• There are three types of tax treatments for employee benefits: tax exemption, tax deferral, and other preferential treatment.
• Tax-exempt treatment in the tax code means that the benefit is not considered taxable income to the individual. Examples of employee benefits that receive this type of tax treatment are health insurance, educational assistance, legal assistance, child-care, discounts, flexible spending accounts, parking, cafeteria facility, and meals. The largest of these is health insurance. According to the President's 1999 budget, the tax exemption for employment-based health insurance will cost the federal government $437.7 billion from 1999 through 2003. This is tax revenue the federal government will not recoup at some later point.
• Tax-deferred treatment means that the employee is not immediately taxed on the contributions the employer and/or the employee makes to the plan or the earnings on plan assets as they accumulate, but they will be taxed when the benefit is paid out to the employee. Examples of employee benefits that receive this type of tax treatment are Keogh plans, defined benefit pension plans, defined contribution plans such as 401(k)s, and individual retirement accounts (IRAs). According to the President's 1999 budget, the tax deferral for employment-based retirement income plans will cost the federal government $365.9 billion from 1999 through 2003. When adding in IRAs and Keoghs, the tax revenue loss estimate is $443.7 billion for 1999-2003.
• The revenue loss for pension contributions and earnings differs from health insurance. The tax revenue loss estimate from pensions is actually a deferral of taxation. At some point in the future, when the individual starts drawing a benefit from the plan, the federal government will receive some tax revenue from the benefit payment. By contrast, employer-paid health insurance is exempt from federal taxation, and the government will not recapture any of the payments.
• Other benefits have limits and/or provisions placed on the tax treatment of the benefits. For example, employer payments for life insurance premiums are tax-exempt to the employee up to a benefit of $50,000; any premium amount for a benefit greater than $50,000 is taxable income to the employee. The benefit paid out from a life insurance policy is not taxable income to the beneficiary. According to the President's 1999 budget, the tax exemption for employment-based life insurance will cost the federal government $11.2 billion from 1999 through 2003.

For more information, contact Ken McDonnell, (202) 775-6342, or see EBRI's Web site at www.ebri.org.

Source: EBRI Databook on Employee Benefits, fourth edition, 1997; and Executive Office of the President, Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 1999, January 1998.

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