March 1996 Fact Sheet
Tax Reform and Employee Benefits: Possible Responses to Tax Reform
Possible responses to changes in the tax treatment of employment-based health insurance
Taxation of health costs would make employers more careful purchasers of health care
services and may make employees seek or demand less health insurance to lower their
overall tax liability. Without the favorable tax treatment, many employees, particularly
young employees, may forgo health insurance coverage.
Without the tax advantage, lower paid employees with no current tax liability for
health insurance may no longer demand health insurance, and some employers may drop this
Possible increase in the use of flexible benefits plans. Facing taxes on contributions
to health insurance plans, employers may find it more advantageous to funnel deductible
cash compensation into flexible benefits plans.
For employees, flexible benefits plans could allow them to choose lower cost health
plans, thereby lowering their overall tax liability.
Increased use of flexible benefits plans by employers could also give employees
expanded health care choice.
Possible responses to changes in the tax treatment of employment-based retirement
Employees would find defined benefit and money purchase plans attractive if they did
not feel employers would give them the full value of contributions as added cash if the
plans were not offered. Full cash payments would be unlikely.
With other defined contribution plans, where the exclusion for employer contributions
would be lost under several proposals, employers may simply give employees some more cash
or offer a payroll deduction in order to give employees a group administrative cost
Will there still be some advantage to maintaining an employee benefit plan if the tax
advantage is no longer there? For employers there may be some competitive advantages in
attracting and retaining a skilled work force, as well as facilitating work force exit by
assuring their employees a retirement income savings pool. For employees there would be
the ease and discipline that a payroll deduction saving plan offers.
The bills and proposals on which these responses are based are in development and are
current as of this fact sheet's writing. Nothing herein is to be construed as necessarily
reflecting the views of the Employee Benefit Research Institute (EBRI) or the Employee
Benefit Research Institute Education and Research Fund (EBRI-ERF) or as an attempt to aid
or hinder the passage of any bill pending before Congress.
For more information, contact Ken McDonnell, (202) 775-6342; Paul Yakoboski, (202)
775-6329; or Dallas Salisbury, (202) 775-6322.
Source: Dallas Salisbury, "Employee Benefits in a Flat Tax or Consumption Tax
World," EBRI Notes (September 1995): 1-12.