Potential State Applications of Section 125 Plans

1
Potential State Applications of Section 125 Plans

• Rick Curtis, PresidentInstitute for Health
  Policy Solutions
• SCI/NASHP/NGA Section 125 Plans Meeting
• July 18, 2008
• Denver, CO

2

• Under Section 125 "Premium-Only Plans", Employers
  can shelter Employee Premium Payments from
  taxation as personal income to the worker, i.e.,
  from
• Federal income tax
• FICA (Social Security and Medicare payroll tax)
• Applicable state income or payroll taxes
• These plans are made available to wage and salary
  employees only, and are NOT available to
• Proprietors and self-employed individuals
• (who may deduct h.i. premium payments).
• Non-employed persons
• (who may not deduct h.i. premiums).

3

• This Section 125 "POP plan" simple option, does
  not entail complications of other flexible
  spending account plans (e.g., workers set aside
  amounts, they "use or lose").
• To implement these POP tax sheltering plans (not
  ERISA plans), EMPLOYERS need to establish the
  plan, and
• Deduct the amount to be paid for h.i. premiums
  from the workers (otherwise taxable) pay (payroll
  firms often do this for smaller employers), and
• Verify that the full amount thus "sheltered" goes
  to health insurance premium payments.

4

• Premium payments that can be sheltered include
  employee payments
• Towards employer group coverage (employer
  contributions are automatically "sheltered",
  i.e., they are not treated as income to the
  worker).
• For individual health insurance that complies
  with certain requirements.
• For COBRA coverage from a former employer--
  Where there are worker "earnings" from which to
  deduct payments.

5

• Sheltering these payments AUTOMATICALLY reduces
  the premium cost realized by the worker.
• That is, the worker's take-home pay reduction for
  premium payments reflects the reduction in taxes
• (because taxable income and associated tax
  with-holding amounts are reduced)
• Immediate federal tax savings to the worker are
  often substantial (depending on income).
• For example, for a family of four at 250 FPL,
  22.7 of the worker-paid premium
• For single adult at 500 FPL, 32.7 of the
  worker-paid premium.
• Not including EITC, employer FICA, state tax
  effects.

6
Who can benefit (and not)?

• States can extend use of POP plans to reduce
  health insurance costs of many individuals not
  otherwise eligible for such Section 125 plans,
• I.e., wage and salary workers and dependents, who
  are
• Offered employer coverage but not a 125 plan
  (some small-firm workers)
• Employed by a firm that does not offer group
  coverage
• Are ineligible for their employer's group plan.
• (The latter 2 groups constitute a significant
  share of the uninsured
• population).
• Not a financing source for coverage of the poor,
  who should
• generally decline participation in these plans
  (participation could
• reduce net income for poor parents receiving
  EITC).

7
Range of State applications for different policy
contexts and goals

• Individual Mandate / Near-Universal Coverage /
  Shared Responsibility (e.g., Mass.)
• Requiring employers to make POP plan available to
  all workers makes sense.
• Substantially reduces (net) costs of coverage for
  many individuals, an important carrot/silver
  lining for those who could afford but do not now
  have coverage and for those already insured
  workers without POP plans.
• Can significantly reduce net state subsidy costs,
  especially for state only tax credits/premium
  assistance for populations above
  federally-matchable income ranges(e.g., for
  older individuals buying age-rated coverage)
• Can ease the transition for healthy insured
  individuals with underwritten low individual
  rates to coverage with no health rating (note
  that individual plans qualify for 125 sheltering
  only if they qualify as HIPAA/COBRA group plan
  complainte.g., no health rating).

8
Range of State applications for different policy
contexts and goals

• Voluntary State Coverage initiatives, e.g.,
  subsidized coverage for uninsured small-firm
  workers, such as the Maryland Plan.
• E.g., condition of program participation
  requirement that employers offer POP plan to all
  participating worker
• Reduces coverage costs for higher income workers.
• Can mitigate state subsidy and/or worker costs
  for modest income/subsidized workers.
• For this or other applications, note that a State
  exchange/connector/choice pool can make it easy
  for employers to provide POP plan sheltering
  while workers have choice of competing plans
• I.e., by providing the employer with
• Single list bill for respective employee
  premium amounts to be withheld from
  pay/sheltered.
• Ongoing assurance that these tax-sheltered
  amounts go for health insurance.

9
Range of State applications for different policy
contexts and goals

• State measures to reduce health insurance costs
  for workers (group or individual plan) not now
  eligible for a POP plan. Either state
  requirements, incentives, information and/or
  facilitating policy changes for employers to
  adopt/extend such plans
• Could reduce net coverage costs for a number of
  insured (voters).
• Might reduce costs enough to induce some insured
  (higher income) persons to participate.
• Might be a vehicle for achieving some desired
  individual market rules or options (again, note
  that any individual plans would have to be
  available with no health rating).

10
Concluding Observations

• Be Aware of Potential Downside Risks
• For example, making individual coverage very
  attractive and affordable for higher income
  workers could lead some employers to drop group
  plans and contributions, leaving heretofore
  insured lower-income workers uninsured.
• And Keep Your Eye on the End Game.
• If your state wants to achieve coverage of all
• Remember that extending 125 plans to all workers
  can be a carrot for acceptance of individual, as
  well as shared responsibility. (If you give the
  carrot away too early, it will already be eaten
  when you need it.)