The Mutuality of Employee Benefits and Tax Expenditures

By Salisbury, Dallas L. | Generations, Spring 2005 | Go to article overview

The Mutuality of Employee Benefits and Tax Expenditures


Salisbury, Dallas L., Generations


How tax policy ensures the vitality of employee benefits-which are crucial to public programs.

Employee benefits come in many shapes and sizes. Governmentmandated employee benefits like Social security, Medicare, Unemployment Compensation, and Workers Compensation have been created and expanded since 1937, the year Social security began, with the other programs added in later decades. Voluntary pensions for employees paid for by employers began to sprout in the 1800s, were given special tax treatment early in the 1900s, and have been the subject of numerous tax-law changes over nearly 100 years. Voluntary employer-funded health benefits saw their primary growth begin in the late 1940s when favorable tax treatment was granted and wage and price controls allowed increases in such "fringe benefits" while cash wages were restricted.

While employee benefits have received favorable tax treatment for decades, the government did not begin calculating a "tax expenditure" for those preferences until congressional action in 1974 required an annual accounting. Each year since then, as part of the president's budget, a report is provided on the "tax expenditure" cost to the government of most preferences in the tax code. Employee benefits for public- and private-sector workers are among the largest tax-expenditure costs in the budget.

The tax preference for employee benefits is directed at the individual worker, not at the employer, a point that is important to note because it is frequently misunderstood. Many simply assume that since the cost of employee benefits is a deductible business expense for employers, that is where the tax expenditure arises, but it does not. The tax expenditure arises because the employees are not taxed on the contributions the employer makes to pension plans or the earnings on those contributions until they accept benefit payments, and they are not taxed on the value of health insurance premiums paid by their employer.

Because the provision of employee benefits by the employer does not create immediately taxable income for the employee, employers began by requiring that employees participate in the benefit programs. This requirement was generally the case until the growth of 401 (k)-type plans in the early 1980s and the growth of employee premium payments for health insurance in the inflation surge that began in the 1970s.

This article describes the tax treatment of employee benefits, the types of voluntary plans, the concept and level of tax expenditures, alternative ways of looking at the value they deliver, and the level of participation in employee benefit plans over time, and discusses the possible consequences of changes in the tax treatment of employee benefits.

VOLUNTARY EMPLOYEE BENEFIT PROGRAMS AND TAX TREATMENT

Employees value employee benefit programs. They serve to attract, retain, and motivate. Health insurance is the most important employee benefit for more than 60 percent of workers and is second most important for 15 percent. Defined-contribution retirement plans are the most important for 17 percent and second most important for 38 percent. Retiree health insurance is most important for 5 percent, and second most important for 9 percent. Defined-benefit pension plans are most important for 4 percent, and second most important for 9 percent. Twenty-seven percent of workers report being unwilling to leave their current job because of "job lock" created by their health insurance (Helman and Fronstin, 2004).

Health insurance is now most commonly found with the employer paying about 80 percent of the cost of single or family coverage. Over time, the employer payment has been getting less and less generous, and some employers are now beginning to pay a far smaller portion of family premiums (Mercer, 2004). Tax law provisions allow workers to pay their share of the premiums on either a pretax basis (if the employer sets up the administrative arrangements to allow it), with some tax credit (if they meet income tests), or as a deduction on Schedule B (if total medical expense exceeds 7. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

The Mutuality of Employee Benefits and Tax Expenditures
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.