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Small Business Employee Benefits and HR Blog

What Motivates Businesses to Provide Employee Health Benefits?

June 28, 2012
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The following post is adapted from a Linked-In Answer that I responded to last month via the Linked-in Answers Tool.  It received "Best Answer", so I thought I'd share it on the employee health benefits blog. The question was what motivates you to provide employee benefits?Motivation Employee Health Benefits

 

Why Businesses provide Employee Health Benefits

Two words: Recruiting & Retention.

The primary reason companies offer employee health benefits today is for recruiting and retention purposes. That is, employee health benefits are a valuable form of compensation because:

  1. They are tax deductible to the business
  2. Employees get the benefits 100% tax-free

As a result of this enormous tax advantage, $1 in employee health benefits may be worth $1.50 - $2.00 in pay to an employee depending on his or her family's tax bracket.

Additionally, the $1 in employee health benefits costs the company less than $1 in pay. (Remember, it's tax deductible to the business so the company does not have to pay payroll taxes!)

The history of businesses providing employee health benefits goes back for decades.

In the early 1940s, the federal government changed the tax laws to allow businesses to provide employee health benefits as part of an employee's compensation package 100% tax-free.

During World War II, workers demanded wage increases that were prohibited by wartime wage and price controls. To grant a concession to labor without violating wage and price controls, Congress exempted employer-sponsored health insurance from wage controls and income taxation—in effect allowing off-the-books raises for employees in the form of non-taxable health benefits.

This created an enormous tax advantage for employer-sponsored employee health benefits over health insurance purchased by employees with after-tax dollars (e.g., auto insurance).

By the mid-1960s employer-sponsored health benefits were almost universal.

In the 2000s, the IRS extended the tax deductions of traditional group-based employee health benefits to individual health insurance via employer-based Premium Reimbursement Arrangements (Section 125 Plans) and Health Reimbursement Arrangements (Section 105 Plans).

 

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