1. UNDERSTANDING THE POLICY IMPACT OF SECTION 125 PLANS
Lynn Quincy
Mathematica Policy Research, Inc. (MPR)
June 20, 2008

2. Boston’s Unique Geographic Setting
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Boston’s Unique Geographic Setting
Anthony

3. 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)

4. Potential Beneficiaries from a Section 125 Policy
Employee Premium Contribution Not Sheltered by Section 125
Employee (or connection to an employee)
Employee Benefits from New Tax Savings for Coverage
Employee Eligible for Employer’s Coverage
All Residents
No Workforce Connection/Self-Employed
Employer Doesn’t Offer Coverage
Not Eligible for Employer’s Coverage
Zero Employee Premium Contribution
Has a Section 125 plan
Zero Tax Liability/ Trivial Savings

5. 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.

6. Percent of All Uninsured Employees (National, 2005)
Only 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%
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 Unpublished estimates based on the February 2005 Contingent Work Supplement of the Current Population Survey (CPS) and the March 2005 Annual Social and Economic Supplement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.

7. Percent of Enrolled Employees with Zero Health Insurance Contribution
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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
Firm Size
Single Coverage
Family Coverage
2–9 workers
67%
59%
10–24 workers
49%
33%
25–99 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).
Anthony

8. Section 125 Plans Are Less Prevalent in Smaller Firms
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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)
2–9 workers
65%
10–24 workers
50%
25–99 workers
30%
Source: Agency for Healthcare Research and Quality. Unpublished National MEPS-IC Data for 2004 (Private-Sector Employees).
Anthony

9. 81582 Mathematica
The Potential Savings Depends on One’s Implicit Marginal Income Tax Rate
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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
Anthony

10. Federal Tax Bracket Rates
Illustration for a single parent with one child:

11. Federal Tax Bracket Rates vs. Implicit Marginal Income Tax Rates
Illustration for a single parent with one child:

12. 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
These tax code features cause implicit marginal income tax rates to diverge from federal income tax bracket rates.

13. The Value of the EITC by Family Type (2008)
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The Value of the EITC by Family Type (2008)
Note: Married filers are allowed higher maximum earnings than unmarried filers.
Anthony

14. Potential Marginal Tax Rates Facing a Single Parent with Two Children
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).

15. Overall Marginal Income Tax Rates Vary by Family Composition*
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Overall Marginal Income Tax Rates Vary by Family Composition*
Family Composition
Income as a Percent of FPL
Adults
Kids
75%
100%
125%
150%
175%
200%
225%
250%
275%
300% 1
11%
28%
32%
23%
26% 2 9%
15%
13%
17%
24%
-18% 2%
-1%
35%
45%
47%
50%
44%
30%
-34% 0%
48%
56%
59%
51%
29% 3
-14% 4%
34%
31% 1%
-10%
19%
42%
33%
-7%
-2%
54%
37%
52%
27%
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).
Anthony

16. 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.)

17. State Tax Expenditure Leverages Substantial Federal Funds
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State Tax Expenditure Leverages Substantial Federal Funds
Anthony

18. Employers Also Benefit from Section 125 Plans
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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
Anthony

19. Section 125 Policy Impact: MPR Estimates for Minnesota
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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)
Anthony

20. 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

21. Lynn Quincy MPR lquincy@mathematica-mpr.com 202-264-3449
Contact Information
Lynn Quincy
MPR