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Small employers cannot buy health insurance unless 75 percent of workers offered coverage enroll. Under Senator McCain's proposal to replace the tax exclusion for employer-sponsored insurance (ESI) with tax credits usable for ESI or non-group plans, many young and healthy workers would save money by shifting from ESI to non-group coverage; non-group plans typically lower premiums for healthy enrollees. Some employers could no longer meet participation requirements and would become unable to buy group insurance. Many of their employees would involuntarily lose ESI, forcing them into the non-group market, where older workers and those with health problems may fare poorly.
“Employer-sponsored health insurance is tax-free, but people who buy their own coverage receive no tax breaks. Policymakers should level the playing field by giving every form of health coverage the same tax treatment.”
This initially appealing claim misses some key facts. Insurance companies will not sell to employers unless at least 75 percent of workers accept coverage offers. Currently, according to the Treasury Department, the unequal tax treatment of employer-sponsored insurance (ESI) and nongroup coverage “can increase the after-tax cost of [nongroup] insurance … by as much as 50 percent.” If this inequality ended and many workers left ESI for nongroup coverage, some companies would no longer meet insurers’ minimum participation requirements and would lose the ability to offer coverage.
These participation requirements have particularly serious implications for proposals that maintain or increase current differences between the rules for insurers that sell directly to individuals and those that sell to employer groups. For example, Senator McCain’s health proposal would repeal the current exclusion of employer insurance payments from income subject to federal income taxation. McCain would substitute a federal income tax credit that could be used either for ESI or nongroup coverage. Federal law prohibits an employer from charging higher premiums or providing fewer benefits to workers who are older or who have health problems. By contrast, under both current law and the McCain plan, the consumer’s age, gender, and health status can determine nongroup premiums, available benefits, and whether coverage is offered at all.
At small firms with fewer than 100 workers, 21 percent of employees with ESI are under age 30. Another 14 percent are age 30 to 44 and report excellent health. Because nongroup insurance typically costs less for healthier people, many of these young and healthy workers would save money if they used a McCain-style tax credit to buy nongroup coverage rather than ESI, even if that meant forgoing the after-tax value of their employers’ health insurance contributions.
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