UNDERSTANDING THE POLICY IMPACT OF SECTION 125 PLANS

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UNDERSTANDING THE POLICY IMPACT OF SECTION 125
PLANS

• Lynn Quincy
• Mathematica Policy Research, Inc. (MPR)
• June 20, 2008

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Bostons Unique Geographic Setting
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Key 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)

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Potential Beneficiaries from a Section 125 Policy
Employee Premium Contribution Not Sheltered by
Section 125
Employee Benefits from New Tax Savings for
Coverage
Employee (or connection to an employee)
Employee Eligible for Employers Coverage
All Residents
No Workforce Connection/Self-Employed
Zero Tax Liability/ Trivial Savings
Employer Doesnt Offer Coverage
Not Eligible for Employers Coverage
Zero Employee Premium Contribution
Has a Section 125 plan
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Among the Uninsured, 76 Percent Have a Wage
Earner in the Family
Work Status Percent 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 Employers 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Unpublished estimates based on the February 2005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
Percent of Enrolled Employees with Zero Health Insurance Contribution Percent of Enrolled Employees with Zero Health Insurance Contribution
Firm Size Single Coverage Family Coverage
29 workers 67 59
1024 workers 49 33
2599 workers 37 16
Source Agency for Healthcare Research and
Quality. National Medical Expenditure Panel
Survey-Insurance Component (MEPS-IC) Data for
2005 (Private-Sector Employees).
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Section 125 Plans Are Less Prevalent in Smaller
Firms
Firm Size Percent of Employees in Offering Firms Without a Section 125 Plan (National)
29 workers 65
1024 workers 50
2599 workers 30
Source Agency for Healthcare Research and
Quality. Unpublished National MEPS-IC Data for
2004 (Private-Sector Employees).
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The Potential Savings Depends on Ones 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

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Federal Tax Bracket Rates
Illustration for a single parent with one child
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Federal Tax Bracket Rates vs. Implicit Marginal
Income Tax Rates
Illustration for a single parent with one child
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Tax Code Features Designed to Assist Lower-Income
Taxpayers

• Earned Income Tax Credit (EITC)slides with
  income and is fully refundable
• Child Tax Creditpartially refundable
• Dependent Care Tax Creditnot 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.

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The Value of the EITC by Family Type (2008)
Note Married filers are allowed higher maximum
earnings than unmarried filers.
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Potential Marginal Tax Rates Facing a Single
Parent with Two Children(Negative rates not
displayed)
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
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).
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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.)

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State Tax Expenditure Leverages Substantial
Federal Funds
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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

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Section 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

• 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

• 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 Information

• Lynn Quincy
• MPR
• lquincy_at_mathematica-mpr.com
• 202-264-3449