The Reagan administration told Congress yesterday that it opposes legislation to require businesses to include coverage in their employe health policies aimed at preventing illnesses in children.

Testifying in a Senate Finance subcommittee hearing, J. Roger Mentz, deputy assistant Treasury secretary for tax policy, said the administration does not believe that the tax system should be used to regulate employers' group health plans.

"More specifically, we do not believe that substituting the view of the federal government, no matter how well intentioned, for the choices of employers and employes about the benefits to be provided . . . will result in a more optimal allocation of compensation and health benefits," he told the taxation and debt management subcommittee.

The bill, sponsored by Sen. John H. Chafee (R-R.I.), the subcommittee chairman, would require coverage for a wide range of preventive services for children, including immunizations and other examinations. Chafee noted that studies had shown that "for every dollar spent on measles vaccinations $10 was saved, and for every dollar spent on mumps vaccinations $7.40 was saved."

He argued that many young families with limited incomes could not afford preventive services and may wait for serious symptoms to appear before paying for care.

"The sad truth is that 24 percent of all preschool-age children are not immunized," he noted, arguing that in addition to the personal tragedy of a child left retarded by measles, "the cost of lifetime institutional care can be staggering."

Mentz said the administration believes that the legislation would impair the flexibility of the health care system and contended that it would "likely be both duplicative of and inconsistent with state regulation of health insurance."

Robert Haggerty, president of the American Academy of Pediatrics, told the panel that "common sense is at the heart" of the bill because under the current system, "taxpayers today are being forced to subsidize group health insurance plans which adversely affect the health of children."

The United States Chamber of Commerce, however, said it opposed any mandated coverage plans because it said they limit flexibilty and raise costs.