Paying for Health Insurance Reform: 40% Tax on Some Federal Health Plans

How will America pay for costs associated with changing the nation’s health care system? Many readers have a “Cadillac health plan.” Two Congressmen are concerned that a proposed tax of 40% on the FEHB will be unpopular among their federal constituents.

Federal employees are unhappy with the increasing cost of health insurance benefits. The average cost in 2010 for federal employees will be an increase of 8.8% but the real cost for some plans will be higher than that.

Here is more food for thought.

How would you feel about a 40% tax on the aggregate value of your health insurance? A letter from two Congressmen posted by Government Executive explains Congressional concern over the possibility of federal employees getting hit with a new tax levy.

The Senate Finance Committee is proposing a 40% tax on health insurance plans that exceed $8000 for individuals and $21,000 for families beginning in 2013. Before you conclude that this would not impact you, consider also that in calculating the value of your insurance plan you also have to consider coverage for dental, vision or other supplemental programs as well as your contribution to a flexible spending account (FSA).

Many federal employees would be paying this tax unless you switch to a less expensive plan or otherwise cut back on your current insurance benefits. In fact, that may be the theory behind the proposal. With health care expenses that could rapidly increase the federal debt load, how will the government get the money to pay for the all the programs now being provided by Uncle Sam?

The Congressional Research Service has figured out the impact of this tax using the value of 2010 dollars. The adjusted threshold for this tax next year would amount to $6500. Adding in the average FSA contribution, along with dental and vision coverage, the value of your insurance plan probably exceeds the maximum amount required to trigger the tax.

The result: A new tax of 40% on the aggregate value of your “Cadillac health plan.”

The problem is that proposals to change the nation’s health care system are probably going to be expensive when all is said and done. Where will this extra money come from?

No doubt, much of it will come from increasing our national debt as the Treasury Department continues selling government bonds to foreign governments. But, with federal debt in the neighborhood of $12 trillion and rapidly rising, there presumably will have to be an end to this gravy train at some point.

Federal employees make a tempting target for raising money. The average salary of a federal employee is twice as high as it is for the average American. And, while many readers contend they should be making much more than they are now because their jobs require more skill, greater challenges, etc., don’t look for much sympathy beyond the Washington Beltway. A political decision is often based on perception and taking money away from a group with an average income much higher than it is for most Americans would probably be popular with many Americans.

For example, the article entitled “Millions of federal employees might be exempt from health benefits tax.” It is not sympathetic to the plight of the average federal employee.

The letter from the two Congressmen notes that “Throughout this year, we and members of the Administration have assured the public, including 2 million federal employees, that if individuals or families like their current health coverage, they will not have to change it.”

Congress usually puts its own interests at the top of the priority list. The reality is that with Congressmen Gerald Connolly (D-VA) and James Moran (D-VA) highlighting the issue, and the negative impact this tax would have on Congress as well as the impact on the rest of the federal workforce, changes will be made in the final version of any health plan that may pass so that you (we) will not have to pay this tax.

Who will end up paying for the rapidly increasing federal debt and the interest on this debt? Presumably, America’s leaders will think about tackling that issue later.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47