always ultimately get passed on to the consumer.
A recent JEC study examines the effects of the high cost plans tax, revealing the hidden impacts of the insurance plan tax provisions in the modified mark. The full study is available at : https://www.jec.senate.gov/republicans/public/_files/TheTaxManComethSeptember302009.pdf.
Highlights of the study include:
1) All plans would eventually be subject to the tax of 40% because it is not indexed to premium inflation.
2) The stated tax rate of 40% could translate into an effective tax rate of 67%.
3) The $2,500 cap on FSAs means an immediate tax increase for those who currently contribute more than the cap (e.g., a family with a taxable income of $66,000 that currently contributes $5,000 to a FSA would face a federal income tax increase of $625 and a payroll tax increase of $191).
4) The FSA cap is not indexed for any sort of inflation, causing the real value of FSA contributions to fall from $2,500 to $1,700 within the first ten years of the cap.
5) Since an FSA contribution counts toward meeting the threshold for high cost plans, having an FSA subjects a plan to the high cost plan tax much sooner.
Additionally, the chairman’s mark relies on the disparity between medical inflation and the inflation indexing provided in the mark (CPI-U + 1%) to provide the necessary revenue streams to finance the proposal, without which a huge source of revenue used to pay for the mark is lost. And while the taxes on high-cost plans allow the mark to claim it is bending the cost curve, it is a backdoor approach to capping the benefits exclusion, designed to disguise the tax from consumers by imposing it on insurers and employers. Keep in mind taxes always ultimately get passed on to the consumer.
