DJ - GOP May Trim Tax Break for Employer-Backed Insurance

By Kristina Peterson and Richard Rubin

WASHINGTON -- House Republicans, looking for ways to pay for their plan to repeal and replace the Affordable Care Act, are considering changing the special tax treatment for employer-provided health benefits.

Capping how much of employees' health benefits can be shielded from income and payroll taxes is one of the ways GOP lawmakers might offset the cost of their emerging health plan. In that plan, they hope to replace the 2010 health-care law with a new system centered on a refundable, age-adjusted tax credit for Americans buying health care on the individual market.

House Ways and Means Committee Chairman Kevin Brady (R., Texas) said Republicans are looking at "a whole range of options" for financing the proposed tax credit for individuals, which he said was "at the heart of the freedom to buy a plan that's right for them."

Currently, when an employee receives health insurance through an employer, the value of that benefit isn't subject to income or payroll taxes. On average, employer coverage for a single worker last year ran $6,435, while for a family the tab was $18,142, according to a survey by the Kaiser Family Foundation.

Employers bore about 82% of the cost for single plans and about 70% for family coverage.

A blueprint for a health-care overhaul released last June by Republican House committee chairmen included a limit on how much of that value would be tax-free. If an employer health plan cost more than that limit, the difference could be subject to income tax, just like wages.

Democrats said capping the tax break for employer health care benefits could encourage employers to offer less-generous plans and raise out-of-pocket costs for workers.

"It discourages a lot of quality health care from people who have earned it," said Rep. Richard Neal of Massachusetts, the top Democrat on the House Ways and Means Committee. "When you start going after the exclusion, it's another way to limit access."

Republicans said Thursday that they weren't yet sure whether they would limit the tax treatment of employer health plans in order to pay for their proposal.

"I'm not comfortable with that at this point," Rep. Tom Cole (R., Okla.) said.

While Republicans are still sorting out how they will fund their healthcare proposal, they expect to save some money by reducing funding for Medicaid.

The tax exclusion for employer health benefits represents a big source of potential federal revenue, estimated at $266 billion in 2016, according to the Congressional Budget Office. Capping the exclusion would bring in a fraction of that total.

The Affordable Care Act's so-called Cadillac tax, levied on the value of employer health plans above a certain threshold, would raise federal revenue by $2 billion in 2020, growing to $20 billion in 2025, according to the CBO. Congress has voted to delay the Cadillac tax's impact until 2020.

The Cadillac tax created a political headache for Democrats, who encountered deep resistance to it from employers and unions when they drafted the Affordable Care Act. A GOP push to cap the tax exclusion for employer health benefits could open Republicans to similar opposition.

Employers have balked at the idea, which is also likely to be unpopular among many of their workers.

Write to Kristina Peterson at kristina.peterson@wsj.com and Richard Rubin at richard.rubin@wsj.com