understanding the policy impact of section 125 plans lynn quincy mathematica policy research, inc....
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UNDERSTANDING THE POLICY IMPACT OF SECTION 125 PLANSUNDERSTANDING THE POLICY
IMPACT OF SECTION 125 PLANS
Lynn QuincyMathematica Policy Research, Inc. (MPR)
July 18, 2008
Lynn QuincyMathematica Policy Research, Inc. (MPR)
July 18, 2008
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Key Questions Regarding Policy ImpactKey Questions Regarding Policy Impact
Prevalence of workers “touched” by policy
Potential savings by type of worker/family
Responsiveness of workers to price reduction (in a voluntary system)
Prevalence of workers “touched” by policy
Potential savings by type of worker/family
Responsiveness of workers to price reduction (in a voluntary system)
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Potential Beneficiaries from a Section 125 Policy
Potential Beneficiaries from a Section 125 Policy
Zero Tax Liability/ Trivial
Savings
Employee Benefits
from New Tax
Savings for Coverage
No Workforce
Connection/Self-
Employed
All Residents
Employee (or
connection to an
employee)
Employer Doesn’t
Offer Coverage
Employee Eligible for Employer’s Coverage
Not Eligible for
Employer’s Coverage
Zero Employee Premium
Contribution
Employee Premium
Contribution Not Sheltered
by Section 125
Has a Section 125 plan
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Among the Uninsured, 76 Percent Have a Wage Earner in the Family
Among the Uninsured, 76 Percent Have a Wage Earner in the Family
Work StatusPercent of All Uninsured
(National, 2006)No workforce connection in the family
17%
Self-employed 8%
Wage earner in the family 76%
Source: Employee Benefit Research Institute Brief No. 310.
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Only 22 Percent of Uninsured Employees Are Eligible for Their Employer’s Offer of CoverageOnly 22 Percent of Uninsured Employees Are
Eligible for Their Employer’s Offer of Coverage
Percent of All Uninsured Employees
(National, 2005)
Employer sponsors; employee is eligible 22%
Employer sponsors; employee is not eligible 16%
Employer does not sponsor 63%
Source: Clemans-Cope, L., and B. Garrett. Unpublished estimates based on the February 2005 Contingent Work Supplement of the Current Population Survey (CPS) and the March 2005 Annual Social and Economic Supplement of the CPS. Washington, DC: Urban Institute, 2006.
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Some Employees in Small Firms Do Not Have a Premium Contribution for Single Coverage
Some Employees in Small Firms Do Not Have a Premium Contribution for Single Coverage
Source: Agency for Healthcare Research and Quality. National Medical Expenditure Panel Survey-Insurance Component (MEPS-IC) Data for 2005 (Private-Sector Employees).
Percent of Enrolled Employees with Zero Health Insurance Contribution
Firm Size Single Coverage Family Coverage
2–9 workers 67% 59%
10–24 workers 49% 33%
25–99 workers 37% 16%
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Section 125 Plans Are Less Prevalent in Smaller Firms
Section 125 Plans Are Less Prevalent in Smaller Firms
Source: Agency for Healthcare Research and Quality. Unpublished National MEPS-IC Data for 2004 (Private-Sector Employees).
Firm Size
Percent of Employees in Offering Firms
Without a Section 125 Plan (National)
2–9 workers 65%
10–24 workers 50%
25–99 workers 30%
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The Potential Savings Depends on One’s Implicit Marginal Income Tax Rate
The Potential Savings Depends on One’s Implicit Marginal Income Tax Rate
The relevant marginal tax rate is the rate of tax paid on the last $X of income where $X is the annual premium amount
This tax includes:– Federal income tax– Federal Insurance Contributions Act (FICA) tax– State income tax– Other, state-specific payroll taxes
The relevant marginal tax rate is the rate of tax paid on the last $X of income where $X is the annual premium amount
This tax includes:– Federal income tax– Federal Insurance Contributions Act (FICA) tax– State income tax– Other, state-specific payroll taxes
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Federal Tax Bracket RatesFederal Tax Bracket Rates
Illustration for a single parent with one child:
-20%
-10%
0%
10%
20%
30%
$9,000 $14,000 $19,000 $24,000 $29,000 $34,000 $39,000
Family Income
Federal Income Tax Bracket Rates
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Federal Tax Bracket Rates vs. Implicit Marginal Income Tax Rates
Federal Tax Bracket Rates vs. Implicit Marginal Income Tax Rates
Illustration for a single parent with one child:
-20%
-10%
0%
10%
20%
30%
$9,000 $14,000 $19,000 $24,000 $29,000 $34,000 $39,000
Family Income
Federal Income Tax Bracket Rates
Implicit Federal Marginal Income Tax Rates
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Tax Code Features Designed to Assist Lower-Income Taxpayers
Tax Code Features Designed to Assist Lower-Income Taxpayers
Earned Income Tax Credit (EITC)—slides with income and is fully refundable
Child Tax Credit—partially refundable
Dependent Care Tax Credit—not refundable but credit percentage is higher for lower incomes
Earned Income Tax Credit (EITC)—slides with income and is fully refundable
Child Tax Credit—partially refundable
Dependent Care Tax Credit—not refundable but credit percentage is higher for lower incomes
These tax code features cause implicit marginal income tax rates to diverge from federal income tax bracket rates.
These tax code features cause implicit marginal income tax rates to diverge from federal income tax bracket rates.
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The Value of the EITC by Family Type (2008)The Value of the EITC by Family Type (2008)
Note: Married filers are allowed higher maximum earnings than unmarried filers.
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$0 $10,000 $20,000 $30,000 $40,000
Family Earnings
EIT
C A
mo
un
t Two or more Children
One Child
Childless
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Potential Marginal Tax Rates Facing a Single Parent with Two Children*
(Negative rates not displayed)
Potential Marginal Tax Rates Facing a Single Parent with Two Children*
(Negative rates not displayed)
0%
10%
20%
30%
40%
50%
60%
$9,398 $11,862 $13,687 $17,337 $20,986 $24,636 $29,198 $34,673 $40,148 $45,623 $51,097
Family Income
Ta
x S
ub
sid
y P
erc
en
tag
e
State
FICA
Federal
* Assumes that the state levies an income tax and has a state EITC (most advantageous scenario).
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Overall Marginal Income Tax Rates Vary by Family Composition*
Overall Marginal Income Tax Rates Vary by Family Composition*
Shaded areas indicate overall marginal tax rates in excess of 40 percent.
Shaded areas indicate overall marginal tax rates in excess of 40 percent.
* Includes FICA and federal and state income tax rates. This state levies an income tax and has a state EITC (most advantageous scenario).
Family Composition Income as a Percent of FPLAdults Kids 75% 100% 125% 150% 175% 200% 225% 250% 275% 300%
1 0 11% 28% 32% 23% 26% 28% 28% 28% 28% 28%2 0 9% 15% 13% 17% 23% 23% 23% 24% 28% 28%
1 1 -18% 2% -1% 35% 45% 47% 50% 44% 30% 28%1 2 -34% 0% 9% 48% 56% 59% 51% 28% 29% 30%1 3 -14% 4% 28% 48% 59% 34% 28% 29% 30% 31%
2 1 1% -10% 19% 45% 45% 42% 33% 28% 28% 28%2 2 -34% -7% -2% 31% 54% 54% 51% 37% 28% 28%2 3 -34% -7% -2% 23% 28% 52% 51% 34% 27% 28%
Family Composition Income as a Percent of FPLAdults Kids 75% 100% 125% 150% 175% 200% 225% 250% 275% 300%
1 0 11% 28% 32% 23% 26% 28% 28% 28% 28% 28%2 0 9% 15% 13% 17% 23% 23% 23% 24% 28% 28%
1 1 -18% 2% -1% 35% 45% 47% 50% 44% 30% 28%1 2 -34% 0% 9% 48% 56% 59% 51% 28% 29% 30%1 3 -14% 4% 28% 48% 59% 34% 28% 29% 30% 31%
2 1 1% -10% 19% 45% 45% 42% 33% 28% 28% 28%2 2 -34% -7% -2% 31% 54% 54% 51% 37% 28% 28%2 3 -34% -7% -2% 23% 28% 52% 51% 34% 27% 28%
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Lower-Income Families Can Face Surprisingly High Marginal Income Tax Rates
Lower-Income Families Can Face Surprisingly High Marginal Income Tax Rates
But…
Marginal tax rates vary tremendously by income and family type.
Marginal tax rates can be negative for families with children at incomes below 125 percent of the federal poverty level (FPL). (Participation in a Section 125 plan is always voluntary.)
But…
Marginal tax rates vary tremendously by income and family type.
Marginal tax rates can be negative for families with children at incomes below 125 percent of the federal poverty level (FPL). (Participation in a Section 125 plan is always voluntary.)
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State Tax Expenditure Leverages Substantial Federal Funds
State Tax Expenditure Leverages Substantial Federal Funds
Single Parent, 2 ChildrenPurchasing a Family Policy
Employee Premium Share for a Single Policy:
$ 248
Federal Income Tax Savings
@ 32% $ 79
FICA or Payroll Tax Savings
@ 7.7% $ 19
State Income Tax Savings
@ 11% $ 26
Net Cost of Coverage After Tax Savings:
$ 124
Percentage Savings 50%
Percent of Savings From Federal Sources
79%
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Employers Also Benefit from Section 125 Plans
Employers Also Benefit from Section 125 Plans
When payroll is lower by the amount of the employee share of health premiums, the employer pays less in FICA taxes
Some states assess other payroll taxes which may be lower
When payroll is lower by the amount of the employee share of health premiums, the employer pays less in FICA taxes
Some states assess other payroll taxes which may be lower
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Section 125 Policy Impact: MPR Estimates for MinnesotaSection 125 Policy Impact:
MPR Estimates for Minnesota
For Minnesota, MPR estimated the impact of a “stand-alone” mandatory Section 125 policy for employers with 10 or more employees. We found:
For Minnesota, MPR estimated the impact of a “stand-alone” mandatory Section 125 policy for employers with 10 or more employees. We found:
• Policy reduced the number of uninsured by 12 percent• Adults comprise the majority of those newly covered• The newly covered are split somewhat evenly by
under/over 275 percent of FPL• Three-fourths of the newly covered enrolled in group
coverage (the remainder enrolled in nongroup coverage)
• Policy reduced the number of uninsured by 12 percent• Adults comprise the majority of those newly covered• The newly covered are split somewhat evenly by
under/over 275 percent of FPL• Three-fourths of the newly covered enrolled in group
coverage (the remainder enrolled in nongroup coverage)
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Conditions Necessary to Benefit from a Newly Available Section 125
Conditions Necessary to Benefit from a Newly Available Section 125
There is a wage earner in the family Wage earner has access to coverage and a
nonzero premium contribution but is currently unable to purchase on a pretax basis
Family faces a federal or state tax liability that could be decreased (or a refund that could be increased)
Tax savings are nontrivial Special case: those eligible for an EITC refund
must be able to “front” the premium amounts until taxes are filed
There is a wage earner in the family Wage earner has access to coverage and a
nonzero premium contribution but is currently unable to purchase on a pretax basis
Family faces a federal or state tax liability that could be decreased (or a refund that could be increased)
Tax savings are nontrivial Special case: those eligible for an EITC refund
must be able to “front” the premium amounts until taxes are filed
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Contact InformationContact Information
Lynn QuincyMPR
Lynn QuincyMPR