Lane 3

Taxing Health Benefits – Remember Section 89?

It was 1989 when I got into the health insurance business. A new law was coming on-line called Section 89. It was championed by Chicago politician, Dan Rostenkowski, who chaired the House Ways and Means committee.

This legislation was a small, almost ignored part of the massive Tax Reform Act of 1986. In a nutshell, Section 89 was designed to:

• limit the tax-favored status of health benefits for “highly compensated” employees (those earning $50,000 or more),
• discourage employers from offering health plans that favored “highly compensated” employees, and
• extend health coverage to the uninsured.

Taxing the health benefits of “highly compensated” employees to fund benefits for the uninsured – sound familiar?

Once the Internal Revenue Service got around to writing the administrative rules for the law, Section 89 went from being ignored to the biggest issue in human resources. Employers were forced to conduct complicated non-discrimination tests – and employees were exposed to taxes on their benefits.

The outrage was so great that in late 1989 Section 89 was repealed with a House vote of 390 to 36.

So now twenty years later as Congress and President Obama consider taxing health benefits you should remember Section 89. Remember that the paragraphs of legislation signed by a president become reams of policies and procedures once touched by the Internal Revenue Service. Remember that it is you, the employer, who must comply these new rules. And, it will be your clients and employees who will bear the ultimate cost.

Contact your senators and congressman and let them know what you think.