1. Premium Subsidies in the Context of Section 125 Plan Tax Savings and Employer Payroll Withholding How Much Can This Save Individuals and States? Ed Neuschler, Institute for Health Policy Solutions SCI/NASHP/NGA Section 125 Plans Meeting June 20, 2008 Boston, MA

2. Illustration: Single Worker with No Children Earning $20,800 Annually ($10.00 per hour) = 200% of Poverty Not Using Sec. 125 Plan Full Premium (monthly) $ 350 Payroll Deduction Amount (i.e., through sec. 125 plan) - Reduction in FICA tax - Reduction in federal income tax withholding - Desired Worker Contribution 875.0% Public Subsidy Payment $ 263 Note: Red figures in italics = percent of income.

3. Illustration: Single Worker with No Children Earning $20,800 Annually ($10.00 per hour) = 200% of Poverty Not Using Sec. 125 Plan Using Sec. 125 Plan, Billing Net Amount Full Premium (monthly) $ 350 Payroll Deduction Amount (i.e., through sec. 125 plan) - 1126.5% Reduction in FICA tax - 97.65% Reduction in federal income tax withholding - 1715.0% Desired Worker Contribution 875.0% 87 Public Subsidy Payment $ 263 $ 238 Public Savings - $ 259.6%

4. Illustration: Single Worker with No Children Earning $28,080 Annually ($13.50 per hour) = 270% of Poverty Using Sec. 125 Plan, Billing Net Amount Using Sec. 125 Plan, Billing Gross Amount Full Premium (monthly) $ 350 Payroll Deduction Amount (i.e., through sec. 125 plan) 1516.5% 35015.0% Reduction in FICA tax 127.65% 277.65% Reduction in federal income tax withholding 2315.0% 5315.0% Desired Worker Contribution 1175.0% 1175.0% Public Subsidy Payment $ 199 $ 154 Public Savings $ 3414.7% $ 7934.0%

5. Illustration: Single Worker with No Children Earning $41,600 Annually ($20.00 per hour) = 400% of Poverty Not Using Sec. 125 Plan Using Sec. 125 Plan, Billing Gross Amount Full Premium (monthly) $ 350 Payroll Deduction Amount (i.e., through sec. 125 plan) - 350 Reduction in FICA tax - 277.7% Reduction in federal income tax withholding - 5315.2% Net Worker Contribution 35010.1% 2707.8%

6. Illustration: Single Parent with Two Children Earning $31,200 Annually ($15.00 per hour) = 177% of Poverty Not Using Sec. 125 Plan Full Premium (monthly) $ 350 Payroll Deduction Amount (i.e., through sec. 125 plan) - Reduction in FICA tax - Reduction in federal income tax withholding - Desired Worker Contribution 1305.0% Public Subsidy Payment $ 220

7. Illustration: Single Parent with Two Children Earning $31,200 Annually ($15.00 per hour) = 177% of Poverty Not Using Sec. 125 Plan Using Sec. 125 Plan, Billing Net Amount Full Premium (monthly) $ 350 Payroll Deduction Amount (i.e., through sec. 125 plan) - 1646.3% Reduction in FICA tax - 137.6% Reduction in federal income tax withholding - 2213.2% Desired Worker Contribution 1305.0% 1305.0% Public Subsidy Payment $ 220 $ 186 Public Savings - $ 3415.5%

8. Illustration: Single Parent with Two Children Earning $31,200 Annually ($15.00 per hour) = 177% of Poverty Not Using Sec. 125 Plan Using Sec. 125 Plan, Billing Net Amount Full Premium (monthly) $ 350 Payroll Deduction Amount (i.e., through sec. 125 plan) - 1646.3% Reduction in FICA tax - 137.6% Reduction in federal income tax withholding - 2213.2% Desired Worker Contribution 1305.0% 1305.0% Public Subsidy Payment $ 220 $ 186 Public Savings - $ 3415.5% Add'l end-of-year savings to worker $ 4141.3%

9. Illustration: Single Parent with Two Children Earning $52,000 Annually ($25.00 per hour) = 295% of Poverty Using Sec. 125 Plan, Billing Net Amount Using Sec. 125 Plan, Billing Gross Amount Full Premium (monthly) $ 350 Payroll Deduction Amount (i.e., through sec. 125 plan) 2806.5% 3508.1% Reduction in FICA tax 217.6% 277.7% Reduction in federal income tax withholding 4215.0% 5315.0% Desired Worker Contribution 2175.0% 2175.0% Public Subsidy Payment $ 70 $ 54 Public Savings $ 6347.6% $ 7959.5%

10. Illustration: Married Couple with Two Children Earning $72,800 Annually ($35.00 per hour) = 343% of Poverty Not Using Sec. 125 Plan Using Sec. 125 Plan, Billing Gross Amount Full Premium (monthly) $ 1,000 Payroll Deduction Amount (i.e., through sec. 125 plan) - 1,000 Reduction in FICA tax - 777.65% Reduction in federal income tax withholding - 15015.0% Net Worker Contribution 1,00016.5% 77412.8%

11. Single Worker with No Children: Contributions as a Percent of Family Income Before and After Tax Savings From Using a Section 125 Account to Pay Premiums (Illustration Using Oregon Tax Rates) Combined effective marginal tax rate starts at 25.75%, reaches 30.3% at 170% FPL. 2.2% 4.2% 4.9% 2.1% 3.0% 6.0% 7.0%

12. Married Couple with 2 Children: Contributions as a Percent of Family Income Before and After Tax Savings From Using a Section 125 Account to Pay Premiums (Illustration Using Oregon Tax Rates) Combined effective marginal tax rate starts at 26.55%, exceeds 30% above 200% FPL. Does NOT include EITC effects. 2.2% 4.2%4.9% 3.0% 6.0% 7.0%

13. Distribution of Subsidy Costs for Low-Income People in an Illustrative Subsidized Exchange, with and without Section 125 Tax-Sheltering

14. Affordability Example 3: Single workers for “pay” employers at different ages, 500% FPL ($51,050) --Purchasing a $2500 deductible plan-- Age Annual Premium (for coverage actually purchased) "20% Credit" plus Tax Savings as a % of Premium Net Annual Cost to Family, After Tax Savings Net Cost as Percent of Family Income, After Tax Savings 19-24 1,39251.3%6781.33% 25-29 1,39251.3%6781.33% 30-34 2,05250.8%1,0091.98% 35-39 2,46051.2%1,2002.35% 40-44 3,08450.9%1,5152.97% 45-49 3,30051.6%1,5983.13% 50-54 4,21252.1%2,0193.96% 55-59 5,40052.3%2,5755.04% 60-64 6,88851.5%3,3436.55%

15. Affordability Example 4: Married parent working at “pay” employer (with non-working spouse), 500% FPL ($103,250) --Purchasing a $2500 deductible plan-- Age Annual Premium (for coverage actually purchased) "20% Credit" plus Tax Savings as a % of Premium Net Annual Cost to Family, After Tax Savings Net Cost as Percent of Family Income, After Tax Savings 19-245,14838.1%3,1863.09% 25-295,14838.1%3,1863.09% 30-346,66039.2%4,0523.92% 35-397,27240.0%4,3654.23% 40-448,06440.7%4,7814.63% 45-498,83241.3%5,1855.02% 50-5410,30842.4%5,9425.76% 55-5912,42043.1%7,0616.84% 60-6414,84443.5%8,3938.13%