Employer Tax Exclusion

VI. Key Issues: Financing and Delivery >> C. Health Financing >> Health-Related Tax Expenditures >> Employer Tax Exclusion (last updated 11.16.15)




  • 1918Revenue Act of 1918 clarified that amounts received through accident or health insurance or from workmen’s compensation acts would be exempt from taxation; the exclusion was limited to amounts received through accident and health “insurance,” which included commercially insured arrangements but not most private employer (i.e., self-insured) or employee association plans (CRS-8).
  • 1935. National Labor Relations Act (Wagner Act) gave employees the right to join labor unions and bargain collectively (p. 347).
  • 1939. Revenue Act of 1939 (Sec. 22(b)5), establishes employee tax exclusion for compensation for injuries, sickness, or both received under workers’ compensation, accident, or health insurance (with the same limitations reported above for Revenue Act of 1918) (CRS-8).  Note that the exclusion of premium payments for employer-provided health benefits did not occur until 1943.
  • 19421942 Stabilization Act  imposed strict limits on wage increases, but defined wages as “excluding insurance and pension benefits in a reasonable amount to be determined by the President” (P.L. 729 of the 77th Congress, 56 Stat. 765, Section 10).
  • 1943. The War Labor Board ruled that controls over wages and prices imposed by the 1942 Stabilization Act did not apply to fringe benefits such as health insurance (p. 3). However the “reasonable amount” that could be excluded from taxation for all fringe benefits “may not exceed five per cent of the employee’s annual salary or wages” (p. 8). (See detailed history/rationale.)
  • 1943.  An August 26 Internal Revenue Service ruling letter held that an employer contribution for group medical and hospitalization insurance issued by a commercial insurer was exempt income to workers (CRS-7).
  • 1949. In W.W. Cross and Co. v. NLRB, the U.S. Court of Appeals First District ruled that health insurance and other employee welfare plans were subject to collective bargaining under the NLRA.
  • 1954. Revenue Act of 1954 (Sec. 106(a)) provides the first statutory codification of the exclusion from taxation for employers’ contributions to accident and health plans benefiting employees, and clarifies that such contributions had always been deductible as business expenses. The term “accident or health plan” includes not only health insurance but also accidental death and dismemberment insurance, short-term and long-term disability coverage, and coverage through reimbursement arrangements such as health care flexible spending accounts (FSAs) and health reimbursement accounts (HRAs) (CRS-4). The exclusion does not apply to self-employed workers since they are not counted as employees under this part of the code (CRS-4). (See detailed history/rationale.)
  • See a more detailed History of Health Insurance Benefits at EBRI (covering years 1787-2000).


  • Carrington WJ, McCue K, Pierce B. Nondiscrimination rules and the distribution of fringe benefits. Journal of Labor Economics 2002;20(2, pt. 2); S5-S33. This describes the conditions that employer health benefits must meet in order to qualify for the tax exclusion. IRS nondiscrimination rules generally limit the ability of firms to differentiate health benefits among different categories of full-time workers: the rules stipulate that if a firm is to provide health insurance, it must make it widely available to substantively all employees. However, certain groups of employees, namely part-time, temporary and seasonal workers, are exempt from the requirements of the nondiscrimination rules. Plans may differ among employees for business-related reasons, such as tenure, age, hours worked, and collective bargaining agreement. However, under HIPAA, it is illegal to violate discrimination laws or charge differently based on health conditions.
  • Congressional Research Service. The Tax Exclusion for Employer-Provided Health Insurance: Policy Issues Regarding the Repeal Debate. November 21, 2008.
  • Helms, RobertTaxes and Health Insurance: Analysis and Policy. Paper presented at Conference Sponsored by The Tax Policy Center and the American Tax Policy Institute, The Brookings Institution, February 29, 2008. 
  • Scofea, Laura A. 1994. The Development and Growth of Employer-Provided Health Insurance. Monthly Labor Review (March): 3 – 10.

Official Estimates of Revenue Losses due to Tax Exclusion

  • Joint Committee on TaxationTax Expenditures for Health Care (2008).
  • Office of Management and BudgetTable 17-1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2011-2017. In 2013, total federal revenue losses related to tax benefits related to employer-provided health plans will amount to just over $300 billion.
    • Line item 132 lists federal income tax revenue losses related to the exclusion of employer contributions for medical insurance premiums and medical care. Footnote 16 provides the corresponding revenue losses related to FICA payroll taxes. In 2013, income tax losses were $180.58 billion, while payroll tax losses were $113.69 billion. Total=$294.2 billion.
    • Line item 133 lists federal income tax revenue losses related to the deduction for self-employed medical insurance premiums; footnote 17 reports that self-employed health insurance premiums were excludable from payroll taxes only in 2010. In 2013, income tax losses were $5.97 billion.
  • State and Local Tax Revenue Losses. There is no official regularly reported estimate of state and local income tax losses arising from the tax exclusion. In 2006, the revenue losses from state income taxes ($23.4 billion) amounted to 20.9% of the estimated revenue losses from federal income taxes ($111.9 billion). Assuming the same ratio for 2013 would imply state and local income tax losses of $37.7 billion due to the exclusion.

Research and Analysis

Items listed in reverse chronological order.

  • Burman L, Khitatrakun S and Goodell S. (2009). Tax Subsidies for Private Health Insurance – Update. Who Benefits and at What Cost? Robert Wood Johnson Foundation, July 2009. [Full Text (pdf)] Policy-makers are considering modifications to the tax treatment of employer-sponsored insurers (ESI) as a way to raise revenue to help pay for health reform and provide incentives to reduce health care costs. Understanding how current subsidies work is important to assessing health reform proposals. This brief is an update of a previous synthesis report published in 2003, and presents essential information about the structure and distribution of existing tax subsidies for ESI and the implications for policy options. Federal tax subsidies for employer sponsored insurance will amount to more than $240 billion in 2010.
  • Cogan, John F.R. Glenn Hubbard, Daniel P. Kessler (2008)The Effect of Tax Preferences on Health Spending. Working Paper 13767, January 2008.  This paper provides a good summary of previous estimates of the impact of the tax exclusion on health spending. Authors estimate that repealing the tax preference would lead to an approximate doubling of the coinsurance rate among those with employer-provided coverage who have nonzero health spending. A doubling of the coinsurance rate from 32 to 64 percent, in turn, would lead to a decline in health spending of between 13.3 percent (at the RAND experiment’s estimate of the elasticity of demand for health services of -0.2) and 46.7 percent (at Eichner’s (1998) elasticity of demand for health services of -0.7).
  • Jason Furman (2008). Health Reform Through Tax Reform: A Primer. Health Affairs, May/June 2008; 27(3): 622-632. [Abstract] The total income tax expenditure for health insurance is $164 billion. In addition, the tax exclusion reduces payroll taxes by about $85 billion, for a total contemporaneous cost of $250 billion. This contemporaneous cost is partially offset by the fact that excluding employer contributions to Social Security from taxable earnings results in lower future Social Security benefits. Taking this into account, the net present value cost of the tax exclusion in fiscal year 2008 is about $200 billion.
  • Thomas M. Selden and Bradley M. Gray (2006). Tax Subsidies For Employment-Related Health Insurance: Estimates For 2006Health Affairs. November 2006. Shows that tax subsidy–inclusive of federal and state income taxes and Medicare/Social Security payroll taxes, amounted to 35.4% of premiums in 2006. The revenue losses from state income taxes ($23.4 billion) amounted to 20.9% of the estimated revenue losses from federal income taxes ($111.9 billion).
  • John Sheils and Randall Haught (2004). The Cost Of Tax-Exempt Health Benefits In 2004. Health Affairs Web Exclusive, February 25, 2004. [Abstract]
  • Roger Feldman and Bryan Dowd (1991). A New Estimate of the Welfare Loss of Excess Health Insurance. The American Economic Review Vol. 81, No. 1 (Mar., 1991), pp. 297-301. Authors calculate that the welfare loss from giving all Americans free care rather than a policy with a $1,000 deductible would have been $33.4 to $109 billion (1984 dollars). The authors do not attempt to calculate what share of this hypothetical loss can be attributed to excess coverage encouraged by the tax exclusion.

General Resources

  • Tax Exclusion (Health Affairs search)
  • See Employer Tax Exclusion under Health ReformTax Reform for a discussion of federal or state proposals to cap or eliminate this exclusion as part of comprehensive health reform.