August 1998

U.S. Budget, Taxes, and Employee Benefits

  • The federal government supports the provision of employee benefits through preferential treatment in the tax code. The Congressional Budget Act of 1974 (Public Law 93-344) requires that a list of tax expenditures (federal government tax revenue losses due to preferential provisions) be included in the budget. The following is a listing of the estimated employee benefits tax expenditures.
  1998 1999 2003 1999-2003
  ($ millions)
Transportation
Exclusion of reimbursed employee parking expenses $ 1,315 $ 1,340 $ 1,475 $ 7,030
Exclusion for employer-provided transit passes 70 80 145 555
Education, Training, Employment, and Social Services
Exclusion of employer educational assistance 215 215 0 440
Exclusion of employer-provided child care 910 950 1,135 5,205
Exclusion of employee meals and lodging (other than military) 620 650 775 3,555
Health
Exclusion of employer contributions for medical insurance premiums and medical care 71,465 76,230 100,245 437,690
Medical savings accounts 30 110 125 585
Exclusion of Social Security Benefits
Old-Age and Survivors Insurance for retired workers 18,330 19,115 22,930 104,740
Benefits for dependents and survivors 2,495 2,685 3,590 15,565
Disability insurance benefits 4,000 4,160 4,795 22,375
Income Security
Exclusion of railroad retirement system benefits 445 460 480 2,340
Exclusion of workers' compensation benefits 4,950 5,210 6,420 28,975
Exclusion of special benefits for disabled coal miners 85 80 65 360
Exclusion of military disability pensions 130 135 155 725
Net Exclusion of Pension Contributions and Earnings
Employer plans 72,135 72,375 73,480 365,865
Individual retirement accounts 10,275 10,780 12,160 57,375
Keogh plans 3,655 3,755 4,450 20,430
Exclusion of employer-provided death benefits 190 200 240 1,099
Special ESOP rules (other than investment credit) 720 740 850 3,960
Exclusion of Other Employee Benefits
Premiums on group term life insurance 2,110 2,150 2,340 11,220
Premiums on accident and disability insurance 175 185 225 1,025
Income of trust to finance supplementary unemployment benefits 5 5 5 25
Veterans' Benefits and Services
Exclusion of veterans' disability compensation 2,930 3,100 3,890 17,415
Exclusion of veterans' pensions 70 65 85 376
Total $197,325 $204,775 $240,060 $1,108,930
  • 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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