A push to repeal Section 89 - income tax on health insurance benefits

A Push To Repeal Section 89

The push is on to repeal Section 89 of the federal tax code, the complex new provision under which many business owners and upper-income employees will pay taxes on a portion of their health benefits.

But even supporters of the repeal effort concede they face an uphill battle. Rep. Dan Rostenkowski, D-Ill., the chairman of the House Ways and Means Committee, has shown no signs of relenting in his support for the measure as it now stands. "He thinks it [Section 89] is a good law, and he wants to see it work," said an aide.

As head of the powerful committee with practically absolute authority over tax law, Rostenkowski would have to be won over to the cause of repeal if the business drive is to succeed.

Rep. John J. LaFalce, D-N.Y., chairman of the House Small Business Committee, has set out to do just that. He maintains that Section 89 is "inherently defective." He has introduced a bill, H.R. 634, to repeal the law. "I fully support the intent of Section 89 and its ultimate goal of encouraging employers to expand health-insurance coverage," said LaFalce. "But I am concerned that the law is so complicated and the compliance burden so onerous that it may well have the opposite effect."

LaFalce's carefully measured language belies the frustration and disbelief generated by Section 89, especially in the small-business community. During committee hearings on the law in January, small-business witnesses hammered Section 89 for its maddening complexity and draconian penalties.

"Many accountants are recommeding to their small-business clients that it may be advisable [and less expensive] to drop coverage in their employee benefit plans rather than meet the costs associated with compliance under Section 89," said Don Hull, an independent accountant speaking for the National Society of Public Accountants.

"Small business has been the focus of debate over ways to expand health-care coverage because most of the working uninsured are found in small firms," said Diane Large, vice president for personnel of the U.S. Chamber of Commerce. "But many companies, as they discover the complexities of compliance [with Section 89], will decide not to offer benefits at all."

That was not the stated goal of Section 89, which was part of the 1986 tax-reform package but did not take effect until Jan. 1 of this year. Congress intended that Section 89 expand and broaden benefits, primarily health insurance, to workers who are inadequately covered or not covered at all.

The law established an elaborate set of nondiscrimination tests to determine whether an employer offers a disproportionate share of tax-exempt benefits to higher-paid employees. The law doesn't ban discrimination, but it is aimed at leveling the differences between the higher-paid employees and everyone else.

However, an employer may continue a discriminatory benefits plan, provided that the higher-paid employees pay taxes on the discriminatory portion of their benefits package. This, in fact, is the route most employers will follow because it is cheaper than broadening benefits, say many consultants.

Stiff tax penalties await any employer who fails to comply with the nondiscrimination rules. But employees are subject to taxation if their employers fail to comply with a separate provision of the law that specifies how to maintain a so-called qualified plan. For example, if a company health plan that fails the qualification test pays $50,000 to an employee who suffers a catastrophic illness, that money becomes taxable income to the employee. For someone in the 28 percent tax bracket, that means an additional $14,000 in federal taxes alone. Moreover, if the employee dies and the company's life insurance plan pays $50,000 to the spouse, that sum also is subject to taxation.

Employers who fail to report these transactions to the Internal Revenue Service also pay a tax penalty on the payout calculated at the highest individual tax rate, now 33 percent.

LaFalce maintains that it isn't fair to tax employees because their employers failed to comply with the law.

"Repeal won't happen quickly; it will take time," said LaFalce. "But the more the small-business community makes its views known to the Ways and Means Committee, the more amenable its chairman might be to reconsideration."

What's Your Story? What type of extraordinary problem have you encountered in trying to comply with Section 89? We would like to hear about it so we can document this law's real-world impact on companies. Write to: Section 89, c/o Nation's Business, 1615 H Street, N.W., Washington, D.C. 20062.

Hotline For Section 89 Repeal You can join the drive to repeal Section 89.

The U.S. Chamber of Commerce has established a Western Union hotline to send to President Bush a message urging him to back repeal.

Call 1-800-257-4900 and ask for hotline operator 9485. Each telegram will cost you $5.75, charged to your phone bill or a major credit card. The 800 call to order the telegram is toll-free.

The message reads:

"Dear Mr. President:

"We need your help! Section 89, a misguided law, puts health and benefits plans at risk. Complicated, costly, and still no IRS regulations. It's bad for employees and employers. Repeal Section 89."

PHOTO : House Small Business Committee Chairman John J. LaFalce is concerned that Section 89's compliance burdens could in fact reduce workers' health coverage.

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