15 I0 II 14 91233 32 31 53725 4 1326 18 21 220 _ummary of _a£ement of Dallas L. gallsbury 629 17 1 23 24 19 32067 822 28 EBRI President, Employee Benefit Research Institute i. J 3 TABLE TABLES 5 Section APPENDIX TABLE TABLE CONTENTS 31 I PaKe During a time when there are no apparent limits on direct federal I0 Deborah J. Chollet, Employer-Provided TABLE 7 Health Benefits: Coverage, INTRODUCTION NOTES constitute An THEExcise TAX REFORM the Tax maj onMOVEMENT oBenefits r form of savings for more than half of all persons with government contributions EliminatinK programs Employer for retirement is Deductions now made and forthrough health Employeeprograms, employer-sponsored Benefits including plans. Social Security Fewer presumably are this average In atamount age short, price 30 hawould ve(calculations whatever ofanproviding beincentive subject the based criterion employee to to onpoffer ayroll table used benefits more 9). tax, for compens Similarly, determining to income various ation tax, thethe employees inor underlying cash cost both. than ofmay Under cost each in be plans--account w whheal omarginal confronted at rk tTo hcan forcinsur eavoid a.nd taxwith ance Census sh rates. for ould the representatives were nearly dbeaadded ta They estimated prov two-thirds shided o also wtaxtha of prefer faliability, t otralmost of o$17 bver oth total .individual 6 the every so billion cial benefit-related many lasspecial tand decision-making de in low- ca ec1984 de, oninterest omi . and c1the 3taxre moderate-income This parexpenditures that sopo ons torti .may benefits employer onEBRI beofa employee benefits by an employer buys more than would the same dollar spent by expenditures, Provisions andorPolicy on "tax Issues, incentives," p. I00. analysis For a discussion may not need of to taxing focusemployer on the • Tax reform is an appealing concept that attracts broad based support 7 NOTES ...................... 30 Number How Title Much of Pension-Related Tax Deferrals is PaKe diversity contributions Section of employee to healthbenefits. insurance, During see aalsotime"Revising of apparent PaKe the Federal limitations, Tax when discussed Percentin of theFull-Time context of Employees eliminating Particabuse. ipating My full statement, Savings,BENEFIT PensionCOSTCover FACTORS age, and FOR Income, EMPLOYEES1983 For legislative policy assessment purposes benefits can be classified into at than benefit uniform, and MMedicare, Some 3r. percent contributions. Chairman, of thethese account underlying of Idistributional pension am for please 85 cost and dpercent tohealth ofproblems appbenefits ear of insurance employer befcould orediffers this be payments participants avoided Cowidely mmittee forinaccording benefits. major tearn oday more ttax o to reform than the pension employee's alternative 1of providing Tax "Oucoverage. r ref Coocost mrm proposals, plhealth exisofMore aTax benefits, perenni insurance than the Lawsa:lcap 40if to Ca per for could pi nit ccent women Th otargeted fey cover dis ofBcof ethe ussi contributions child-bearing Ref those olna o.rbor med?" individuals At force least U.S. for reported ageaall News dis likely ozen benefits, higher no and majo to savings rWorld have than tax or projected undert single- relatively individuals an or government aRindividual. kes at adult herintolow the than would households provide decisions price President's capp In choose ing for the thewith made society studies benefits toabsence 1985 on do children the budget. without to andas worker's of pay the in a c tax for health reased share statis abehalf. incentives tsystem iof cand by s compensation, one-third. other thof In at health this encouraging will typesview, allow insurance Over ofitIndividual insurance. informed would hemployer alf that ofbe from the 106 provisions in the code that lead to tax expenditures, and whose however, Treatment when of Employer prioritiesContributions mustLost be to decided the to Health Tre upon, asury? Insurance: careful analysis A Continuing is required Debate,"of and a book nowinbeing Selected published Employeeby Benefit EBRI titled Programs, Retirement Security and least nine categories: AT VARIOUS AGES Report, July 30, 1984. Statement On each EBRI employee Issue Major I Brief Taxbenefit: Reform no. Percent 21,why References August, of each Full-Time employee 1983. ........... Employees benefit exists. 31 Tax Policy, discuss Medium and the Large variousEstablishments, tax reform alternatives. 1983 a Employees Employees Average Annual in $50,000. come in 1983 (table 3). This group's average income was $9,651, just under Value-Added dis proposals cuss Retirement major that Taxtax Plans. would reforminclude Employer optionsnonpension and contributions consequen employee ces forfor benefits retirement employeein benefits. plans the taxtotal base 9.0 by possible the reform the Retirement employee's cost highest pro to of posals age Accounts impose insuring incidence under were anall (IRAs) young, of excise introdu major claims, single are tax cedbenefits. on preferable itin men. all would thetax-favored InBenefits 97 also short, tto h target Congress. either the for benefits, average younger those Social More most whatever price employees Security tax likely ofreform their most are to or priority married may Research pensions, Employer pay women decisions asconducted welfare much pensions areasto benefits, now by $90 account be the in billion madethe Employee and for based in labor so-called nearly benefits upon Benefit fora50 cssessment e."fringe" in percent Research S1984 ingle-adult of and of benefits do Institute benefit-related cserves umented andcould more two-earner (EBRI) costs than alland tax and 60 be elimination provision, could the hurt administrative the pocketbooks structures of thesethat interest make groups. group One purchases group Taxes • 0_ ........ INTRODUCTION Particip ................... ating in Selected Employee 5 Medical Cost Defined-Benefit Life Insurance SavingsI. legally required Covered U_O_ benefits b _00_ (including Not Coveredemployer contributions Income to 2 This total includes Social Security contributions; unemployment Tax Reform Method IITaken For Used Appendix fr aomdiscussion a Ist-aBenefit tement What ofAreoPrograms employer n Employee EMPLOYEEefforts Benefits? BENEFITS Taxes to AND ..... reduce Lost ECONOMIC health 32 SECURITY Deferred care 9costs, by Dalla see s Status EMPLOYEE •a Proposals BENEFITS (Millions) AND set THE forth FactoTAX r(Percent) are as CODE characterized % Co (Millions)(Percent) st Factoby r single Cwords: ost(Dollars) FactoFlat, r as FAST, (Percent) Social Security, Medicare, unemployment insurance and workers' half eliminating the averaemployer ge incometaxofdeductions those reporting for them. some The assetvalue-added income. Almost tax could halfhave of househ benefits. percent Emplo insur lessayonee lds ccostly e; benefits of hworkmen's ave because compensation. differen are cathese ompens key t ation; benefi element employees Federal, t priv ofneeds athe senerally te nstate apen from tion's sionshave thand economic ose andlower of profit-sharing local se the health curity and tradition insurance private plans; al need proposals level. employee For insurance. any This benefits were one wasintrodu employer, Since proposed is much cedthose value higher by in the the most added than Treasury 98th likely is the Congress. the cost to todifference become this of S providing Committee omesick, legisl between disabled, benefits at inive receipts Testimony propos to or some from adie ls of expenditures. percent employer cost-effective capped others separately. in of pensions dicathe tes There maypopulation. asnever this aat means wide have income of disagreement, been Inproviding de 1984, developed. terminesbyforhowever, comparison, whe retirement. ther about or federal nothe t pe proper ospendin_ ple way without for to will probably not be represented in these discussions, however. The average L. Salisbury THE GOALbefore S OF EMPLOYEE the United BENEFITS States .......... Senate Finance Committee 6 Subcommittee on "Controlling the Cost of Health Care: Recent Trends in Employee Health Plan consumption, etc. of Cost Yet,atfew onasthe % of street Cost fully %understand of Cost atwhat is Employee compensation Benefit insurance); Program Percent of Employees federal, state and local government employee retirement plans; group health Before the United States Senate 2 Distribution of Employees with Pensions Taxation Design," aEBRI nd Debt IssueManagement Brief No. he23, aring October, on Employee 1983. Fringe Benefits, July 26, 27, involved in obtaining "reform" and "simplification." I hypothesize the Aindividuals stru this ge group The cGture, roup effect, taxreporting and code anddepending have much is abeen little lower major Age at on 45for -4 influence the or how 9 others. center noit sat awas in vings of Agthe edesigned, tax45growth in -4 reform c 9ome a of were and disAemployee cge ussions. some covered 45-49versions bbenefits. by In aemplo re ofcent One ythe er claims, employer-sponsored insurance,disability group liferates, retirement insurance; and mortality plans and supplement arates. ccount al The for unempadjustments loyment 5.3 percent benefits. thatofwould total be measure would June call salesSuch on 1983. and face these the anamounts This Treasury the approach costs. would highest paid to could Tax-expenditure avoid for sttax udyraise materials, creating ma liability, joritstax ameasures own supplies, target reform, taxing set benefit of used while and employer problems. services in others level thecontributions for cFor federal ontain purchased employers example, detailed budget from for an to single-earner, Medicare working employer-provided The Alternative Liberals press person, is expected rele support two-p atreatments se who he arent aon lth broadening takes tothis total cfamily. over for hearing forage $62.2 the granted employee pur M tax stated: abillion ncyhabase se the employers benefits as he dollars; suacalth, h way cthat overage now pension, of federal-state eliminating provide have themselves. been andchild- insurance spending proposed tax-code careIf Committee on Finance and 30,Reti 1984. rement Plans ................. 7 and Health Coverage by Earnings 9 TreasuryPrivate that Method few pension workersplawho n favor "tax reform" understand 82 83% that many 0% proposals No savings 2. discretionary18.2benefits19.0 that are20.6 fully taxable 21.5 (primarily, $ 9,661 40.5 payment 14 12 In Health Health 1981, insurance Insuran the lcaetest................. year for which complete data are7 available, Social would treat non-cash compensation as taxable income. Would they be Some Undersavings 30 forctime not36.9 worked); 80.0 38.4 20.3 23.0 21.1 1719,209 .0 59.5 effect interview results on tax fromreform, provisions John Chapoton, that allow then someAssist employer ant Se contributions cretary of theand some pensions, reach. other required compensation. consumption firms. An however would excise tax.vary Total Contributions would Pensions tax, across value provide however, benefits. added thus for for this. would cfor Soci onstituted athe lhave Security entire the a net same economy retirement inceffect rease is in on equal andbenefits sadisability vings to total for as benefits amendments Opti employer employers include: 3 Unpublished ons for would with did of Alternative the not aimpose EBRI mature, Internal provide estimate. taxTax long-tenure liability he Revenue Treatment alth coverage, Code. inwork inverse President force most proportion could low-in Reagan cbe ometo put has ability workers atalso a competitive to asked would pay.that not process benefits, for provisions "Our Medicaid are interest ascalculated perceived well is asas estimated ato on flexible Committee benefit a cash-flow atbenefit primarily $37.8 is or in cross-sectional pl building billion. athe ns rich. thata tax allow Together, They basis, system single-p alsowith that prefer these arent the will public direct taxes abe nd benefits provided in his or her compensation package, almost surely does not Hearing on Tax Reform Lifetime Method: SecurityOther 3 OldRisks Age, Sa................... Sur vings, vivors', Pensionand Cover Disability age, and benefits Income were 7 $138.6II billion,, Total less employee interested 55.1in "tax57.4 reform" if40.9 they did? 96 42.6Action 15,338 may be I00.0 30-34 80.0 33.0 17.0 supported by a broad consensus so that the goals of equity and efficient 9 September Ii, 1984 Nominal dollars a 14 86 while private-sector and federal, state, and local government retirement plan Fringe appropriate, dependents Benefits but ................. an effort should be made 93 to assure clear 7 public these 35-39 3.workers. discretionary As the benefits 80.0Committee that insure press 48.0 the release employee noted, 33 against .0 assessments financial of employee 4Treasury benefits For fcontributions uaccount for rtherTax detail Policy for the toon was remaining finance these asked estim benefits to3.7define ates, percent. onbro see aadening tSophie ax-preferred the M. tax Korcbasis. bzayse. k, Retirement HeAnother Pensions. Faced with Actuarial such a provision, methods usedemployers in defined-benefit who now offer pensionbenefits plans dowould not disadvantage eliminating the wages, Another If Treasury employer salaries, potential employer compared department contributions interest, with deductions effect analyze an rents, for of employer basic benefits taxing for and tax profits. benefit with employee reform were a younger contributions. inLike coptions luded benefits the work in and current force, the toprepare the tEmployers axeven income individual base, a if report tax, they now the deferred two-earner programs pur government think crevenue-raising hase o ofIncluding byemployee finance priv families current expenditures ate benefit benefits health will pension he toalth tailor not contributions over care as plan insur be atheir undermined the atax services participants nce.tax loophole. benefits insubsidies in Since for the the offset pemployee's ac only kye most ages athat rsabout against ahead." to people might adjusted meet 18thepercent arise their covered taxes grossspe from paid of income; by cifithe by tax can _ . _.._° benefits Real dollars 4were b $73.2Percent billion.Distribution of Participa28 tion 72 Life insurance 96 understanding risks and are if there tax is exempt to be (including confidence employer in the new contributions system. to 40-44 80.0 69.0 50.0 Security and Tax Policy (Washington, D.C.: EBRI, forthcoming), Chapter IV. Discounted for interest: in Retirement c Programs, by Earnings II WHO RECEIVES EMPLOYER SPONSORED 45-49 health, life, and I00.0disability insurance I00.0 plans); I00.0 SOURCE: Long-term Sophie disability M. Korczyk, insurance Retirement Security 45 and Tax Policy (Washington, major responded: Health impact Insurance. stems from Employer the inflation-driven contributions increases for health ininsurance real taxaccount rates of for pension-related the offering probably value-added benefits cut them tatax x poli would back could ciesand cut include should those themor consider back, who exclude dowhile the not employee net those would incbenefits rewithout probably ase andinbenefits redistribution not the tax institute base. would current benefits might by could generally incentives. December be bebeneficiaries. in to treated allocate 1984. increase the two in firms contributions the the Measured asame ttr were activeness waidentical. y th this or at of the projected way, flexible Furthermore, Intern about al benefits compensation Revenue $0.83 a capto out Code could or individuals, now ofcafeteria actevery treats as a needs. population. employer Our The o Cost Eliminating research Congress, hedaalth ta onindic plan these employer however, atesabenefits re deductions this members at charged is thenotpresent of forcurrentl with benefit low- taking tax y and av contributions; tre ailable. middle-in a atment perspective come of retirement, fon amilies, these of 13atBudKet pension Sickness EMPLOYEE ofrate the andBENEFITS? U.S. accident Government, ............... insuranceFiscal Year 1985, 49 40 Special8 Analysis 60 G. • Revisions in the tax treatment of employee benefits considered in the 50-54 D.C.: Employee 112.5 Benefit Research 146.0 Institute, forthcoming. 170.0 5 EBRI calculations based on U.S Congress, Congressional Budget Office, -- g 5 How Much of Pension-Related Tax at federal rate 36 64 context of major tax reform should include several considerations: of we 55-59 al4. th discretionary that results frbenefits 125.0 om expanded thatpension help216.0 the cover employee age. meet250.0 special needs and the Federal last "A lot Sales 20 of years. Tax incomeWhile that statutory taxpayers tax receive ratestodhave ay goes been unt faalling xed--emplo at yer most income WHO them. determining 4.4RECEI percent VES Some EMPLOYER them employers of total instead SPONSORED who compensation. for offer an EMPLOYEE employee benefitsOf BENEFITS? might cohort this eliminate total, based on 3.5them aggregate percent or continue forecasts of total to tax-deferred probably plans. empl target Revisin employer-provided EMPLOYEE oyer-paid At Kthat the Under BENEFITS not theheart dollar firms Individu institute flexible lifeIN of appears he with al ainsurance MAJOR lth the compensation them. Income less-generous maTAX to benefits jorbeREFORM premiums The Tax tax lost(W plans, reform only prob PROPOSALS to ashington, benefit athe fbly odifference r employees movement Treasury. cover substantially plans D. age C.:is between would can in U.S.Government the elect exfeel cess widespread rthe aise various compelled two of raPrinting $tes 5options 0levels belief ,000.of to health,In o aCapping any nd other revisions theriskshare related of othe f total benefits tax compensation treatment meets this of that criterion. employee can bebenefits, The provided currentseveral in tax the issues that transcends the concerns of special interest groups. In Dallas L. Salisbury* 14 Deborah First J. - distributional Chollet, Deferrals "Assuring isimpact Lost to-Economic the the middle-income Treasury? Security worker for Workers: will14be He the alth, alndividuals 60-64EmployerarePensions classified 160.0 ................ as having 323.0 some savings or no 383.0 8 savings based on are tax exempt (including employer contributions to child care and contributions to pension plans, health insurance, free parking, government Office, 1983), Table 9. President Disability, Health and InsurLife ance Insurance ................. Benefits," Statement beforeI0 the United States major SOURCE:victim U.S. of Department any such changes. of Labor, Second Bureau - progressivity of Labor desired Statistics, - whether 65-6 Not9 all or legal re nottirement plans); they reported benefi 225.0 ts any exhibit assetthecincome same income in response distribution 383.0 to thepatterns, survey levels,A federal real taxsales rates taxhavewould risen. have Inflation the _same has effect overwhelmed as some the forms taxofrate the offer of compensation pathat yments, them cohort's with fin those afull nces benefits employee future federa.... l, demographic To past yment. a produ te, celocal Others enough andandmight revenue, economic private forego theemployer-sponsored experience. flimproving at tax would their If rules of meet would that These Recent coverage While meet to the be premiums maintain in tax EBRI the taxthe under Committee reform system research, atax retheir the crates urrently his asmajor competitive criteri unfair however, bro they adatypes inwould support, and cluded ofsuggests positions. equity, of inefficient. impose. employee init that the would simplicity, If The tax such benefit an aThe lso efforts bexcise aestimates se. middle-income have balance plans. The of tax widespread such overstate and carried cost An employers economic employee taxpa ofcosts. lower the life yer considerations privThese ate form hebenefits althof tax-favored insuran should arecenow becoverage provided prominent. employee throughout abenefits; crossFirst thethe-income nonelderly distributional distribution. population. impact In medium - the particular, it is essential that major tax reform debates look beyond Employee Benefit Research Institute 6 Revenue Loss for Major Benefits and SOURCE: Senate some Fin Sophie ance treatments M.Committee, Korczyk, would Retirement be Subcommittee more regressive Security on Tax than aand tionothers. Tax and Policy Third Debt (Washington, M-anagement, "Employee Benefits in Medium and Large Firms, 1983," May I, 1984. uestions. have toAsset apply income lower includes tax rates interest, to more tydividends, pes of income rents, withandfewer royalties. 6 Alternative tax systems would require detailed judgments about the EMPLOYEE BENEFITS AND THE TAX CODE ........ 12 Hearing on D.C.Fringe : EBRI, Taxes Benefits, forthcoming). Paid July by Income 26, 27,Class and as 30, a1984. Percent transition - reform would create significant reductions in public however. Coverage treatment 5. deducdiscretionary tions. In refers ofpavrticul arious ''Itoar, public- sour benefits st cesatutory and andthat uses private-sector provisions have of in traditionally come. aimed pension Both at would en been cplans ouraging called alsoandcreate individual includes fringes some cuts enacted over this period. To stem the erosion of real income brought feels value-added defined-benefit group benefitthat health packages, hetax. orinsurance. she pension The while isdifference paying costs still The theremaining were others is bill that allocated for might a0.9 the federal institute loopholes percent among sales individuals, is of ortax the accounted increase would wealthy. be it employee for lewould vied by amount middle-income revenue-raising rates to choosing insuran catch Forcof than e those revenue aupvathe less-generous ries could worker who corporate considerations lost acc coffset hose ording will duetohealth or the be toctoontinue business the effects these theinsurance alone major individu provisions. their taxes onvictim and employers al's plan, insur theex aof nfirm aacBecause mine ge. for eany whose might cex over For such athe mple, abenefits today's ge, ex be changes. abroader mple, paying, can thepension-plan exceeded "spend" imp ataSecond then economic ctage ofthe the the 30,-a efficiency. and One large oof Imposing theestablishments, most Theyanimportant hexcise ave brotax acdconsequences overage onpublic the employer's forsupport: of major tax benefit employee reform Social contributions; proposals Security, benefits that is Medic and seek nearly are, to of Total Adjusted Gross Income Class 15 welfare and would exacerbate intergenerational tensions. Fourth - and are intended to meet employer needs and are tax exempt holders of IRA or Keogh accounts. SOURCE: Anna M. Rappaport, F.S.A. and Malcolm H. Morrison, Ph.D., The Costs formidable implementation and transition problems. These problems and issues ¢J "_ WHOaBefore BENEFITSadjusting FROM EBRI TAX Rese for arch INCinflation. ENTIRelated VES? ........ to Ma_or Tax Reform 13 simplification - taxing benefits would actually be more complex than Clncludes (including individuals employer reportingprovision negative ofasset purchase income discounts, (i.e., decreases job site in provision about To are aid tre byathe ted this for Congress in "bracket retirement detail in creep," considering elsewhere. differemployees consider tax Forreform haaably. vedisnegotiated cproposals, ussion While of59 compensation Iemployer would percent like pensions ofpto ackages pension in become contributions, employer The clear tax contributions ofsyEmplo stem that deductibles, yinis financing Kconsidered Older for or the Workers a copayments bgiven Medicare y some (Washington, retirement tocomponent where be ineffi appropriate. D. benefit Cc.: of ientthe U.S. be requires cSoci ause Senate Employers alinvestment Security aSpelower ciaare l employer's at tincentives cap. the ax the cost onSuch point he ofato lth cost aproviding eliminate system of savings insuran sale,could life cebenefits while oninsur also premiums added aanwould cvbe ealue-added life difficult worth would not insurance, beanbe tax asindividual's tostrong. regressive. is implement imposed vacationannu for atadays, While leach non-profit salary or stage employer other is or of 17 universal. Medicaid, participants progressivity implications restructure o Imposing employer Employee the will ofdesired eliminating atahave xvpensions, alue- benefits system -ahigher dded somefor incentives employer atreatments re or retirement the nnow ation aver aahealth, lnow amainst gewould incomes sbuilt ales taxpayer aybe life tax. of into more than the and would the today's regressive middle-in distax be ability code. toretirees, come change than protection worker's others. thethey tax TABLE 2 bAfter 7 adjusting Benefit for Costinflation. Factors for Employees asset values). the current system. Fifth - the potential revenue gains from taxing cafeterias, special bonuses and awards, van pools, clubs, and Committee on Aging and the Employee Benefit Research Institute, basic tax reform, see Sophie Korczyk, Retirement Security and Tax Policy 6 Books at Various Ages 22 THE benefits Clnterest TAX REFORM should rateMOVEMENT used be compared to discount ............. with additional taxes paid demands in retirement 16that could to theresult parking); pin aArti Value-Added cwhich ipants benefits foerth aor rn coming). National less have thaSales played n $20,000, Taxan increasingly 46.5 percent important of individu role. al retirement It is p provide already (Washington, rogram. some working bD. ackground C.:to reduce EBRI,on forthcoming) employee their benefit benefits, andcosts; "Bathe sic including tTax ax benefits Reform: benefits Impli they cations re in ceive, the for tax benefits. public-sector production. percent cand contribution ontributions otheraseconomic All laSince rge for employers, for employees--except as alife adecisions younger it sales and is neither tax at disabilit employee are age imposes of for often 45, ywhich those than while tax insur driven pay who liability afor ncbusiness at eas chronically one age much arecloser 60 on bprofit aor sed this the more guessed to total ontaxes. cost by retirement thetax value is wrong employee's needs nearly ofabout age. the as4 work will ecIn The treatment onomi particular, Many pay together c issues more seof cof urity, employer and these taxes toincluding meet building economic in incentives contributions retirement. a major benefit saeffects vings were component contributions aOver sfor designed that well employee their a of arise s pro the to lifetimes, vbenefits. iding in further under nation's the haz each individual's employees asocial rd economic prote approach and cnow tion. security adjusted economic atdiffer the on the yearexpenditure of retirement. side of the budget. Distribution of Employees with Pension and Health Coverage Employee Benefits," EBRI Issue Brief no. 28, March, 1984. For a wide-ranging II EMPLOYEE BENEFITS IN MAJOR TAX Deborah 6. discretionary J. Chollet, Employer-Provided "reimbursement by Earnings account" Health Benefits: benefit programs CoveraKe, that Provisions, have account (IRA) holders and 34.8 percent of those participating in Section 401(k) interesting and Other the socRisks. ial to benefits note,Employer however, theycontributions provide that (see this also Aptrend pendix finance haI). s abated unemployment In my with testimony increasing insurance, today needs. abase dis Defined cussion would contribution clearly of theoreti accelerate cal plan acnd oststhis prac dotiprocess cnot al vaissues rybut by at age. in abasi social c taxcost. reform, see Dallas by their eproduct, times The arnings, economi Of Instituting contribution as need the large it ccontributions four for would ret(c urns he aaalternatives alculations lth for nation implicitly and the insurance afor lprodu younger sales health bcatax that tivity sedoremployer tax on employee tax insur other table cor onsiderations. reformers ancaebenefits--would outlays value-added 7). can are accrue have not. for proposed, High employee tax As interest segregate awould marginal result, benefits over however, notthemselves tax the ha a vlonger evrates since aonly lue the Emplo beginning gross goals considerably. yerincome that Pensions of could their is the not pension option be efficiently cathat reerswould willpursued most repaydisrupt all through butthe $0.25 thearrangements expenditure to $0.40 of now side every used of Comprehensive Income Tax Table 4 REFORM PROPOSALS ................ 17 and •Policy Federal, been Issues legally state, (Washington, allowed local andsince private D.C.: 1978 employer-sponsored Employee which Benefit allow employees Resear retirement ch Institute, toplans have bsame life insurance cost is assumed for 65 to 69 as for 60 to 64 because it L. Salisbury, ed., Why Tax Employee Benefits? (Washington, D.C.: EBRI, 1984). 1984) account reimbursement for 5.3 accounts--funded percent Employees of total compensation. by withthe employer Employees Threeorand through one-half with salary I will discuss: emphasis is assumedon that 401(K)thesalary benefits reduction will beprogr redu ams ced that to equ are al subject cost; regul to aFICA tionstax allow and plans worker's period The fell ofgreatest compensation, in time, to this while impact income the andof group same life proposals benefit insurance. (table 4). to increment eliminate These Sectionprograms for401(k) an employer older protect plansemployee deductions inworkers partihas cular and for to tax-deferred the of same en into the these courage These employer-provided To national budget. plans effect outlays avoid basic taxpayers according dollar. asthe sales The are benefits a inequities tax elimination atax to cost cto As over levied seek would the are the age of expected th not out production. specifically pension is aoffer of t tax-f a"tax-ripoffs," would these laemployers rger vasystem avored lue arise incentives It share onofmatures, sources would benefits. if their and of are allemployees tot likely in claims. not of individu athe lthe in Any viewed cc ompens have numbers ome--capital name als tax more While alittle tion byof were levied and the flexibility this short-term taxed atpublic effect, income at gains, islower the the on for Includin5 OfAproviding all comprehensi Benefit full-time vebenefits Contributions tax emploattempts yees and in could inmedium toAdjusted taxalso aboth ndGross result laactual rgeIncome establishments, in and the imputed mostincome. 82regressive percent Many themselves, percent their of total Percent families, compensation Distribution and their finances offuture. Participation employer-sponsored This in social group contract health and Comprehensive Income Tax ............. 17 Earnings reduction--to pay expenses Pension CoveraKe, that fall1983 into "statutory Health Coverage, benefit"1983 areas a 30 percent o"reduction. If benefits are not reduced, assume costs at 65-69 7 This argument is advanced in Robert E. Hall and Alvin Rabushka, Low Tax, Total Percent Total Percent Sophie M. Korczyk, Retirement Security and Tax Policy (Washington, D.C.: EBRI, Consumption insurance. TaOf xRetirement all ................. full-time Programs, employees by Earnings, in medium1983 and17large follow a and different are taxinexempt come distribution (including health from bo care th IRAs reimbursement, and employer-sponsored child care employer are aboutattention 30 percentto health higher. careFigures cost-cont assume ainment.life insurance provided is worth for be benefits their financed example--and o dependents Thewould goprimarily als probably tax-favored of against employee outbe economic ofon uses benefits; employer those ofuncert inemployees contributions. come, ainty,suchwho and as are death. housing. not Payments now covered. for these Most are aspoint fan than however, in Simple undamental come covered "aaver busive the of aTge levels ax, on tax sale by cost Fl either principle tax-shelters," cap ataor andTax pension of to atemployer the choose insur (New different behind aadded plan nce, York: among or and (table tax flexible Mstages individual Treasury cGr benefits are apa w-Hill yment I). of farregul compens production behavior Sand mall of Company, too ations to alow-in tion firms, significant choose regarding c1983), ome would prescribe plans, for the workers p. be numerous level the 90. neutral to many theprovision be would ofamount employers economi coverage between termed becof ofa levels redistribution budget comprehensi Most of goals vpension-plan plans e could income of do not tax leadtax participants determine liability to proposals much higher the andand costs include benefit retirees costs of for in employee coverage. will tax the able differ federal benefits Third income less govem_ment on -not than transition theonly they basis incash do the of - related forthcoming), Vatax lue-Added benefits Chapter Taxincludes IV. ................. the majority of the U.S. labor18 force. establishments, "_ 82oopercent (in millions) are covered by_ a pension (inEmillions) plan. 96 percent reimbursement, etc.); one times pay. Pension Federal Sales Tax ................ 18 of this group of employees are covered by health and by life insurance benefits employees Employeetotal without benefits 2.4 benefit percent are also of coverage total now compensation. playing tend to abemajor in smaller role infirms tax and policy. at lower As plans C8pension In .Ma Pension o jsmaller or More Whocosts tax reth costs ceives apl nfor reform ans, half in these emplo a the ofproposals defined-benefit yee employees Sceost ction benefits; of 401(k) offer providing dependplan plan ways on he the may parti alth toplans's therefore cres ip insur atnts ructure--no adesign. nceebe arnfor 14between t times thelower--the marginal as $20,000 high wsponsoring premiums lto employee aages rger be provided and shabenefits. to rethese benefits beof under recognized their plansas major income nowa as price form benefits. than income of theatcompens high-cost for higher Establishing individuals ation incinsurance omeandalevels. ontax thus the options cap, would basis EBRI however, atnot tof abul less age ations change would than (in reasons, "fringes." today. would wages the char but create As acteristics doaalso Further, result, not significant allsponsor or of consider in most the thereductions aplans tion future, individual employeraof spension-related contributions in uniforml the forpublic appropriate whom y. protection welfare In for taxtax 1981 employee expenditures and treatment isthe would being benefits President's exacerb of measured provided. these a onte a future. When compared with the costs of assuring economic security through Dallas The plans. L.distribution Salisbury, Retirement ed., of benefit-related benefit Why Tax payments Employee tax exceed Benefits? benefits $80 billion (Washington, amongforincome a D.C.: $50 groups EBRI, Less than $20,000 27.9 59.0 83.7 74.3 7. discretionary Earnings benefits thatPlprovide an retirement 401(k) income IRA as a stream of employee is based on the average costs of insuring the insured population of o ._ __oo ._ • _ 4 1984) ISSUES IN IMPLEMENTATION AND billion tax expenditure, with benefits growing rapidly to complement $20,000 topayments $49,999 and for which18.1taxes are 38.0 deferred 26.2 until benefits 23.2 are and directed ISSUES $50,000, INinIMPLEMENTATION cthe ompared Congressional with AND under TRANSITION Budget 50 percent Act for of both 1974, IRAs theand President's employer-sponsored annual nation's income current that for FrinKe oan community. Who levels. bemployee asis. tax re Benefits. cei bill. vesAsIn atthe small larger Ma agejRecent tor ax60 and in pl tax as acentives ns, new debates reform atfirms the agefor cover proposals ost 30 grow these of (calculations tax and insuring progr legislation become such ams; asthe profitable, and based the marginal have fla ontfocused table tax, they employee the are 7). on employer the point of five-year davalue taupprodu and the of brackets) cemployee ed the difference claims by the and preferences. expected Cin ongressional coverage the tax under levels. treatment Budget them toThe Office of maintain Treasury insurance (CBO) a reasonable indi tables provided cate use that under risk blended under pool the Commission benefits using direct intergenerational These thepricing federal should Treasury's on Pension be spending, structures clearly tensions. approach Politax c sep y are awill rFourth incentives c ated oncre luded be asonable from much - simplification th deb for closer at ates from employee thisover toemployer's clifetime ould "consumption benefits - taxing onlyestimates. viewpoint be may benefits cfringes." hanged turn out would given byto reflects TRANSITION the distribution ................... of coverage and participation. 18In 1981, employees $50,000 Social and over $ ISecurity. to $19,999Benefit payments 1.459.0 approach 34.8 2.9 $80 billion 46.5 .o 2.7 for a $17 2.4 received (including employer contributions to defined benefit is based on the average cost of insuring the population represented by that 0 ,o_ o_ . _ ._ Shorter Papers billion $20,000 tax expenditure. to $49,999 38.0 55.7 45.4 pension plans and to defined contribution plans which require budget CONCLUSIONS or both.submission Famil ANDy POLICY st toatus Congress IMPLICATIONS could blists e usedeach to pye redi ar's ct tax health expendit insuran ures. ce claims These under are plans THE more other employer's GOALS .o likely benefits TheOF cEMPLOYEE work onsequen toinforce. incur ces addition BENEFITS ofthe While altern tofinancial athe tive thesemajor mtwo ajcommitment orormethods tax traditional reform would involved propos categories. bealslikely in for establishing emplo toTheyyield eeTax of the Attributing "fast" employer's actuarial participants This Administr tax, cassumptions ommittee auspices ation's antheunder average consump compared expressed propos each fortpension ion almen option. with to ta aan ndxcontribution ,ca the interest pwomen Ifand the treatment employees the baamount sed ingross to on implement of were ofeach the insurance he income being alth proportions aemployee tioninsur taxed tax, purchased and ancwould on would e of transition the premiums men by create value lower athe nd mandating actu be Consumption current From aallybargain. the tax plans be Tax standpoint more treatment, or For complex by offering example, of since long thanthe tterm athe according x tot credits social current al cost . to and As system. ofDepartment economic firms insuring grow, Finally, policy, the ofhowever, employer's Commerce the however, potential theydata, the work do earning Total abetween / $15,000 and 47.4 $50,000 received I00.0 71.8 112.6 percent I00.0 of all Including $50,000 Benefit and over Contributions 2.9 in 9.5 8.0 payment in the form of an annuity); different insurance costs for any given employee, under either method the cost "Basic Tax Reform: Implications for Employee Benefits," EBRI Issue Brief no. • The average taxpayer demanding tax reform does not see employee Health Insurance Adjusted Gross Income ............. 19 benefits plans thatperceived offer maternity to flow or to dependents' certain taxpayers benefits.as a result of the statutory Reform of insuring benefits Act ofth1984 atand,emplo codified therefore, yee does theeconomi treatment not c represent securit of benefits y. the cost like ofemployee that employee's discounts difference marginal employer-based women of issues serious employee individual employer Basic inininequities. the tax benefit between tax basi directly. group contributions, rates reform cpensions ttax plans. aof xand appeals employees exemption Older reform. While now expand Removing provide however, employees persons towith These and the a broad over the tax coverage income without problems such would deferral half tax constituency. subsidies tax deductions over be as pension could base much must undercredited, $50,000 . be retirement always would coverage These for Current formid in employee probably be value. proposals able, noted: can while and income projected establish abenefits have nd younger as these would even the to arevenue dd th force atEmployer retirement The anisgains employee consumption not contributions affected from programs. cantaxing tax recby eive would benefits the Among fortax-free, atax llocation allemployees ashould ll public those income of beemployer, in with these compared that allthe costs iseslowest twith private spent, ablishments among additional inexcluding cemployer, omes the members who would demands swere aving and paof y _o2._ _._ 28, March, 1984. health-relatedPensions Number tax ofpreferences, .................. workers 64.5 percent of all 20 pension-related tax *The views benefits expressed as tax in abuse. this Rather, statementboth areemployers solely those and employees of DallasseeSalisbury these 8. discretionary benefits that provide for the deferral of salary until expected claims. 12 Health Insurance .............. 20 SOURCE: treatment and should benefits EBRI of not certain (in tabulations be asmillions) part attributed sources ofofthe orU.S. to uses social the Census of 47.4 contract Employee income. Bureauthat Benefit 1.9Current defines Research 16.7Population how, with Institute, the Survey,its Of alltermination full-time of employees employment, in medium generally and pay large benefits establishments, as a lump sum, 96 per and cent and The subsidized Employee Benefit cafeterias. ResearcThese h Institute benefits(EBRI) are watoo s formed small inas1978a as share a of Effe would cts probably of Taxin_makeBenefits this commitment uneconomical. more predi stop, change IRAs employees from To cthan on ting since taxable the achieve a would tax-preferred six distribution them they times income an beinvolves would overcredited. equit as auntil mu ble of mean basis, chsome tax tax that distribution the liabilit those unas cTo ert low-risk funds aathe without inty per y camong extent ent were ofemployees about health of tax individuals that used inthe li come or aolder bility, would re for other ac astions by employees those be consumption. insurance elimina apaying schedule ofwithemployers, tearn ing the pay incomes many more like tax for The programs c social deficit that Social overed the covered could by employee Security both levels pensions result population. reduce pose program. benefits in on demands a 1983, threat the They inexpenditure on nearly Ifto 1982 are Social employer the irrelev 28 constituted economy; million Security aside pensions nt to of (or it and 15.8 the were the may 59.0 contribute employee budget. be percent elimin perthat cent) ated who to only of Once earned the and cares employee sweeping such public Social less onlya officers, trustees, sponsors or other staff. "Revising the Federal Tax Treatment of Employer Contributions to Health preferences, Options assistance for which and for Alternative of taxes 67.5 employers, are percent deferred Taxindividuals Treatment ofuntil allprovide benefits ...... insurance-related forarethemselves, 21 received preferences (including their 1983 and EBRI-HHS Current Population Survey Pension Supplement. 9 Deborah J. Chollet, Employer-Provided Health Benefits: CoveraKe, I0 families, and their future. This social contract and related tax Insurance: EffectsA Continuing of Taxing Debate," Benefits EBRI ............ Issue Brief no. 21, August, 22 1983. contributions to some profit sharing plans, to money purchase plans are Of covered the 51by taxhealth expenditure and by provisions life insuran that ce benefit plans (table individuals, I). Among 20, or all non-profit, CappinK compens Theation effe Employee cts non-partis for ofBenefits tthe aan, xing Department publi as benefits acShare poli ooooo would cof yofoTotal resear Commerce varychCompensation _®_ among organiz tobenefits ation estimateto andcondu their would ct depend value. th consensus bill tax above changes and Provisions, such employees, th an at $are 20,000 preferen governing protection for $50,000. taxed in for higher-risk and (table cthe and es Social atthe insurers with Polic tax ain 2). higher tax Security ystructure after-tax cpersons. urrent treatment Issues and rate (table other law. than (W dollars. will aIf of shington, 5). providers Another younger alife allow ll persons Ainsurance the tax employees, D.set Cof .:federal cap benefits. chose ofEmployee would combined proposals this plans government probinequity This aBenefit bly with priced would un have provisions cto ert would Resear ataraise to raise inty the chbe be compensation comparison about consumption the total istax according made, would amount the therefore of tax to insurance code Department tax could provided, allprove ofemployer to Commerce and be contributions not a very aestimates boutefficient how for the (excludes means benefits cost of of Security benefits were to be increased by 50 percent, the deficit projected in (calculations based on table 6). This group pays 51 percent of total federal Dallas Salisbury is President of the Employee Benefit Research Institute, a a/ Detail Elimin benefits andmay ating ESOPs); not affect Emplo add and yer over to totals Dedu 150ctions million due toAmericans. rounding. In Totals 1981,include employees onlyearning those Institute, 1984), p. 94. An EBRI simulation of private health insurance °_o'o_o_ o._ _ _ o..... ._°°_ _ _ °i_ 2 SOURCE: EBRI tabulations of U.S. Census Bureau Current civilian "Controlling between for health Employee the$15,000 andCostpension Benefits and of He$50,000 aplan lth............. Cparticipants are: received Recent 71.8 who Trends percent reported inof25 Employee all theirhealth-related earnings Health Plan in non-profit, non-partisan, public policy research organization. Before joining employees with employer-provided health coverage, 83.7 million (or 74.3 percent) WHO nearly on resear compounded. whether BENEFITS ch 40andor FROM percent, educational notTAXindividuals INCENTIVES? affect programs.chose the EBRI totaxis continue committed treatment their by of ccover harter aprivately- ge. to the If pension and expected adequate developed additional allowing According asuggests rises Pensions Another from revenues value that individual to for revenue redistribute altern the Chamber 56 all of to to fa atheir through employee tive cteliminate 87 of purchases th per Commerce wealth claims, ath tcaent abenefits. broad tthe this has to of of the adata, vbased favor aall thre il insurance received risk-sharing ability acovered Given these t. value those benefits the added of some with at workers the tax Supreme inherent or abefore-tax ttention lower in account with sales centives Court's in end 1979 tax. group for in of dollars family for decision 0.6 the tax insurance employee in percent poli in ccould ome come cin y vacation). encouraging this that The insurance do flatter notprivate These result is rbilled ate provision payments instru sto aving. cture thefor constitute employer. individual of This some includes ma most economic jor the workers' tax various security. reform maemployee in propossource als benefits would of the President's budget proposal would have been almost 60 percent higher. tDesign," EBRI axes. heByEBRI served comparison, IssueinBrief senior thisNo.income 23, career October, group policy received 1983.research 64.2 percent positions of tax at benefits the U.S the Survey. When those not reporting their earnings are added, coverage 9.Catax pping discretionary preferences, Employee Population benefits Benefits 64.5 percent th aSurvey, sata provide of all 1983pension-related for andthe EBRI-HHS deferralCurrent taxofpreferences, salary Populuntil ation less than $15,000 would not have purchased private health insurance, if an _ _ooooooo _. ._ Department and Share 67.5 of ofLabor percent Totaland Compens ofthe all ation U.S. insurance-related Pension .......... Benefit preferences. Guaranty 25 Corporation. The etotals arned less arespecial higher. than $20,000, needsSurvey arise andPension (loans 23.2 per Supplement. acnd enthardship), earned between or until $20,000 termination and $50,000. of publicly-provided employee benefits. This seems consistent with the nation's apremise of employer ccruals total that were hcompensation. ad the not taxed nation offered on aiscaurrent ndserved contributed basis, positivelsto yaving their in would both health so almost cialinsur and caert nceeconomic ainly plan.decterms line, mitigate plans the debates--though Health Arizona wouldtheInsurance. bev.detrimental eliminated. Norris not necase, Employer cessarily effects suchcontributions on tin ables expansion thewould context toprobably offinance coverage of mnot aj health orthat be tadifferentiated xinsurance could reform result --is are Could benefits thatThe The Thethe provide average basic arguments heconomy as influen tax taxpayer insurance sustain for reform cedbroadening demanding how movement such protection, plans an increase? the tax isare motivated tax reform pr like obase vided does health have inand part not attra designed. insurance see by cted the employee aerosion wide For plans, benefits range example, of life the of protection scale exacerbate Ifwhoemployer doagainst this not regressivity. contributions tendtheto hazards save much for Under thabenefits out t current-l may of current keep were aw rtaxed athem income. tes, to from the the Acc progressivity providing ording employee, to for the the of • ...... (j .. related work An oftoExcise Sophie homeownership. TaxM.on Korczyk, Benefits It would Ph.D., ............ seem Research that employee Associate benefits 27 at are EBRIlessinofthe a Deborah J. Chollet, "Assuring Economic Security for Workers: Health, employment, generally pay benefits as a lump sum, and for which 8 Disability, A Value-Added and Lifeor Insur Nation ance al Sales Benefits," Tax ....... Statement before27 the United States prepar •ation Tax reform of thisis statement a legitimate is gr policy atefully objective. acknowledged. We mustThe be st certain, atement draws taxes are deferred until benefits are received (including About and would 35 percent decline of disproportion all spending ately onamong healththose careat thlower at does income not levels pass who through do commitment by the existen toceeconomic of employee security. benefit 5 Two programs; provisions- they can those be clearl governing y showntheto tax be by establishing income casex. use While tax employee Such traditional base a tables limit duebenefits to could, on benefits the the proliferation ahowever, re share make purcof hased upbetotal the differentiated ofon largest cboth ompens a group business apart tion bybasis, of that age, and employee caindividual family emplo n beybenefits, ers provided status, tax and as political the from similarly insurance, aTax tax tax taxing scabuse. incentives hedule based support. and employer dis on offsets Rather, ability the Conservatives contributions fortotal the both insurance. health effe cost employers ct support for of on insurance Since benefits. insuring taxand broadening liability cash employees raise acompensation particular of the similar see the taxthese deemployee would base clining issues. benefits as continue ashare group. wayTax as of of to EBRI themselves, entire /U.S.pricing Department their and cost fof amilies, aHe llocation alth and and structure Hum their an Services of futures. benefit(HHS) plTogether, ansMaycould 1983have employer Current to be heavily from research studies conducted and published by EBRI. luxury Senate than Finance owning Committee, your own home. Subcommittee on Taxation and Debt Management, however, contributions that theto"reform" some profit ultimately sharing enjoys plans, greater thrift-savings public suupport plans, Hearing CONon CLUSIONS Employee ANDFringe POLICYBenefits, IMPLICATIONS July 26, ....... 27, and 30, 1984. 27 not tend to save out of current income. than and the salary present reduction system. plans). Inability to achieve this goal with major tax treatment of employer-sponsored retirement plans and health insurance improve economic security. We are aware, however, that there may be limits to employees in employee the form benefits canofbenefit tax-f have avored from also employee ebegun conomies tobenefits. evolve of scale. to meet Benefits Therefore, the provided needsa dollar of in theexspent changing cess of on part preferences. health eliminating Underlying be a of tainsur x-deductible the acosts nthe cesocial As in in for the come-earning ccost ompens health contract Congress aof tiondoing insurance proceeds disin that atbusiness higher cendefines can tives with in be to come and twice the these howlemarket employer, vels. as individuals discussions, high intthe erferen at age employer provide cit e60 will oas f would high they for be Population expenditures revised to Survey alloc attributed ate (CPS) contributions to Pension the tax Supplement, appropriately exemption acc of among umul employer atindividuals. ed pension contributions While benefits the to reform may tell us why all industrialized nations have complex tax codes. 08/22/84 EMPLOYEE BENEFIT RESEARCH INSTITUTE 2121 K Str_.'c_. N\k .";uitc _O_ _ \\ashington. D_ 100',7 [-clcphonc {201) 0:,'4-0_70