Read §§ 106 and 223.
During World War II, the nation lived under wage and price controls. Employers could circumvent wage controls by providing employees with certain benefits, notably pensions and health insurance. In 1954, Congress codified the employee exclusion of employer payments for accident or health plans in § 106(a). Recall that § 105(b) excludes the payments that such plans provide for care from gross income. Employers of course deduct whatever payments they make as employee compensation, § 162(a)(1). Thus most of the money that employees spend or employers spend on their behalf for health care is never subject to income tax at either the employer or employee level. Not surprisingly, in the United States health care is now a significant aspect of any employment relationship. Costs have spiraled upward, and payments for health plans have become the most costly expenditure that employers make for employee benefits. Highly distorted markets for health care services now exist in the United States. See William P. Kratzke, Tax Subsidies, Third-Party Payments, and Cross-Subsidization: America’s Distorted Health Care Markets, 40 U. Mem. L. Rev. 279 (2009).
Health Savings Accounts (HSA) are savings accounts established for the benefit of an individual who has a high-deductible health plan. See § 223. An employee taxpayer may deduct the contributions s/he makes to such an account. § 223(a). An employee taxpayer may exclude employer contributions to such an account. § 106(d). Unspent funds in an HSA grow tax-free. § 223(e)(1). There is a monthly limit to the amount that taxpayer may save in such accounts. The savings in the account can be withdrawn without income tax to pay for medical expenses, presumably for the deductible portion that the health plan will not pay for. § 213(f)(1). Employer contributions to an HSA are not subject to employment taxes, § 106(d)(1), but employee contributions are subject to employment taxes.
Beginning in tax year 2018, a 40% excise tax will be due from the health insurance issuer, the employer, or the plan administrator – as the case may be – on amounts paid for coverage that exceed a threshold cost of so-called “Cadillac health plans.” § 4980I. This tax is not deductible. § 275(a)(6). Such a tax will likely greatly increase the cost of such coverage and make employers less willing to provide it, even for substantial trade-offs in wages.