This post was authored by Dan Colacino, Vice President of Underwriting and Compliance at Rose and Kiernan, Inc.
We recently highlighted how the House and Senate’s tax bills could impact employers, but the timeline and details of the final bill were still somewhat uncertain. Now both chambers of Congress have passed the final version of their tax cut bill – referred to rather disingenuously as “reform”. It’s assumed that the President will sign the bill on Friday, and then the Republicans will officially own it. For employers, it’s essential to understand how this tax bill will impact employee benefits.
First and most importantly, the idea of taxing employer-sponsored health insurance (ESI) never materialized, although Speaker Paul Ryan had it in his original health care plan. That’s important from a couple perspectives, but mostly because ESI covers the vast majority of Americans, approximately 155 million as of 2017. In comparison, Medicaid, including the Children’s Health Insurance Program (CHIP), covers 70 million, Medicare covers 44 million and the ACA (in 2017) covered 12 million. It’s the one part of the health coverage picture that works so why mess with it? This tax bill will not impact the ESI.
Unfortunately, the Cadillac tax on high-cost health insurance was only minimally impacted but there is legislation in the House and Senate which would repeal or delay this tax. The change to the Cadillac tax was included, along with some other tax thresholds and deals, with the indexing factor that was changed from the Consumer Priced Index or CPI (which was a flawed measure) to the Chained Consumer Price Index – an alternative to the regular CPI created by the Bureau of Labor Statistics. Chained CPI is more of a time-weighted measure and may actually be more relevant in some situations. It appears, however, that this may end up increasing the Cadillac tax thresholds even less than the CPI, causing more employers to hit it sooner.
The individual mandate tax still exists but the penalty was reduced to $0 which is essentially the only option Republicans in the Senate had under reconciliation rules. There are conflicting opinions on the impact this will have on the Individual Marketplace. If you look at the actual penalty ($695 or 2.5% of gross income) and compare that to an average Individual premium of $6,000 to $7,000 per year, it’s hard to imagine any healthy person would opt for the insurance simply to avoid a tax that is approximately 10% of the cost of health insurance. The decision to buy insurance involves more than the avoidance of a tax so I’m hard pressed to see it having any meaningful impact. The tax still exists for CY 2018 and will go into effect in 2019.
Finally, some fringe benefits, formerly exempt from taxes, will now be taxable. The most prominent of which is the transportation fringe benefit, which formerly allowed employers to deduct expenses for employee commuting expense payments or reimbursements. Although I personally have never ridden my bike to work, it’s important to acknowledge that this repeals the bicycle commuting expense exclusion. It’s hard to separate this decision from the Administration’s refusal to buy into global warming.
Hopefully the Administration spin that the tax cuts for corporations will increase GDP materializes and this bill won’t add the estimated $1.5 trillion to the national debt. However, with a shrinking workforce and lack of solid evidence of increases in GDP or revenue from the previous Reagan and Bush tax cuts, it remains doubtful.
Stay tuned for updates in the new year.