March 25, 2025

The Council of Insurance Agents & Brokers (CIAB) and the American Benefits Council (ABC) recently released a study by Ernst & Young (E&Y), which examined the impact of the tax exclusion on employer-provided health insurance. The study reviewed the effects of limiting the income and payroll tax exclusion for employment-based health insurance to the 75th percentile of premiums, effective January 2026. The study was based on a model similar to those used by the Congressional Budget Office, the Joint Committee on Taxation, and the U.S. Treasury Department.  

The tax exclusion for employment-based health insurance coverage includes employer-paid premiums from income and payroll taxes, as well as contributions made by employees and/or employers to flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), and health savings accounts (HSAs). The tax exclusion was designed to incentivize employees to select employer-sponsored insurance and for companies to provide health insurance.  

The E&Y analysis found that placing a limit on the tax exclusion would have a number of far-reaching implications for employers and employees, as well as long-term impacts on the economy and healthcare delivery in the U.S. Specifically, the study found that imposing a limit on the tax exclusion would decrease the number of individuals covered by employment-based insurance, increase the uninsured rate, and worsen health outcomes. By reducing the tax incentive for employment-based health insurance, fewer employees would have health insurance due to the increase in the after-tax cost of health insurance. The study estimated that it could result in 2.8 million fewer individuals with employment-based insurance by 2035 relative to current law and a total of 1.5 million uninsured.  

The report also found that a significant portion of the impact of limiting the tax exclusion would fall on U.S. workers through decreased employment, with 75,000 fewer U.S. jobs, on average, in each of the first ten years, growing over time to 240,000 fewer jobs each year in the long run. There would also be a $75 billion reduction in after-tax employee compensation each year for 10 years, growing over time to $280 billion less in after-tax employee compensation annually. 

Employer Takeaway 

While there has not been any official announcement by the administration regarding the tax exclusion, employers should familiarize themselves with the subject and continue to monitor legislative and regulatory developments that may impact the tax treatment of employer-sponsored health plans. A copy of the E&Y report can be accessed here.