Employment-Based Health Coverage and
Health Reform: Selected Legal Considerations
Jennifer Staman
Legislative Attorney
Edward C. Liu
Legislative Attorney
June 12, 2009
Congressional Research Service
7-5700
www.crs.gov
R40635
CRS Report for Congress
P
repared for Members and Committees of Congress
Employment-Based Health Coverage and Health Reform: Selected Legal Considerations
Summary
It is estimated that nearly 170 million individuals have employer-based health coverage. As part
of a comprehensive health care reform effort, there has been support (including from the Obama
Administration) in enacting comprehensive health insurance reform that retains the employer-
based system. This report presents selected legal considerations inherent in amending two of the
primary federal laws governing employer-sponsored health care: the Employee Retirement
Income Security Act (ERISA) and the Internal Revenue Code (IRC).
ERISA may be a key part of the health reform discussion in two main ways. The first way is if
Congress desires to amend the employer-based system, for example, to require financing or
benefits for group health plans as provided by employers. If a national proposal were to require
employers to provide or contribute to the payment of health benefits or to provide specific
benefits as part of group health plans, ERISA could be a vehicle for this type of proposal. Second,
if Congress were to amend the role of states in regulating employment-based health benefits,
ERISA’s express preemption provision, § 514, would likely be implicated. Section 514 of ERISA
is commonly seen as a barrier for states in enacting health reform that affects the employer-based
system. This report provides an overview of ERISA preemption and analyzes some of the current
issues dealing with the extent to which ERISA can preempt state health reform efforts, as well as
issues that may be considered in a national health reform effort.
While the current tax treatment of employer-provided health insurance is not technically an
obstacle to health reform, various health reform proposals have included amendments to these tax
provisions. The value of employer-provided health insurance is generally not subject to income or
payroll taxes. This effectively results in the subsidization of employer-provided health insurance
by the federal government. Some have argued that this subsidization is partly responsible for
increasing costs of health insurance, as it gives participants an inaccurate sense of the true cost of
their health care and leads to increased utilization of health care resources. Therefore, some have
proposed reducing or eliminating this exclusion in order to provide individuals with a more
accurate economic picture of their health care choices, while simultaneously raising federal
revenue to pay for other aspects of health care reform. This report discusses the legal framework
underlying the current tax treatment of employer-provided health care.
Congressional Research Service
Employment-Based Health Coverage and Health Reform: Selected Legal Considerations
Contents
The Employee Retirement Income Security Act (ERISA) ............................................................ 1
Overview of ERISA Preemption............................................................................................ 4
ERISA Preemption and Health Reform........................................................................................ 7
ERISA and Current State Health Reform Efforts ................................................................... 7
ERISA and National Health Reform Efforts .......................................................................... 9
Federal Tax Treatment for Employer-Provided Health Care Insurance ....................................... 11
Employer Paid Health Insurance Premiums ......................................................................... 12
Premium Conversion........................................................................................................... 12
Employment and Unemployment Taxes .............................................................................. 13
Incentives for Employees to Elect Employer-provided Health Insurance.............................. 14
Incentives for Employers to Offer Health Insurance............................................................. 15
Contacts
Author Contact Information ...................................................................................................... 15
Congressional Research Service
Employment-Based Health Coverage and Health Reform: Selected Legal Considerations
t has been estimated that nearly 170 million individuals, or approximately 64% of the non-
elderly population, have employer-based health coverage in the United States.1 While under
I federal law, employers are not required to provide coverage to employees, many do so
voluntarily.2
Employment-based insurance has several strengths, including risk pools that are not
formed on the basis of health status, ease of acquisition by workers, and tax subsidies that exceed
those for individual market insurance.3 In addition, employers may have greater negotiating
power with an insurance company than does an individual consumer.4 On the other hand, plans
chosen by employers may not meet individual workers’ needs, and changing jobs may require
obtaining both new insurance and new doctors. Nevertheless, given that employers are a large
source of financing for health coverage in the United States, whether employment-based
insurance should be strengthened, weakened, or kept the same is likely to be evaluated by
Congress. If Congress chooses to amend the employer-based system as part of a federal health
reform effort, it is possible that two primary federal laws governing employer-based coverage,
Employee Retirement Income Security Act and the Internal Revenue Code, may be the vehicle
for making changes. 5 This report provides an analysis of selected legal considerations in
amending these two federal laws.6
The Employee Retirement Income Security Act
(ERISA)
The Employee Retirement Income Security Act (ERISA)7 provides a comprehensive federal
scheme for the regulation of private sector employee benefit plans.8 While ERISA does not
require an employer to provide employee benefits, it does mandate compliance with its provisions
if such benefits are offered. Enacted in 1974, the act sought to eliminate the conflicting and
1See CRS Report 96-891,
Health Insurance Coverage: Characteristics of the Insured and Uninsured Populations in
2007, by Chris L. Peterson and April Grady.
2 It should be noted that employers may provide health benefits pursuant to a collective bargaining agreement. This
report does not discuss possible implications that the presence of an agreement may have on amending employer-based
health coverage.
3 For more information on the advantages or disadvantages of an employer-based system, see CRS Report R40517,
Health Care Reform: An Introduction, by Bob Lyke.
4 Joint Committee on Taxation, Background Materials for Senate Committee on Finance Roundtable on Health Care
Financing, JCX-27-09 (May 8, 2009).
5 It is important to note that ERISA is not the only federal law that governs health coverage. In general, while ERISA
covers private-sector employee benefit plans and health insurance issuers providing group health coverage, it does not
cover governmental plans, church plans, or plans with less than 2 participants. The Public Health Service Act covers
both group health plans, health insurance issuers providing group health coverage, and coverage in the individual
market, including some governmental plans. The Internal Revenue Code covers group health plans, including church
plans, but does not cover health insurers. The requirements of the PHSA may apply to church plans if the plan provides
coverage through a health insurer.
6 One predominant concern that Congress will likely address in enacting major health reform legislation is how to
improve health care quality. While employers may play a role in attempting to improve health care quality for
employees and beneficiaries (e.g., by creating a wellness program), issues of health care quality will not be discussed in
this report.
7 P.L. 93-406, 88 Stat. 829 (Sept. 2, 1974).
8 For a general discussion of ERISA’s requirements, see CRS Report RL34443,
Summary of the Employee Retirement
Income Security Act (ERISA), by Patrick Purcell and Jennifer Staman.
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Employment-Based Health Coverage and Health Reform: Selected Legal Considerations
inconsistent regulation of employee benefit plans by various state laws.9 Such laws were believed
by some to be inadequate in protecting the interests of plan participants and beneficiaries.10
While ERISA was enacted primarily to regulate pension plans, ERISA also regulates welfare
benefit plans11 offered by an employer to provide medical, surgical, and other health benefits.12
ERISA applies to health benefit coverage offered through health insurance or other arrangements
(e.g., self-funded plans).13 Health plans, like other welfare benefit plans governed by ERISA,
must comply with certain standards, including plan fiduciary standards and reporting and
disclosure requirements. However, while ERISA provides extensive regulation of pension plans,
its regulation of health and other welfare benefit plans is less detailed. For example, unlike its
regulation of pension plans, ERISA does not include vesting requirements for welfare benefit
plans, under which a benefit becomes non-forfeitable.14 In addition, ERISA requires pension
plans to meet extensive funding requirements, but these requirements do not apply to health and
other welfare benefit plans. Thus, if an employer with a self-funded plan were to go bankrupt,
there is little federal protection for employee medical claims.
Since the enactment of ERISA, Congress has taken certain steps to regulate the nature and
content of group health plans more comprehensively.15 These requirements, found in Part 6 and
Part 7 of Title I of ERISA, only apply to group health plans and health insurance issuers offering
group health coverage. 16 For example, the Consolidated Omnibus Budget Reconciliation Act of
9 According to a statement made by one of ERISA’s sponsors, Representative Dent, “I wish to make note of what is to
many the crowning achievement of this legislation, the reservation to Federal authority the sole power to regulate the
field of employee benefit plans. …[W]e round out the protection afforded participants by eliminating the threat of
conflicting and inconsistent State and local regulation.” 120 Cong. Rec. 29197 (1974).
10 See, e.g
., id. See also generally, James A. Wooten,
A Legislative and Political History of ERISA Preemption, Parts 1-
3, Journal of Pension Benefits, Vols. 14-15, (2006-2008).
11 ERISA considers a number of non-pension benefit programs offered by an employer to be “employee welfare benefit
plans.” For example, health plans, life insurance plans, and plans that provide dependent care assistance, educational
assistance, or legal assistance can all be deemed welfare benefit plans. See 29 U.S.C. § 1002(1).
12 See Phyllis C. Borzi,
Symposium: On the Cusp: Insight and Perspectives on health Reform: Part II: Private and
Public health Coverage: How Should They Change?: There’s Private and then There’s “Private”: ERISA, Its Impact,
and Options for Reform, 36 J.L. Med. & Ethics, 660 (Winter 2008), for a discussion of the reasoning behind the
disparity between regulation of pension and welfare benefit plans under ERISA.
13 Under self-funded (or self-insured) plans, instead of using health insurance (i.e., where an employer pays a premium
to an insurer to cover the claims of plan participants) an employer acts as the insurer itself and pays the health care
claims of the plan participants. While self-insured plans may use an insurance company or other third party to
administer the plan, the employer bears the risk associated with offering health benefits. See Employee Benefits
Research Institute, Capping the Tax Exclusion for Employment-Based Health Coverage: Implications for Employers
and Workers, January 2009, available at http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4159.
14 However, it should be noted that in the context of retiree health benefits, some courts have found that under certain
circumstances, when an employer has made a promise to provide health benefits for an employee’s lifetime or other
length of time, the health benefits have been found to vest. For a discussion of this issue, see James P. Baker, Andy
Kramer, Evan Miller, and Steve Sacher
, Retiree Medical Litigation’s Dirty Little Secret-"Location, Location,
Location!” 22 Benefits Law Journal 26 (2009).
15 For additional information on the regulation of health benefits under ERISA, see CRS Report RS22643,
Regulation
of Health Benefits Under ERISA: An Outline, by Jennifer Staman.
16 It should be noted that insurance matters are primarily regulated at the state, rather than the federal, level. Congress
explicitly recognized the role of the states in the regulation of insurance with the passage of the McCarran-Ferguson
Act of 1945. This law was passed in response to the Supreme Court’s ruling in
United States v. South-Eastern
Underwriters, 322 U.S. 533 (1944), in which the Court affirmed the federal government’s right to regulate the
competitive practices of insurers under the Commerce Clause of the United States Constitution. The intent of the
McCarran-Ferguson Act was to grant states the explicit authority to regulate insurance in light of the
South- Eastern
(continued...)
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1985 (COBRA) amended ERISA and the IRC to require the sponsor of a group health plan to
provide an option of temporarily continuing health care coverage for plan participants and
beneficiaries under certain circumstances.17 The Health Insurance Portability and Accountability
Act of 1996 (HIPAA) created additional health plan coverage requirements under ERISA and
other federal laws, including limitations on an exclusion period for an individual’s preexisting
condition.18 HIPAA also prohibits a health plan from requiring an individual to pay a higher
premium or contribution than another “similarly situated” participant, based on certain health-
related factors, such as medical history or disability.19 Further, ERISA also contains provisions
that do not require employers to provide specific benefits, but regulates these benefits if such
coverage is offered. For example, health plans that choose to provide mental health benefits must
provide a certain amount of parity between medical/surgical benefits and mental health benefits
offered,
and plans that provide hospital coverage in connection with the birth of a child must
allow for certain minimum hospital stay requirements for these mothers following childbirth.20 In
addition, ERISA requires group health plans providing mastectomy coverage to cover prosthetic
devices and reconstructive surgery.21 Congress also recently enacted Michelle’s Law,22 which
amended ERISA and other laws to require group health plans and health insurance issuers that
provide coverage for dependents to retain as dependents on the health plan, college-age students
who are required to take a medically necessary leave of absence from school.23 While some
commentators may argue that ERISA’s regulation of health plans is sufficient in scope and should
not be expanded (so that employers are not discouraged from providing health benefits to
employees), others have pointed to a lack of regulation in this area.24
ERISA may be a key part of the health reform discussion in two main ways. The first way is if
Congress desires to amend the employer-based system, for example, to require financing or
benefits for group health plans as provided by employers.25 If a national proposal were to require
employers to provide or contribute to the payment of health benefits or to provide specific
(...continued)
Underwriters decision. Section 2(a) of the act states: The business of insurance, and every person engaged therein, shall
be subject to the laws of the several States which relate to the regulation or taxation of such business. 15 U.S.C. §
1012(a). However, under the act, Congress also reserved to itself the right to enact federal statutes that “specifically”
relate to “the business of insurance.” 15 U.S.C. § 1012(b). Parts 6 and 7 of ERISA are examples of where Congress has
exercised this right.
17 P.L. 99-272, tit. X, 100 Stat. 327 (1985). For additional information on COBRA, see CRS Report R40142,
Health
Insurance Continuation Coverage Under COBRA, by Janet Kinzer. It also should be noted that COBRA amended the
Public Health Service Act to that requires coverage for certain state and local government employees (if the state
receives funds under the act). See 42 U.S.C. § 300bb-1 et. seq.
18 P.L. 104-191, 110 Stat. 1936 (1996).
19 29 U.S.C. § 1182(a)(1)(A)-(H).
20 29 U.S.C. § 1185a; 29 U.S.C. § 1185.
21 29 U.S.C. § 1185b.
22 P.L. 110-381, §2(a)(1), 122 Stat. 4081 (Oct. 9, 2008).
23 29 U.S.C. § 1185c.
24 See, e.g., The ERISA Industry Committee Health Policy Issue Brief, Successful Employer-Provided Health Plans
Depend On Nationally Uniform Standards (Oct. 15, 2007), cf. Rebecca A.D. O'Reilly,
Is ERISA Ready for a New
Generation of State Health Care Reform? Preemption, Innovation, and Expanding Access to Health Care Coverage, 8
U. Pa. J. Lab. & Emp. L. 387 (Winter 2006) (“The scope of ERISA preemption in the context of health and welfare
plans is particularly significant because … unlike ERISA’s expansive regulation of pension plans, it provides relatively
little substantive regulation of health plans. The result is that health plans governed by ERISA can be structured to go
largely unregulated.” citations omitted.)
25
Id.
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Employment-Based Health Coverage and Health Reform: Selected Legal Considerations
benefits as part of group health plans, ERISA could be a vehicle for this type of proposal. Second,
if Congress were to amend the role of states in regulating employment-based health benefits,
ERISA’s express preemption provision, § 514, would likely be implicated. Section 514 of ERISA
is commonly seen as a barrier for states in enacting health reform that affects the employer-based
system.26 This report will provide an overview of ERISA preemption and analyze some of the
current issues dealing with the extent to which ERISA can preempt state health reform efforts, as
well as issues that may considered in a national health reform effort.
Overview of ERISA Preemption
In an effort to protect employee benefit plans and participants, Congress, through ERISA,
federalized regulation of plan administration “to minimize the administrative and financial burden
of complying with conflicting directives among States or between States and the Federal
Government”27 This goal is carried out through a critical feature of ERISA: its preemption of
state laws.28 According to the Supreme Court, Congress provided for ERISA preemption in order
to “avoid a multiplicity of regulation in order to permit the nationally uniform administration of
employee benefit plans.”29 The question of whether ERISA preempts state law has, at times, been
complex and controversial. The provisions at issue in the preemption debate are (1) § 514,
ERISA’s express preemption section, under which ERISA may supersede state law, and (2) §
502(a), which limits claims that may be brought and remedies a plaintiff may recover under
ERISA, and may preempt a state law cause of action.30 Section 514 will be the focus of this
report.
ERISA § 514 preempts “any and all State laws insofar as they may now or hereafter relate to any
employee benefit plan.... ”31 The U.S. Supreme Court has interpreted this language as applying to
any state law that “has a connection with or reference to such a plan.”32 In conjunction with these
26 See generally, e.g., Peter D. Jacobson, The Role of ERISA Preemption in Health Reform: Opportunities and Limits,
Legal Solutions in Health Reform, available at http://www.rwjf.org/pr/product.jsp?id=39410; Wendy Parmet,
Regulation and Federalism: Legal Impediments to State Health Care Reform, 19 Am. J. L. and Med. 121(1993).
27 Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 142 (1990).
28 The preemption doctrine derives from the Supremacy Clause of the Constitution, which establishes that the laws of
the United States “shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any
Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” U.S. Const., art. VI, cl. 2. In general,
federal preemption occurs when a validly enacted federal law supersedes an inconsistent state law. For a discussion of
preemption doctrine, see Constitution of the United States of America, Analysis and Interpretation, Congressional
Research Service, pp. 257-278.
29 Travelers, 514 U.S. at 657.
30 Section 502(a) of ERISA (29 U.S.C. § 1132) creates a civil enforcement scheme that allows a participant or
beneficiary of a plan to bring a civil action for various reasons, including “to recover benefits due to him under the
terms of the plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the
terms of the plan.” If a plaintiff seeks to bring a state law claim is “within the scope” of § 502(a), the state law claim
can be preempted. While the remedial provisions of ERISA may come into play in a federal health reform effort, this
report will only address preemption under § 514. For more information on preemption under § 502 of ERISA, see CRS
Report 98-286,
ERISA’s Impact on Medical Malpractice and Negligence Claims Against Managed Care Plans, by Jon
O. Shimabukuro.
31 29 U.S.C. § 1144(a). “State law” includes “[a]ll laws, decisions, rules, regulations, or other State actions have the
effect of law of any State. A law of the United States, applicable only to the District of Columbia, shall be treated as a
State law rather than a law of the United States.” 29 U.S.C. § 1144(c)(1).
32 See Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97 (1982).
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two factors articulated by the Supreme Court, a court’s preemption analysis typically examines
whether a state law interferes with the ERISA’s goal of uniform national standards.33
The Supreme Court has explained that to determine whether a state law has a “connection with”
an ERISA plan, a court must consider the objectives of ERISA as a guide to the scope of the
statute that Congress understood would survive, as well as the nature of the effect of the state law
on ERISA plans.34 State laws that attempt to regulate plan benefits or the administration,
operation, or structure of the plan may be seen as having an improper connection with an ERISA
plan. For example, in
Shaw v. Delta Airlines, 35 a New York law which required plans to provide
pregnancy-related benefits was found preempted because it burdened the administration of
employee benefit plans.36 Similarly, in
Egelhoff v. Egelhoff, the Washington law at issue provided
that the designation of a spouse as the beneficiary of a non-probate asset (e.g., a pension plan)
would be revoked automatically upon divorce. In determining that the Washington law had an
impermissible connection with ERISA plans because it interfered with nationally uniform plan
administration, the Court explained that one of the principal goals of ERISA is to enable
employers to establish a uniform administrative scheme that provides standard procedures for the
processing of claims and disbursement of benefits. The Court maintained that uniformity is
impossible if plans are subject to different legal obligations in different states.
A state law has a “reference to” an ERISA plan if it acts “immediately and exclusively” on
ERISA plans or if the existence of such a plan is essential to the law’s operations.37 For example,
in
Mackey v. Lanier Collection Agency & Service,38 the Court evaluated Georgia statutes which
addressed the garnishment of funds from ERISA employee welfare benefit plans. The Court held
that ERISA preempted the state statute that specifically exempted ERISA plans under state
garnishment procedures. The Court declared that “any state law which singles out ERISA plans,
by express reference, for special treatment is pre-empted.”39
Despite § 514’s wide scope, ERISA does not preempt every state action that affects an employee
benefit plan.40As the Supreme Court has articulated, “[s]ome state actions may affect employee
benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law
‘relates to’ the plan.”41
While the Court’s early ERISA preemption decisions suggested that the
application of ERISA’s explicit preemption clause was virtually limitless, its decision in
New York
State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co. signaled a change
in the Court’s interpretation of § 514(a).42 In
Travelers, several commercial insurers challenged a
state law that required them, but not Blue Cross and Blue Shield, to pay hospital surcharges. The
33 As the Supreme Court has stated with regard to ERISA preemption, “[t]he purpose of Congress is the ultimate
touchstone.” Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138 (1990), quoting Allis-Chalmers Corp. v. Lueck, 471
U.S. 202, 208, (1985).
34 See California Div. of Lab. Standards Enforcement v. Dillingham Construction, 519 U.S. 316 (1997).
35 463 U.S. 85 (1983).
36 In
Shaw, which first articulated this test, the Court found that the law had both an impermissible connection and
related to a plan.
37
Id. at 325.
38 486 U.S. 825 (1988).
39
Id. at 838, n. 12.
40 Marram v. Kobrick Offshore Fund, Ltd, 2009 Mass. Super. LEXIS 85, (Jan. 30, 2009).
41 Shaw, 463 U.S. at 100 n. 21.
42 514 U.S. 645 (1995).
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commercial insurers argued that the law was preempted by ERISA because it “relate[d] to”
employer-sponsored health insurance plans. In addressing the issue of ERISA’s preemption
clause, the Court first noted that there is a “presumption that Congress does not intend to supplant
state law.”43 The Court then turned to whether Congress intended to preempt state law by looking
to “the structure and purpose of the act.”44 The Court concluded that “nothing in the language of
the act or the context of its passage indicates that Congress chose to displace general health care
regulation, which historically has been a matter of local concern.”45 In other cases, the Court has
similarly recognized the states’ ability to regulate matters of health and safety, and has concluded
that state laws of general applicability are not necessarily preempted by ERISA.46 However, in
spite of an arguable narrowing in the scope of § 514(a), this section still is considered to broadly
preempt state law.47
Under § 514(b)(2)(A), a state law that relates to an ERISA plan may avoid preemption if it
regulates insurance within the meaning of ERISA’s “saving clause.” This section “saves” from
preemption “any law of any State which regulates insurance, banking, or securities.”48 Thus, the
savings clause permits states to regulate health insurance without running afoul of ERISA’s
preemptive scheme, and states may therefore impose requirements on health insurers that are
more comprehensive than the requirements set forth under ERISA.49 However, under §
514(b)(2)(B) of ERISA, commonly referred to as the “deemer clause,” a state law that “purport[s]
to regulate insurance” cannot deem an employee benefit plan to be an insurance company for
purposes of regulation.50 In interpreting this provision, the Supreme Court has found that a self-
insured health plan cannot be “deemed” an insured plan for the purpose of state regulation.51
Accordingly, a plan that provides health benefits through an insurance company can, in effect, be
regulated by state insurance law, as well as by ERISA. On the other hand, a plan that is self-
insured is only subject to ERISA’s requirements, and is immune from state law. It is estimated
that approximately 55% of workers with employment-based health coverage participate in self-
insured plans.52 Thus, by self-insuring an employer can avoid compliance with state requirements
that may be more onerous or costly, and may be able to provide the same coverage to all
43
Id. at 654.
44
Id. at 655.
45
Id. at 661.
46 De Buono v. NYSA-ILSA Medical and Clinical Services Fund, 520 U.S. 806 (1997) (state tax on gross receipts of
health care facilities not preempted by ERISA); California Div. of Labor Standards Enforcement v. Dillingham Constr.,
519 U.S. 316 (1997) (California’s prevailing wage law not preempted by ERISA).
47 See Constitution of the United States of America, Analysis and Interpretation, Congressional Research Service, p.
262, stating that ERISA’s preemption provision is “[p]erhaps the broadest preemption section ever enacted.”
48 29 U.S.C. § 1144(b)(2)(A).
49 Every state has adopted various standards for health insurance, including requirements for the prompt payment of
claims, access to health insurance (e.g., a requirement to cover dependants under a policy up to a certain age), rating
requirements that affect insurance premiums, and mandated benefit requirements (i.e., requirements for health insurers
cover services provided by certain medical specialties or cover treatments for specific diseases). See Mila Kaufman and
Karen Pollitz, Health Insurance Regulation by States and the Federal Government: A Review of Current Approaches
and Proposals for Change, April 2006.
50 29 U.S.C. § 1144(b)(2)(B). See Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 733 (1984) (discussing
ERISA’s “saving clause” and “deemer clause”).
51 FMC v. Holliday, 498 U.S. 52 (1990).
52 Kaiser Family Foundation and Health Research & Educational Trust, Employee Health Benefits, 2008 Annual
Survey, Exhibit 10.1, http://ehbs.kff.org/pdf/7790.pdf.
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employees, regardless of the state where the employee works or resides, which may have
administrative advantages. However, it has been noted that leaving self-insured plans out of state
regulation can lead to greater costs for states.53
ERISA Preemption and Health Reform
ERISA’s preemptive scheme is important in examining possible roles that states might plan in
regulating employment-based health benefits. ERISA preemption arises in the health reform
debate in two primary contexts. First, in the absence of federal legislation, states and localities
have undertaken certain efforts to improve health coverage for their residents, and questions have
been raised about whether ERISA preempts these state laws. Second, if a federal health reform
effort includes a larger role for the states in terms of employee benefit regulation, then ERISA’s
preemption provisions may need to be reviewed.
ERISA and Current State Health Reform Efforts
As discussed above, ERISA preemption may limit the types of health reform initiatives states
may enact. For example, based on judicial precedent interpreting ERISA § 514, states cannot
require employers to provide a minimum level of coverage or specific health benefits.54 While
states may regulate health insurance, they cannot impose regulation on self-insured plans. In
addition, while states may have some flexibility to pass laws of general applicability in order to
generate revenue to pay for health insurance for their constituents (e.g., a tax on all employers), it
has been pointed out that there may be some downsides to this type of approach.55 Despite these
obstacles, and in response to an increasing number of uninsured individuals, the declining number
of employers offering insurance to their employees, and the absence of federal action, states and
localities have experimented with certain measures to address the problems of health care
financing and access, and have sought ways to make employers pay for health coverage of their
employees. One leading approach that states and localities have taken is “fair share laws” (also
referred to as “pay or play” statutes), which generally require employers to choose between
paying a certain amount toward health expenditures or coverage for their employees, or
contributing to a state or locality to offset the cost of medical expenses for uninsured residents.
Recently, questions have been raised as to whether § 514 of ERISA prevents the application of
fair share laws.
Legal challenges to fair share laws enacted in Maryland and San Francisco have yielded varying
conclusions. In 2006, Maryland enacted the Fair Share Health Care Fund Act, which would have
53 See Mila Kofman, “Health Care Reform: Recommendations to Improve Coordination of Federal and State
Initiatives,” Testimony before the U.S. House of Representatives, Committee on Education and Labor Subcommittee
on Health, Employment, Labor and Pensions, May 22, 2007 (discussing, among other things, that [w]hen small
businesses with healthy workers self-insure, their claims are not pooled with others and coverage is more expensive in
state-regulated products as fewer healthy people help pay for the sicker ones.”) See also generally Russell Korobkin,
The Battle over Self-Insured Health Plans, or “One Good Loophole Deserves Another,” 5 Yale J. Health Pol'y L. &
Ethics 89 (2005).
54 See e.g., Shaw, footnote 32 supra; Standard Oil v. Agsalud, 633 F.2d 760 (9th Cir. 1980), aff'd. mem., 454 U.S. 801
(1981).
55 See Borzi, footnote 12 supra (explaining that a proposal to tax all employers in a state in order to pay for health
coverage could be inequitable, as it would affect both employers who offer coverage, as well as those who do not).
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required for-profit employers with 10,000 or more employees in the state to either spend at least
8% of their total payroll costs on employee health insurance costs, or pay to the state the amount
their spending fell short of that percentage.56 Shortly after the Fair Share Act was enacted, a retail
trade association that includes Wal-Mart as a member, challenged the measure on the grounds that
it was preempted by ERISA. In
Retail Industry Leaders Association v. Fielder,57 the Fourth
Circuit found the Maryland Fair Share Act was preempted because it effectively forced employers
to restructure their employee health plans, and as such, interfered with ERISA’s goal of providing
uniform nationwide administration of these plans.58 The
Fielder court opined that just because an
employer had the option not to spend money on health care for their employees, this option was
not a “meaningful alternative” and did not protect the law from preemption.59
The City of San Francisco passed the San Francisco Health Care Security Ordinance, which
requires covered employers to make minimum health care expenditures on behalf of covered
employees.60 The San Francisco Ordinance identifies various qualifying health care expenditures,
including contributions to health savings accounts and payments to a third party for the purpose
of providing health care services for covered employees. Covered employers may also satisfy the
Ordinance’s spending requirement by making payments directly to the city. Regulations that
implement the Ordinance confirm that a covered employer has discretion with regard to the type
of health care expenditure it chooses to make for its covered employees. In a case challenging the
Ordinance,
Golden Gate Restaurant Ass’n v. City and County of San Francisco, the Ninth Circuit
upheld San Francisco’s Act as not preempted by ERISA. 61 In its opinion, the Ninth Circuit
refuted the argument that the Ordinance established an ERISA plan (and therefore, “related to”
and ERISA plan) because of the administrative obligations imposed on employers by the
Ordinance. The court found that the Ordinance only places minimal duties on employers, and
does not bind plan administrators to a particular choice of rules for determining plan eligibility or
entitlement to particular benefits. 62 The court further explained that the Ordinance does not
require employers to structure their employee benefit plans in a particular manner or to provide
specific benefits. The Ninth Circuit also distinguished
Fielder, emphasizing that the Ordinance
does not require employers to structure their employee health care plans to provide a certain level
of benefits. In contrast, the court maintained, the Maryland Fair Share Act did not provide
56 2006 Md. Laws 1.
57 475 F.3d 180 (4th Cir. 2007).
58 The Department of Labor, in an Amicus brief, had argued for this result. It was argued that “[b]y setting an aggregate
amount (by percentage of payroll) affected employers must spend on employee health benefits, Maryland is taking
away employers’ fundamental authority over whether, and on what terms, to sponsor a plan, and potentially subjecting
employers to the competing demands of a multiplicity of state and local regulatory schemes.” Brief of the Secretary of
Labor as Amicus Curiae, Supporting Plaintiff-Appellee and Requesting Affirmance, RILA v. Fielder, 475 F.3d 180 (4th
Cir. 2007) (No. 06-1840, 06-1901).
59 See also RILA v. Suffolk County, 497 F.Supp.2d 403, 407 (E.D.N.Y. 2007) (Suffolk County Act, which enacted fair
share legislation, found to be preempted by ERISA under similar reasoning as
Fielder).
60 “Covered employers” are defined by the Ordinance as employers engaged in business within the city that have an
average of at least 20 employees performing work for compensation during a quarter. The term also applies to
nonprofit corporations with an average of at least 50 employees performing work for compensation during a quarter. A
“covered employee” under the Ordinance is defined as any individual who works in the city and county of San
Francisco, works at least 10 hours per week, has worked for his employer for at least 90 days, and is not excluded from
coverage by other provisions of the Ordinance.
61 546 F.3d 639 (9th Cir. 2008).
62
Id. at 643-47.
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meaningful alternatives to comply with the law. It is expected that the Golden Gate Restaurant
Association will petition the Supreme Court for review of the case.63
The state of Massachusetts, which has received a great deal of attention for enacting
comprehensive health care reform, maintains a fair share requirement as part of its health care
reform package. Under the Massachusetts Act,64 employers with more than 11 full-time
equivalent employees that do not make a “fair and reasonable” contribution to a group health plan
for their employees’ health coverage must pay a “fair-share contribution” into a state trust fund in
order to help cover costs of health care provided to uninsured Massachusetts residents “fair and
reasonable” contribution to a group health plan for their employees’ health coverage.65 The
Massachusetts law has not been challenged on preemption grounds, but if the Supreme Court
were to review
Golden Gate Restaurant Association, there could be implications for the
Massachusetts law. For a more detailed discussion of fair share laws, ERISA preemption and an
analysis of the Massachusetts statute, see CRS Report RL34637,
Legal Issues Relating to State
Health Care Regulation: ERISA Preemption and Fair Share Laws, by Jon O. Shimabukuro and
Jennifer Staman.
ERISA and National Health Reform Efforts
ERISA may come into play in a national health reform effort in two primary ways. First, as
mentioned above, Congress may choose to supplement the current federal regulation of health
plans under ERISA. If Congress were to require employers to establish a health plan, provide
specific health benefits, or provide financing of health benefits, ERISA may be a vehicle for
carrying out these types of proposals. For example, Congress may choose to create additional
requirements for group health plans under Parts 6 and 7 of Title I of ERISA (which includes
include rules on health care continuation coverage (COBRA), limitations on exclusions from
health care coverage based on preexisting conditions, and parity between medical/surgical
benefits and mental health benefits.)66 While some may be in favor of using ERISA as a tool for
requiring employers to play a potentially larger role in the financing of health coverage for
employees, others may argue that adding requirements may cause employers to cease to provide
benefits (assuming a proposal retains the voluntary nature of these benefits) or impose
burdensome costs on employers. It is also possible that Congress could legislate in this area
without amending ERISA. Congress could repeal ERISA’s provisions as they relate to group
health plans and create a new federal law with entirely new requirements. However, if national
health reform includes an expansion or contraction of private-sector employment-based health
coverage, ERISA’s current regulation of health benefits may need to be amended or repealed.
Second, ERISA preemption may be implicated in any federal health reform proposal that involves
greater state regulation of employment-related health benefits. As discussed above, there are
impediments to states’ involvement in the regulation of employment-based health coverage. Thus,
63 After the Ninth Circuit decision, Golden Gate Restaurant Association petitioned for a rehearing, which was denied.
Golden Gate Rest. Ass'n v. City & County of San Francisco, 558 F.3d 1000 (9th Cir. 2009). Following the rehearing,
Golden Gate Restaurant Association filed an emergency stay application with the Supreme Court, which was also
denied. The association’s petition to the Supreme Court for review is due on June 8, 2009.
64 An Act Providing Access to Affordable, Quality, Accountable Health Care, Ch. 58 of the Acts of 2006, available at
http://www.mass.gov/legis/laws/seslaw06/sl060058.htm.
65 MASS. GEN. LAWS ch. 149, § 188 (2008).
66 See footnotes 15 through 23 and accompanying text.
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any federal proposal that may involve a role for the states in regulating employment-based health
coverage, may need to take ERISA preemption into account. For example, there has been interest
in implementing some type of health insurance exchange,67 either on a national, state, or local
level.68 Among the other federal laws that may be amended in this type of proposal, ERISA could
come into play in the insurance exchange context with respect to state laws that seek some way to
compel an employer or employee benefit plan to participate in an exchange.69
Another area where ERISA preemption may need to be evaluated is under a federal proposal that
allows for states to have some flexibility to enact their own reforms. If Congress, as part of a
large scale health reform effort, desires to preserve Massachusetts’ fair share requirements, or
wants to clarify that fair share legislation such as the San Francisco Ordinance are acceptable
under ERISA, or to allow states to enact other types of legislation that could, at least in theory,
“relate to” employee benefit plans, amending ERISA’s preemption provision may be considered.
While some may argue that states should be allowed to be laboratories of experimentation70 in
figuring out what practices work and what practices do not in controlling costs and assuring
access to health care, others may argue that, as was desired by many when ERISA was enacted,71
there is a need for national uniformity in regulating health plans and that a patchwork of state
regulation could be burdensome on employers.
Some commentators have suggested that a waiver of ERISA preemption may be an avenue to
pursue for allowing states to enact health reform legislation while keeping national standards in
place.72
Congress has granted one waiver to the state of Hawaii. Under the
Hawaii Prepaid Health
Care Act of 1974, employers are required to provide health insurance to employees who work
more than 20 hours per week, but may require employees to contribute up to 50% of the costs of
67 A health insurance exchange generally entails a public or private entity that facilitates the purchase of health
insurance by private individuals or small employers and consists of a range of plans. See Timothy Stolzfus Jost, Health
Insurance Exchanges: Legal Issues, Legal Solutions in Health Reform, available at http://www.rwjf.org/coverage/
product.jsp?id=38109&c=OTC-RSS&attr=PA.
68 See, e.g., Description of Policy Options, Expanding Health Care Coverage: Proposals to Provide Affordable
Coverage to All Americans, Senate Finance Committee (May 14, 2009), available at http://finance.senate.gov/
sitepages/leg/LEG%202009/051109%20Health%20Care%20Description%20of%20Policy%20Options.pdf. For
additional legal issues regarding a Health Insurance Exchange, see Stolzfus, footnote 66 at 11.
69
Id. 70 As constitutional expert Erwin Chemerensky has explained, the Supreme Court has often recognized the idea that
there is a need to protect states rights so that states can serve as “laboratories for experimentation.” Justice Brandeis
first articulated this idea:
To stay experimentation in things social and economic is a grave responsibility. Denial of the right
to experiment might be fraught with serious consequences to the Nation. It is one of the happy
incidents of the federal system that a single courageous State may, if its citizens choose, serve as a
laboratory; and try novel social and economic experiments without risk to the rest of the country.
See Erwin Chemerinsky, David G. Trager Public Policy Symposium: Our New Federalism? National
Authority And Local Autonomy In The War On Terror: Empowering States When It Matters: A Different
Approach to Preemption*quoting New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J.,
dissenting).
71 Indeed, legislative history indicates that a number of Members of Congress influential the passage of ERISA
expressed the desire to preempt state regulation of employer-provided health care. See, e.g., remarks of Senator Javits,
“the emergence of a comprehensive and pervasive Federal interest and the interests of uniformity with respect to
interstate plans required ... the displacement of State action in the field of private employee benefits programs.” 129
Cong. Rec. 29942 (Aug. 22, 1974).
72 See, e.g., Jacobson, footnote 26 supra.
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premiums or 1.5% of their salaries to health insurance, whichever is lower.73
This mandate was
challenged
Standard Oil Co. v. Agsalud,74 in which the Ninth Circuit found that the statute was
preempted by ERISA.75 After the Supreme Court affirmed the decision, in 1983 Congress
exempted Hawaii’s Act from ERISA preemption.76 This type of waiver has been sought for other
states, however, Congress has not granted them.77 Case-by-case waivers may offer some state
flexibility while maintaining some national uniformity. However, unless Congress articulates
standards for acceptable state legislation and delegates the review process to an appropriate entity,
Congress may have to umpire up to 50 separate disputes between employers and insurance
companies arguing cost and uniformity against states arguing for local flexibility.
Federal Tax Treatment for Employer-Provided
Health Care Insurance
In some ways, the cost of employer-provided health insurance is subsidized by the tax code. The
tax burden of both employers and employees may be reduced when an employer provides health
benefits to an employee. For example, the Joint Committee on Taxation recently estimated that
limiting the size of this benefit to “the 75th percentile of health insurance premiums paid by or
through employers” would increase federal revenues by $108.1 billion over the 2009-2013 period
and by $452 billion over the 2009-2018 period.78
Although the preferential tax treatment of employer-provided health insurance does not
technically provide a legal obstacle to legislative changes in health insurance coverage or
delivery, some reform proposals have suggested repeal or modification of these provisions.79 This
73 See Haw. Rev. Stat. Ann. 393-13. Excluded from this list are emergency state employees, workers covered by
collective bargaining agreements, independent contractors and part-time workers.
74 633 F.2d 760 (9th Cir. 1980), aff'd. mem., 454 U.S. 801 (1981).
75 As the Supreme Court explained in
Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987), the Hawaii law was struck
down because of the obstacles it placed on the administration of ERISA health plans. As the Court explained :
The Hawaii law was struck down, for it posed two types of problems. First, the employer in that
case already had in place a health care plan governed by ERISA, which did not comply in all
respects with the Hawaii Act. If the employer sought to achieve administrative efficiencies by
integrating the Hawaii plan into its existing plan, different components of its single plan would be
subject to different requirements. If it established a separate plan to administer the program directed
by Hawaii, it would lose the benefits of maintaining a single administrative scheme. Second, if
Hawaii could demand the operation of a particular benefit plan, so could other States, which would
require that the employer coordinate perhaps dozens of programs.
Agsalud thus illustrates that
whether a State requires an existing plan to pay certain benefits, or whether it requires the
establishment of a separate plan where none existed before, the problem is the same. Faced with the
difficulty or impossibility of structuring administrative practices according to a set of uniform
guidelines, an employer may decide to reduce benefits or simply not to pay them at all.
Id. at 12-13 (citations omitted).
76 29 U.S.C. § 1144(b)(5).
77 See, e.g., H.R. 3618, Universal Health Care for Oregonians Act of 1993, 103rd Congress, 1st Sess. (1993). See also
139 Cong. Rec. E3126 (daily ed. Nov. 24, 1993) (statement of Rep. Wyden) (explaining the necessity of obtaining an
ERISA waiver for Oregon’s health care reform legislation).
78 CONGRESSIONAL BUDGET OFFICE,
Budget Option, Volume I: Health Care, at 24 (Dec. 2008).
79 For an analysis of the policy arguments surrounding the repeal or modification of these provisions, see CRS Report
RL34767,
The Tax Exclusion for Employer-Provided Health Insurance: Policy Issues Regarding the Repeal Debate, by
Bob Lyke.
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section of this report is intended to provide an overview of the operation of these provisions as
they currently exist, as well as a general description of the effects they can have on one’s income
tax liability.
Employer Paid Health Insurance Premiums
Under § 106 of the IRC, gross income does not include amounts paid by an employer to provide
health insurance for an employee.80 As an example, consider an employee who earns a salary of
$30,000, but also participates in a group health insurance plan offered through his employer that
covers the medical expenses of himself and his family. The plan has annual premiums of $6,000,
two-thirds of which are paid by the employer. The other third of the premiums is paid for through
deductions from the employee’s salary. In the absence of § 106, and assuming the employee has
no other income, the employee would have $34,000 of gross income during a taxable year: the
$30,000 he receives as salary plus the $4,000 contributed by his employer towards health
insurance premiums. However, § 106 excludes the employer-provided premiums from gross
income, leaving the employee with only the $30,000 in salary as gross income during the taxable
year.
A similar tax benefit is provided for self-employed individuals under § 162(l) of the IRC.81 Self-
employed individuals cannot take advantage of § 106 to exclude the costs of health insurance
because self-employed individuals do not qualify as “employees” as that term is generally used
under the IRC. Therefore, § 162(l) permits a deduction equal to the cost of health insurance
coverage for a self employed individual and her family. This deduction is not permitted if the self-
employed individual is eligible for coverage offered by an employer of the individual or her
spouse.82
Any amounts that are paid to individuals under a health insurance plan to reimburse the
individual for medical costs83 are also excluded from gross income.84 For example, if an
individual receives $1,000 worth of care through his employer-provided health insurance plan,
the value of that care is not includable in his gross income.85
Premium Conversion
Section 106 only excludes amounts contributed by an employer. In contrast, amounts deducted
from an employee’s paycheck to pay for that employee’s portion of employer-provided health
insurance do not receive favorable tax treatment under § 106. However, many employers have
established “premium conversion” programs in which an employee’s contributions to health
insurance premiums are converted into employer paid premiums that may be excluded under §
106.
80 26 U.S.C. § 106.
81 26 U.S.C. § 162(l). For more information,
see CRS Report RL33311,
Federal Tax Treatment of Health Insurance
Expenditures by the Self-Employed: Current Law and Issues for Congress, by Gary Guenther.
82 26 U.S.C. § 162(l)(2)(B).
83 Eligible medical costs are limited to those that also fall under 26 U.S.C. § 213 (providing a deduction for
unreimbursed medical expenses).
84 26 U.S.C. § 105.
85 This exclusion also applies to benefits paid from health insurance plans that are not provided by an employer.
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For example, if an employee and his employer pay $100 and $200, respectively, toward health
insurance for that employee, § 106 would only exclude the $200 provided by the employer from
the employee’s gross income. The employee would still be taxed on the $100 he contributes, as it
constitutes part of his wages, even though it is likely deducted from his paycheck automatically.
Under a premium conversion program, the employee’s wages would be reduced by $100, but the
employer would assume the $100 payment formerly contributed by the employee. For the
employee, there is no difference in take home pay, but his overall tax liability decreases because
the entire $300 premium is now paid by the employer, and is consequently excludable under §
106.
Premium conversion is made possible in part by § 125 of the IRC. 86 Under the doctrine of
constructive receipt, if a taxpayer has a choice between a taxable benefit and a non-taxable
benefit, he must include the value of the taxable benefit in gross income, even if he chooses the
non-taxable benefit.87 However, § 125 permits employees to choose between taxable and non-
taxable benefits in a “cafeteria plan” without being forced to recognize the constructive receipt of
income. Therefore, §125 allows employees to participate in a premium conversion program,
essentially choosing between higher wages or employer paid premiums, without including the
value of those premiums in gross income.88
Employment and Unemployment Taxes
Employer paid health insurance premiums similarly are not subject to employment tax liability.89
Employees and employers both pay employment taxes on wages as defined under the Federal
Insurance Contributions Act (FICA).90 However, the statutory definition of wages excludes:
the amount of any payment (including any amount paid by an employer for insurance or
annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an
employee or any of his dependents under a plan or system established by an employer which
makes provision for his employees generally (or for his employees generally and their
dependents) or for a class or classes of his employees (or for a class or classes of his
employees and their dependents), on account of ... medical or hospitalization expenses in
connection with sickness or accident disability.91
Therefore, amounts paid by an employer to provide health insurance on behalf of an employee are
not considered wages when calculating either employment tax liability of either employers or
employees.
Employers are also required to pay unemployment taxes on all wages under the Federal
Unemployment Tax Act (FUTA).92 As with FICA, the act’s definition of wages excludes
employer paid health insurance premiums.93
86 26 U.S.C. § 125.
87 Treas. Reg. § 1.451-2(a).
88 Whether a premium conversion plan is offered to employees is subject to that employer’s discretion.
See, Rev. Rul.
2002-3.
89 26 U.S.C. § 3121(a)(2).
90 26 U.S.C. §§ 3101, 3111. The amounts collected from these taxes partially fund Medicare and Social Security.
91 26 U.S.C. § 3121(a)(2).
92 26 U.S.C. § 3301
.
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Incentives for Employees to Elect Employer-provided Health
Insurance
The exclusion of health insurance premiums for employer-provided plans has a number of
beneficial tax consequences for an employee’s perspective. First, the taxpayer may benefit
through a reduction in both his income and FICA tax liability.94 Although a taxpayer who did not
receive health benefits from his employer, but purchased health insurance independently, could
deduct the cost of that insurance as an unreimbursed medical expense under § 213, that deduction
would only be permitted to the extent that the taxpayers’ total unreimbursed medical expenses
exceeded 7.5% of his adjusted gross income. Taxpayers would also have to itemize their
deductions in order to take advantage of § 213. 95
Additionally, the operation of a number of other tax provisions may be affected by the reduction
of a taxpayer’s adjusted gross income (AGI). For example, a taxpayer that chooses to itemize her
deductions is only permitted to take certain deductions to the extent that the aggregate amount of
those deductions exceed 2% of her AGI.96 Therefore, a reduction in AGI represents not only a
reduction in taxable income directly, but also a reduction in the initial barrier to taking certain
deductions. Other provisions also limit or reduce tax benefits to taxpayers above a certain AGI.97
For individuals with AGI that is approaching that limit, whether employer paid health insurance
premiums are included or excluded can affect whether these deductions or benefits can be
claimed.
Excluding employer paid health insurance premiums from gross income also reduces an
individual’s earned income. Earned income is used primarily for determining the size of a
taxpayer’s earned income tax credit, if any. The statutory definition of earned income includes
“wages, salaries, tips, and other employee compensation, but only if such amounts are includible
in gross income for the taxable year.” Therefore, because employer paid health insurance
premiums are not includible in gross income, those amounts are similarly not includible in earned
income. The effect of a reduction in earned income varies. The size of the earned income tax
credit is directly proportional to earned income, up to a certain point. But, after earned income
exceeds a statutorily defined “phaseout amount,” the size of the credit gradually decreases. For
individuals with earned income above the phaseout amount, reducing earned income can have the
effect of increasing the size of the earned income credit.
(...continued)
93 26 U.S.C. § 3306(b)(2).
94 The amount of the reduction in tax liability is governed by the taxpayer’s marginal tax rate.
95 26 U.S.C. § 213(a).
96 26 U.S.C. § 67(a).
97
See,
e.g., 26 U.S.C. § 24(b)(1) (phase out of child tax credit based on AGI); 26 U.S.C. § 25A(d) (phase out of
Lifetime Learning Credit based on AGI); 26 U.S.C. § 213(a) (restricts deduction for unreimbursed medical expenses to
aggregate amount in excess of 7.5% of AGI); 26 U.S.C. § 221(b)(2) (limiting deduction for interest on education loans
based on AGI); 26 U.S.C. § 222(b) (amount of deduction for qualified tuition and related expenses dependant upon
AGI).
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Incentives for Employers to Offer Health Insurance
The exclusion of employer paid health insurance premiums also creates incentives for an
employer to offer health benefits to its employees. Some of these are unrelated to an employer’s
income tax liability. For example, providing health benefits as compensation directly to
employees results in lower tax liability for those employees than if the employer had simply
raised their wages by the same amount. When comparing two jobs, an employee may find that a
job with a lower salary plus health benefits results in a lower tax burden than a job with the same
total compensation value paid entirely as salary. Therefore, an employer who provides health
benefits may have a hiring advantage over other employers who offer higher nominal wages
without health benefits.
Employers may also enjoy payroll tax deductions as a result of providing health benefits to
employees. From an employer’s perspective, the principal tax implication of providing health
care to employees, instead of the comparable value in cash, is a reduction in the wage base of
their employees. The reduction in wages means employer’s tax burden, under FICA and FUTA,
can be reduced by offering health insurance instead of increasing actual wages.
Author Contact Information
Jennifer Staman
Edward C. Liu
Legislative Attorney
Legislative Attorney
jstaman@crs.loc.gov, 7-2610
eliu@crs.loc.gov, 7-9166
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