ECFC Issue: Employer Tax Exclusion
Share |

Employer Tax Exclusion

Employer contributions to employee health plans should be preserved and the tax exclusion for employer-provided health coverage should not be capped.

The tax exclusion for employer-provided health coverage is an important tax benefit for employees and it provides the foundation for consumer driven health plans offered by employers. This exclusion exempts employer-provided health coverage from both income taxes and employment taxes. With this exclusion, the employer-paid portion of health coverage (such as premiums for health insurance or coverage under a self-insured health plan) is not taxed and the employee’s portion paid by salary reduction through a cafeteria plan is also not taxed. Similarly, any contributions an employer makes to a consumer-directed health account that only reimburses employees for qualified health costs (such as an HRA, FSA or HSA) is not taxed. The health care aspects of employer-provided wellness programs are also not taxed due to the exclusion. Finally, employee contributions to an FSA or an HSA through a cafeteria plan are not taxed due to the exclusion. While an employee can deduct a contribution to an HSA on their income tax return if the employer does not offer a cafeteria plan, that HSA contribution will still be subject to employment taxes.

Why the tax exclusion matters

Without the exclusion, health care coverage costs for hard-working employees would increase as they will lose the tax benefits currently provided by FSAs, HSAs and HRAs.  Employers will no longer incur the costs of establishing consumer-directed plans if there is no tax benefit to employees to participate in these plans. In addition, any cap created on the exclusion could include contributions made by employees to their accounts. Individuals and families rely on these accounts to save for and manage their health care expenses and the ability to deduct them from their taxes allows them to invest in the preventative care they need and still continue to fulfill their other financial obligations.

Employees who participate in consumer driven health plans have a real appreciation of the costs of health care, since it is the dollars in their self-funded accounts that are used purchase health care. If the goal is to make people more cognizant of health care costs and become better consumers of health care, eliminating consumer directed health accounts by eliminating or capping the exclusion makes little sense. 




Proposals have been advanced which would eliminate or place a cap on the tax exclusion for employer-provided health coverage. ECFC’s membership strongly objects to those proposals.  ECFC believes that any cap of the employer exclusion is bad for employees and will result in employers curtailing the maintenance of consumer-directed health accounts, particularly those accounts funded through employee salary deductions through a cafeteria plan.

Learn more about other ECFC issues.