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The federal income tax exclusion for employer-sponsored health benefits will help employers and workers cut their tax payments by $296 billion this year—and cost the U.S. Treasury $296 billion in tax revenue. The employer health benefits tax exclusion is on track to be 5.9 percent higher this year than in 2025, and that one "tax expenditure" will account for 15 percent of the $2 trillion 2026 tax expenditure total, according to a tax expenditures list posted along with the Trump administration's budget proposal for 2027.
The second biggest employee benefits–related tax expenditure—the tax exclusion for 401(k) plans and other defined-contribution retirement plans—will increase 9.6 percent this year, to $156 billion, and amount to 7.7 percent of the 2026 "tax expenditure" total.
The federal Office of Management and Budget (OMB) compiles the tax expenditure list every year to show members of Congress, Executive Branch officials, and the general public just how much tax deductions, tax credits, and other tax discounts affect federal revenue. Note that the tax expenditure table references federal fiscal years; fiscal year 2026 started on October 1, 2025, and will end on September 30, 2026.
The OMB also projects that in 2026, the U.S. federal government will generate about $5.5 trillion in tax revenue and other forms of revenue, while spending $7.5 trillion, producing a deficit of $2.1 trillion.
Employers and benefits groups contend that health-benefits tax incentives, retirement-benefits tax incentives, and other benefits incentives end up saving the federal government money by encouraging employers to offer the kinds of helpful health and retirement programs that are offered by national governments in many rich countries.
But the 2026 employer health and defined-contribution retirement plan tax expenditures alone have a value equal to 22 percent of the 2026 federal budget deficit.
Those and nine other benefits-related expenditures—the tax incentives for defined-benefit pension plans, health savings accounts, workers' compensation benefits, group term life premiums, employer-paid parking, employer-provided educational assistance, accident and disability insurance premiums, employer-provided child care, and employer-provided transit passes—will cost the federal government $559 billion, or 27 percent of the value of the 2026 federal budget deficit.
Employers and employees love benefits tax incentives, and many members of Congress like improving benefits incentives. But defending existing tax incentives and adding new ones takes work.
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From: BenefitsPRO
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