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Congress may consider tax on executives' health plans

Lawmakers are looking at a levy on top-tier medical coverage - the kind that most corporate executives enjoy - to help finance healthcare reform. Some fear that such a tax could trickle down badly.

September 08, 2009|Ken Bensinger

As the chief executive of TRW Automotive Holdings Corp., John Plant received the company's generous healthcare benefits last year, as well as special "executive medical" coverage worth an additional $38,272.

When he eventually leaves the Michigan parts maker, Plant and his wife will be entitled to healthcare for life. TRW values that coverage at $1.4 million. That's enough, it said in public filings, to provide him the same level of care he would have received under the National Health System in his native England.

But in contrast to his $1.7-million salary, the 55-year-old Plant doesn't pay taxes on these perks. That's because under U.S. law, employer-paid health insurance premiums -- even lavish ones -- are exempt.

Now lawmakers are looking to target so-called Cadillac or gold-plated coverage like Plant's to help pay for healthcare reform.

A proposal circulated over the weekend by Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, would pay for the sweeping reform in large part by taxing insurance companies on the most expensive policies they offer.

Although no exact policy price threshold has been established, supporters estimate such a tax could raise as much as $180 billion over 10 years. Originally championed by Sen. John F. Kerry (D-Mass.), who introduced the proposal over the summer, the tax would also help curb healthcare costs, those supporters say, because insurers would be under pressure to reduce costs and premiums on their priciest products to avoid the levy.

Officials across the political spectrum say such a tax would iron out a wrinkle in the tax code long criticized as regressive and unfair to lower-wage workers and the uninsured.

"We're interested in it as a discipline within healthcare," said Sen. Charles E. Grassley (R-Iowa), shortly after the proposal emerged in the summer.

The top brass at many large companies enjoy blue-chip medical coverage. Unlike their rank-and-file employees, these executives often don't shell out a dime for co-pays, out-of-network specialists or deluxe annual checkups that can cost more than $10,000.

Taxing those benefits might sound appealing to a public frustrated by bonus scandals and outsize executive pay. But the plan could face opposition from an unlikely alliance of labor unions, insurers and business leaders concerned that the government would have to go far deeper than the executive suite to raise enough money to cover the costs of a sweeping reform.

Although the proposal would not tax employees directly on their benefit, a tax could indirectly affect workers if insurers react by cutting benefits, raising premiums on some plans to pass along the costs or eliminating some types of coverage altogether.

"I get what a big tax loss this is to the U.S., but this would be very problematic," said Gerald Shea, who heads governmental affairs at the AFL-CIO.

The union federation instead supports a House-sponsored proposal to boost income taxes on people earning more than $250,000 to help fund coverage for the 47 million Americans who lack insurance.

Though employees pay part of their health insurance premiums out of pocket and after taxes, the largest share is usually covered by the employer. Those premiums are a deductible expense for the company, and unlike other contributions on employees' behalf, such as picking up the cost of a move, they're tax-free to the beneficiary.

According to a survey of healthcare costs by the Kaiser Family Foundation, 73% of all premiums for family plans were paid by U.S. employers last year. Kaiser found the average family plan cost $12,680 in 2008. That means employers paid $9,256 per plan, on average, saving typical employees about $2,500 in taxes.

That income-tax exemption costs the government about $240 billion a year in receipts, according to an Urban-Brookings Tax Policy Center estimate. It's essentially a subsidy to encourage private health coverage. But because it disproportionately rewards those in higher tax brackets, it also opens the door to ever-more-luxurious plans, experts said.

"The current system encourages overconsumption and it rewards those with higher income disparity," said Len Burman, a former Treasury Department official and now professor of tax policy at Syracuse University, who has spoken critically of the tax break.

It's impossible to know how much U.S. companies spend on blue-chip plans because they generally are not required to disclose this information. Some companies, such as TRW and Goldman Sachs Group Inc., do disclose premiums paid for supplemental executive health coverage, policies that typically pick up any deductibles and other costs not covered under a company's primary plan, including co-pays and out-of-network and over-limit charges.

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