Effect of Individual Mandate on Colorado Income Withholding Orders

Employers have asked MSEC what effect, if any, the individual mandate requiring individuals to purchase health insurance or pay a tax penalty has on their processing of income withholding orders like tax levies, creditor garnishments, and child support orders.

Most income withholding orders direct employers to deduct from an employee’s “disposable income.” Colorado law defines disposable income as an individual’s gross earnings less only deductions required by law. Deductions required by law typically include only federal, state, and local taxes, but can include health insurance premiums if the employer has received a separate court order such as a National Medical Support Notice for that deduction. Typically, health insurance premiums not separately court-ordered are not considered deductions required by law.

However, beginning January 1, 2014, the Colorado Department of Revenue (DOR) changed the calculation of “disposable income” for state tax levies to subtract “Health Insurance Provided by Individual.” The DOR made this change in response to the individual mandate, and now employers will deduct the full cost of any health insurance premiums paid by the employee from his or her disposable income before deducting for the tax levy.

Should employers deduct health insurance premiums from disposable income for other common income withholding orders like creditor garnishments and child support orders? The Colorado Division of Child Support Enforcement asked the Colorado Attorney General’s Office to render its opinion on this question for child support orders. The Attorney General said because individuals can forgo health insurance and pay a tax penalty instead, the individual mandate does not make health insurance premiums a deduction required by law for child support orders.

The Attorney General’s Office based its opinion on Colorado’s statute defining disposable income for not only child support orders, but also creditor garnishments and attachments of earnings. As a result, employers should follow the same rule for Colorado garnishments and attachments. However, employers should not apply this opinion to federal orders or orders from other states as they may take a different approach.