The House GOP Plan and Employer-Sponsored Health Insurance: Killing It Softly?
Of the many peculiar incentives that would be generated by the House Republicans’ proposed ACA replacement, one that hasn’t drawn much attention yet is the incentive for firms with low- and middle-income workers to drop their employer-sponsored health insurance plans. The incentive arises from the fact the premium credit proposed by House Republicans would be available only to taxpayers who aren’t eligible for insurance through their employer. In many cases the premium credit would be more valuable than the exclusion of employer contributions to employee health plans under existing federal income and payroll tax laws. In those circumstances, employees would be better off if their employer dropped coverage so that they could claim the more generous credit.
Consider a hypothetical family of four with adjusted gross income of $80,000 and health insurance premiums of $20,000 per year. (The average annual premium for employer-sponsored family health coverage was $18,142 in 2016, according to the Kaiser Family Foundation; I’m using a round number to make the arithmetic easy.) With the standard deduction plus four personal exemptions, this family falls safely into the 15% income tax bracket (and would still even without the exclusion of employer-sponsored health insurance).
If an employer pays the $20,000 premium, the value of the income tax exclusion is $3,000. If we add in Social Security and Medicare taxes (ignoring any future benefits that family members will receive as a result of the Social Security benefits formula), then that’s an additional 15.3%, or $3,060. All in, the value of the federal income and payroll tax exclusions is $6,060.
If family members aren’t eligible for employer-sponsored health coverage, they can qualify for the refundable tax credit in the House Republicans’ plan. With two parents in their 40s and two children, the credit would be $10,000 ($3,000 for each of the parents and $2,000 for each of the children). Under these circumstances, the family would prefer for the employer to drop coverage, increase wages, and allow the family to claim the $10,000 credit. The gap is wide enough that tweaking the tax bracket or the ages of our hypothetical family won’t alter the result. (Note, though, that the same incentive to drop coverage doesn’t exist with respect to higher-wage workers, because credits phase out for married-filing-jointly taxpayers with modified adjusted gross income over $150,000.)
The ACA penalized firms with 50 or more full-time equivalent employees that failed to cover their workforce. But the House Republicans’ proposal effectively eliminates the employer mandate by reducing penalties to zero. And without the employer mandate, there is no obvious check on employers dropping coverage. By doing so, they might even make their workers better off.
There are lots of problems with our existing reliance on employer-based health care. And maybe it makes sense to transition toward a world in which health insurance and employment aren’t tied together. But if the House Republicans’ objective was to move away from an employer-based system, this is certainly a strange way to do it.