PRETAX PREMIUMS ON TABLE ARNOLD PROPOSAL TO SAVE 40% ON HEALTH INSURANCE.

Byline: MIKE ZAPLER Sacramento Bureau

SACRAMENTO -- Workers in California would be allowed to pay their health premiums with pretax dollars under a proposal Gov. Arnold Schwarzenegger released on Thursday.

The idea, part of a broader health reform plan the governor plans to unveil on Monday, is designed to lure more employees to buy insurance by making it more affordable. The governor wants to make health insurance accessible to the estimated 6.5 million Californians who lack coverage for all or part of the year.

Schwarzenegger said the proposal would save employees as much as 40 percent on their health insurance costs because money they spend on premiums wouldn't be taxed. Employers would also save, paying less in federal payroll taxes, an aide to the governor said.

Also on Thursday, Schwarzenegger proposed requiring health insurers to offer incentives for healthy living. For example, people who sign up for gym memberships or weight loss programs might have their insurance premium rates lowered.

Schwarzenegger, a longtime fitness proponent, believes that such programs can help reduce health care costs by preventing diseases that are expensive to treat.

Reining in spiraling health care costs is a central goal of the governor, said Ruth Liu, associate secretary for health policy at the California Department of Health and Human Services. ``The idea,'' she said, ``is to save employers and employees money.''

Creating a tax incentive for health insurance could persuade some workers who decline health coverage from their employers because of the high cost to sign up, said Jeffrey Miles, the vice president of public affairs for the California Association of Health Underwriters. And that, he said, could reduce the use of emergency rooms by people without insurance.

``It will make premiums more affordable for employees to opt in to health plans,'' he said.

The proposal to force employers to offer so-called Section 125 plans ... a reference to an Internal Revenue Service code ... is not considered controversial. Fabian Nunez, the Democratic leader of the Assembly, included a similar proposal as part of his health reform plan released in December.

But it could carry a big price tag at a time when the state faces a $5.5 billion budget deficit. The governor said the accounts could save residents $900 million annually in state income taxes, although he expects that the loss to state coffers will be less than than that because because the state often ends up paying for health care for the uninsured.

The governor has not said how he would pay for the program, or other costs associated with extending health insurance to millions more Californians. Some of those details are expected next week.