Colorado Legislative Council Staff
NO FISCAL IMPACT
February 2, 1999
Lon Engelking (303-866-4751)
TITLE: CONCERNING THE PAYMENT FOR HEALTH BENEFITS PLANS WITH PRE-TAX DOLLARS FOR SMALL EMPLOYERS.
Summary of Assessment
This bill would eliminate the requirement of current state health law that small employers who offer a cafeteria plan to eligible employees must offer the plan as a group plan. Employer sponsored cafeteria plans would then be allowed to be offered to individual employees on a pre-tax basis. Therefore, this bill would expand the market of potential participants in a cafeteria plan. Current law does however, allow the marketing of plans to only ineligible employees.
Federal Internal Revenue Code Section 125 - Cafeteria Plans. Cafeteria plans are employer-sponsored benefit packages that offer employees a choice between taking cash and receiving qualified benefits, such as accident and health coverage, group-term life insurance coverage, or coverage under a dependent care program. No amount of the contribution is included in the income of a cafeteria plan participant who chooses among the benefits of the plan -- thereby, being treated as pre-tax income. However, if a participant chooses cash, it must be included in gross income as compensation.
At the federal level, participants of cafeteria plans can effectively reduce their gross income by the amount of the contribution to the plan reducing the amount of tax paid on income.
Applicability of State Income Tax. Since the definition of Colorado taxable income is derived from federal taxable income, the non-inclusion of the income of contributions to cafeteria plans at the federal level is reflected at the state level.
In theory, any additional participants in cafeteria plans would impact federal and state income taxes as well as state insurance premium taxes. It is believed however, that any additional participants in individual plans could possibly be offset by employers choosing not to offer group plans. In addition, offering a pre-tax cafeteria plan to part-time and/or low-wage earners might not be enough of an incentive to the employee to participate, especially if they have a pre-existing condition or are at high-risk causing large premiums. For these reasons, it is not estimated that the bill would affect the revenues or expenditures of the state. Therefore, the bill is assessed as having no fiscal impact. The bill would become effective July 1, 1999.
Revenue Regulatory Agencies