Category Archives: Benefits

The Cost of the Individual Mandate Penalty for the Remaining Uninsured

Source: Matthew Rae, Anthony Damico, Cynthia Cox, Gary Claxton, and Larry Levitt, Kaiser Family Foundation, Issue Brief, December 2015

From the summary:
The Affordable Care Act (ACA) expands health insurance coverage by offering both penalties and incentives. Low and middle income households who earn too much to qualify for Medicaid can purchase subsidized coverage on the health insurance marketplaces using premium assistance tax credits. Individuals who do not obtain coverage, through any source, are subject to a tax penalty unless they meet certain exemptions. The penalties under the so-called individual mandate were phased in over a three-year period starting in 2014 and are scheduled to increase substantially in 2016. A key area of uncertainty for 2016 is how much the increased penalties will encourage uninsured people – particularly those who are healthy – to obtain coverage, boosting enrollment in the marketplaces and improving the insurance risk pool. This analysis provides estimates of the share of uninsured people eligible to enroll in the marketplaces who will be subject to the penalty, and how those penalties are increasing for 2016.

Forensics and the Future of a Connecticut Pension Plan

Source: Jean-Pierre Aubry and Alicia H. Munnell, Center for Retirement Research at Boston College, State and Local Pension Plans, SLP#46, December 2015

The brief’s key findings are:
– Connecticut’s State Employees Retirement System faces a large unfunded liability, despite recent efforts by the State to fund.
– A significant source of the liability is the “legacy debt” built up before the State began pre-funding its pensions in the 1970s.
– More recently, inadequate contributions, low investment returns (since 2000), and early retirement incentives have added to the problem.
– A promising approach for addressing the funding problem is to provide more breathing room in exchange for a real and sustained commitment to funding by:
– separately funding the legacy debt over multiple generations; while
– funding ongoing benefits using a stricter method for calculating required contributions, and reducing the long-term assumed return on plan assets.

The ACA Excise Tax will Promote Cost Shift to Workers not Cost-Effectiveness

Source: Laurel Lucia, UC Berkeley Center for Labor Research and Education blog, December 2, 2015

Beginning in 2018 the Affordable Care Act will implement an excise tax on “high cost” job-based health insurance—single plans with yearly premiums exceeding $10,200 and family plans with premiums exceeding $27,500. Congress is currently considering several bills, authored by Democrats and Republicans alike, that would repeal the tax. This blog post is the second in a series in which I discuss the likely consequences of the excise tax policy. (See first post: The ACA Excise Tax Targets Where You Live and Other Factors More than Benefit Levels.)

The excise tax on high cost job-based health plans is typically described as a “Cadillac tax,” but this is misleading. The premise behind the excise tax is that it will rein in overly generous job-based health plans; the evidence indicates, though, that the tax is poorly targeted because premiums depend more on where you live, the health of your co-workers, and your company’s size than on generosity of benefits. It is those factors, not plan richness, that will be more likely to determine whether the health benefits you get through your job are taxed.

Final Report on Connecticut State Retirement Systems: SERS and TRS

Source: Jean-Pierre Aubry and Alicia H. Munnell, Center for Retirement Research at Boston College, November 2015

The report’s key findings are:
– Connecticut’s pension systems for state employees and teachers face large unfunded liabilities, despite recent efforts by the State to fund.
– A significant source of the problem is the “legacy debt” built up before the State began pre-funding its pensions in the 1970s.
– Since pre-funding began, inadequate contributions from the State and low investment returns have added to the problem.
– One way to address the problem is through a two-step approach:
– separately finance the legacy debt over multiple generations; and
– fund ongoing benefits using a level-dollar amortization method over a reasonable rolling period; and reduce the long-term assumed return.

Why U.S. States Need Pension Waiver Credits

Source: Randall K. Johnson, Mississippi College School of Law Research Paper No. 2015-03 September 29, 2015
(subscription required)

From the abstract:
This article identifies a novel approach to public pension reform. It does its work in, at least, four ways. First, the article encourages better use of public sector resources by calling for the elimination of public pension inefficiencies. Next, it explains how to reduce public pension inefficiencies, at least on a prospective basis, by moving away from defined-benefit pension plans. The article also describes a way to move beyond defined-benefit pension plans, which calls for the creation of a new tax expenditure program (Pension Waiver Credits). Lastly, it explains how to implement this new tax expenditure program: so as to optimize the use of public sector resources.

How Does the Probability of a ‘Successful’ Retirement Differ Between Participants in Final-Average Defined Benefit Plans and Voluntary Enrollment 401(k) Plans?

Source: Jack VanDerhei, Employee Benefit Research Institute (EBRI), EBRI Notes, Vol. 36, No. 10, October 2015

From the abstract:
This paper begins with a review of the previous academic literature and summarizes previous Employee Benefit Research Institute (EBRI) research analyzing the conditions under which voluntary-enrollment (VE) 401(k) plans are likely to provide an accumulation of retirement assets at least equivalent to those provided under a counterfactual final-average defined benefit (DB) plan. New research is then presented to show the percentage of “successful” retirements by income quartile for workers currently ages 25-29 who will have more than 30 years of simulated eligibility for participation in a 401(k) plan. Results are first presented for both voluntary-enrollment 401(k) plans and final-average DB plans with a 1.5 percent accrual rate. Sensitivity analysis is provided by also analyzing the comparative success rates of final-average DB plans with accrual rates of 1.0 and 2.0 percent. Using baseline assumptions (defined in the study), it appears that the DB plan has a higher probability of achieving a real replacement rate (when combined with Social Security payments) of 60 percent than the VE 401(k) plans for the first three income quartiles. If a 70 percent replacement rate is used as a threshold, participants in the third- and fourth-income quartiles have a much higher probability of success with the 401(k) plans than the DB plans. When the threshold is set at a higher (and according to many financial planners, more realistic) replacement rate of 80 percent, the 401(k) plans have a much higher probability of success than the counterfactual DB plans for all groups except for the lowest-income quartile (where the results are virtually even).

Revisiting the Taxation of Fringe Benefits

Source: Jay A. Soled, Kathleen DeLaney Thomas, University of North Carolina (UNC) at Chapel Hill – School of Law, UNC Legal Studies Research Paper No. 2679062, October 23, 2015

From the abstract:
The receipt of workplace fringe benefits has become increasingly ubiquitous. As a result of their employment, employees often receive a cornucopia of fringe benefits, including frequent-flier miles, hotel reward points, rental car preferred status, office supply dollar coupons, cellular telephone use, home Internet service, and, in some instances, even free lunches, massages, and dance lessons. Technological advances and workforce globalization are important contributory factors to the popularity of what were, until the turn of this century, previously unknown fringe benefits.

In years past, taxpayers could readily turn to the Internal Revenue Code (Code) to ascertain the income tax effects and reporting responsibilities associated with fringe benefit receipt. Code section 61 mandates that all accretions to wealth, including fringe benefits, constitute gross income; Code section 132 sets forth a list of those fringe benefits specifically excluded from gross income; and finally, for employment tax purposes, Code section 3401 defines the term “wages” to include fringe benefits.

For many years, this statutory framework sufficed to maintain the integrity of the tax base and to ensure taxpayer compliance. However, there has been a fundamental transformation in the manner in which a sizable segment of fringe benefits are currently dispensed. Rather than originating from the employer, they are instead supplied by various third-party vendors such as airlines, hotel chains, rental car companies, office supply distributors, and Internet and cell phone providers. The existing statutory tax compliance framework does not adequately address this marketplace transformation as many of these third-party-provided fringe benefits are not specifically excluded from income yet are not currently being reported as taxable.

This analysis examines what has been an increasingly commonplace phenomenon: employers and employees ignoring their responsibilities to report the receipt of these third-party-provided fringe benefits as taxable income. It argues that Congress has an obligation to preserve the tax base and, accordingly, must institute reform measures to ensure taxpayer compliance. Failure to take action will trigger an expansion of such fringe benefit offerings, eroding the tax base and jeopardizing the integrity of the income tax system.

How Much Are Public School Teachers Willing to Pay for Their Retirement Benefits?

Source: Maria Donovan Fitzpatrick, American Economic Journal: Economic Policy, Vol. 7 no. 4, November 2015
(subscription required)

From the abstract:
Public sector employees receive large fractions of their lifetime income in the form of deferred compensation. The introduction of the opportunity provided to Illinois public school employees to purchase additional pension benefits allows me to estimate employees’ willingness-to-pay for benefits relative to the cost of providing them. The results show employees are willing to pay 20 cents on average for a dollar increase in the present value of expected retirement benefits. The findings suggest substantial inefficiency in compensation and cast doubt on the ability of deferred compensation schemes to attract employees.
Other versions:
How Much Are Public School Teachers Willing to Pay for Their Retirement Benefits?
Source: Maria Donovan Fitzpatrick, National Bureau of Economic Research (NBER), NBER Working Paper No. 20582, October 2014

Retirement Security: A Moving Target – Local Governments Grapple With Benefit Plans

Source: Elizabeth Kellar, PM Magazine, November 2015

Because newer hires will need to work longer and save more to reach their retirement goals, local governments are taking more initiative to help employees save, writes Elizabeth Kellar, SLGE President and CEO in the November issue of PM Magazine. The article explores how local governments have set up automatic enrollment for supplemental retirement plans to make it easier for employees to save. Also, it highlights the retirement income calculator that the City of Los Angeles developed to help employees see what the gap is between their pension income and retirement income goals.

Retirement Security: A Moving Target – Local Governments Grapple with Benefit Plans

Source: Elizabeth Kellar, PM Magazine, Vol. 97 no. 10, November 2015

Local governments have faced fiscal pressures over the past decade, often exacerbated by higher pension and health care costs. They have made significant changes to their benefits, especially for new hires, and have increased employee and employer contributions to their pension and health care plans.