surance companies over self-insured arrangements through the income exclusion for group-term life insurance. Arguments against the proposal 1. The exclusion from income and wages of employer-provided group-term life insurance, to the extent conditioned on effective nondiscrimination rules prohibiting the favoring of highly compensated employees, is justified, as a matter of social policy, by the fact that such exclusion encourages the provision of the insurance to low- and middle-income employees who otherwise might not purchase such insurance. 2. If any of the proposals were enacted, employers would be less likely to provide group-term life insurance to low- and middleincome employees. In addition, many of such employees would not purchase life insurance on their own. Accordingly, their survivors may in some cases need public assistance, because social security survivor benefits often are inadequate. The cost of providing this assistance may well exceed the cost of retaining the present-law exclusion of employer-provided group-term life insurance from income and wages. 3. The limit on the exclusion of employer-provided group-term life insurance from income is sufficiently low to ensure that it cannot be used to provide unnecessarily generous protection. (3) Repeal the $5,000 exclusion for employer-provided death benefits Present Law Death benefits paid by an employer to the estate or beneficiaries of a deceased employee generally are excluded from the recipient's income. The maximum amount, however, that may be excluded from income with respect to any employee is $5,000. Possible Proposal In the Treasury Department Report to the President issued in November of 1984, and the President's tax reform proposal of May 1985, it was proposed that the $5,000 exclusion from income of employer-provided death benefits be repealed. Arguments for the proposal Pros and Cons 1. The exclusion of employer-provided death benefits from income can result in taxpayers with the same economic income paying different amounts of tax because of the form in which their income is received. In addition, the exclusion from income also narrows the tax base, thereby requiring higher tax rates to produce a given amount of revenue. 2. The exclusion from income favors taxpayers in a higher tax bracket over taxpayers in a lower tax bracket, because the higher the bracket, the more valuable the exclusion. Moreover, the rules establishing the exclusion would permit the employer to provide the benefit only for highly compensated employees, exacerbating the problem that high-bracket taxpayers are favored. 3. The costs and inequities of the exclusion, described above, outweigh the marginal beneficial effect of the exclusion. Arguments against the proposal 1. The exclusion from income of employer-provided death benefits is justified, as a social policy, by the fact that such exclusion encourages the provision of the death benefits with respect to lowand middle-income employees who otherwise might not purchase life insurance. 2. If the proposal were enacted, employers would be less likely to provide death benefits to low- and middle-income employees. In addition, many of these lower income employees would not purchase life insurance on their own. Accordingly, their survivors may in some cases need public assistance, because social security survivor benefits often are inadequate. The cost of providing this assistance may well exceed the cost of retaining the present-law exclusion of employer-provided death benefits from income. 3. The limit on the exclusion of employer-provided death benefits from income is sufficiently low to ensure that it cannot be used to provide unnecessarily generous benefits. (4) Repeal the exclusion of employer-provided dependent care assist ance Present Law In general, employer-provided dependent care assistance is excludable from an employee's income. The exclusion is conditioned, however, on the assistance being provided under a plan meeting certain nondiscrimination and qualification requirements. In addition, the exclusion is limited to $5,000 in a taxable year ($2,500 in the case of a separate return by a married individual). Employer-provided dependent care assistance is excludable from wages for FICA and FUTA purposes if, at the time the assistance is provided, it is reasonable to assume the assistance will be excludable from income. Dependent care expenses (defined in the same manner as with respect to the exclusion) paid for by an individual are eligible for a nonrefundable credit against income tax liability of up to 30 percent (phasing down to 20 percent for higher income taxpayers). For this purpose, dependent care expenses are limited to $2,400, if there is one dependent, and $4,800, if there are two or more dependents. Possible Proposals 1. In the Treasury Department Report to the President issued in November of 1984, Treasury proposed that the exclusion from income of employer-provided dependent care assistance be repealed. The repeal also could apply to the exclusion of employerprovided dependent care assistance from wages for FICA and FUTA purposes. Employer-provided dependent care assistance would be eligible for the dependent care credit. 2. The exclusion from wages for FICA and FUTA purposes of employer-provided dependent care assistance could be repealed. Pros and Cons Arguments for the proposals 1. The exclusion of employer-provided dependent care assistance from income and wages can result in taxpayers with the same economic income paying different amounts of tax because of the form in which their compensation is received. The exclusion from income and wages also narrows the tax base, thereby requiring higher tax rates to produce a given amount of revenue. 2. The exclusion from income favors taxpayers in a higher tax bracket over taxpayers in a lower tax bracket, because the higher the bracket, the more valuable the exclusion. This is contrary to the policy explicit in the structure of the dependent care credit. Moreover, the rules establishing the exclusion are structured to permit larger exclusions for highly compensated employees, increasing the bias in favor of high-bracket taxpayers. 3. Because the dependent care credit (to the extent available) is more advantageous for low-income employees, the exclusion largely functions to enable high-income taxpayers to obtain a larger tax benefit than they would otherwise obtain under the dependent care credit. 4. The costs and inequities of the exclusion, described above, generally outweigh the marginal beneficial effect of the exclusion. 5. It is inequitable to permit employees receiving employer-provided benefits to be exempt from FICA while individuals who pay for dependent care themselves are required to pay FICA on the wages used to purchase this care. The proposals would allow lowand middle-income employees to earn credit toward social security benefits by virtue of compensation received in the form of dependent care assistance. Arguments against the proposal 1. The exclusion from income and wages of employer-provided dependent care assistance, to the extent conditioned on effective nondiscrimination rules prohibiting the favoring of highly compensated employees, is justified, as a matter of social policy, by the fact that the exclusion encourages the provision of the assistance to low- and middle-income employees who otherwise might not purchase the dependent care or, at least, not the same quality of dependent care. 2. If a taxpayer's dependent care expenses exceed the amount eligible for the credit, the exclusion will be advantageous regardless of income level. In addition, there are a significant number of middle-income taxpayers for whom the exclusion is more beneficial than the credit. Thus, retaining the exclusion is justified as a matter of social policy. 3. The social policies served by encouraging the provision of dependent care by employers include: (1) enabling many individuals to return to work who otherwise could not afford to; (2) increasing worker productivity to the extent that the worker need not be concerned during the workday with dependent care; and (3) increasing the quality of care provided to children of working parents. 4. Valuing dependent care assistance for inclusion purposes would impose a substantial administrative burden on employers and on the IRS. |