According to gpoaccess.gov, federal tax expenditures on employer-sponsored healthcare plans are expected to be approximately $185 billion in federal fiscal year (FFY) 2012. That value represents forgone federal taxes on the medical insurance premiums paid by employers and medical benefit claims incurred by their employees in these plans. (There are corresponding multi-billion dollar federal tax expenditures for other types of employer-sponsored plans.)
Whether Congress will introduce legislation to explore reducing the favorable tax status of these employer plans as a new source of tax revenue for the federal government is speculation; but the idea should not be surprising in this age of our multi-trillion dollar federal deficit. (State governments could also follow suit.)
But let’s assume for the moment that Congress makes no attempt at eliminating the tax subsidy for employers (while we acknowledge that the impact of the 2014 exchanges is still quite uncertain) and employer-sponsored insurance (ESI) continues. There could still be an opportunity for newfound federal tax revenue that has yet to be considered, as follows.
Under the health reform law, employers will be required to report the annual “value” of employer healthcare benefits on Form W-2. Employees should see it on the tax year 2012 Form W-2 in January 2013. Congress could introduce legislation that would require this value to be taxed as ordinary personal income as part of the tax year 2012 Form 1040, permanently ending a genuine “tax-free” benefit. (Contrast this to the benefits paid from employer pension plans, which are “tax-deferred.”)
Let’s call this new taxable income the PPACA stealth income. It could result in a severe financial hardship for an employee, who would need to come up with enough money to pay for the additional tax liability generated by this “income.” Perhaps Congress could also view this value as taxable for Social Security taxes. U.S. taxpayers could wind up under-withheld for personal taxes and possibly fined for it. There are a myriad of other issues that could be listed, but would violate the spirit of a brief blog entry.
What do you think?