Taxes And Health Care

I like HSAs. I like the tax break they give consumers who are able to fund them. I like the lower premiums that come with high-deductible health insurance policies. I like the simplicity of said policies – especially if they offer 100% coverage after the deductible. I like a system that rewards people for putting a little money aside whenever they can, in order to be able to pay for medical bills when the need arises. And we encourage our clients in Colorado to apply for high deductible health insurance and set up HSAs if they are in a position to do so. But high deductible health plans are not for everyone. And people who struggle just to pay the premiums on these plans are not likely to be able to fund an HSA. Critics argue that they are just a tax-break for people who don’t really need any more tax breaks. But Brian Schwartz from Patient Power has an interesting article about how the merits of HSAs really rest in the more equitable tax system they bring to the financing of health care. He argues that the current tax exemption on premiums for employer-sponsored health insurance is inherently unfair to those of us who don’t have access to employer-sponsored coverage, or for those who would rather choose from the wider array of options available on the individual market, as opposed to having to accept whatever health insurance plans their employers are offering. He makes some very good points. Jay and I are both employees of our corporation, but we have individual health insurance for our family. Since we’re not self-employed, we are not able to deduct the premiums that we pay (roughly $5000/year). We can deduct money we put into our HSA, but not our premiums. If we were to set up a group health insurance policy instead, we could deduct all of our premiums, in addition to the money we put into our HSA. But then our health insurance would be tied to our employment and our company. Our situation is a bit more secure than most, since we own the company that we work for. But for most employees, accepting employer-sponsored health insurance means accepting that a job loss would also lead to an eventual loss of health insurance.

I don’t think that we should end the tax deduction for employers who offer health insurance to their employees. I think without it, far fewer employers would find it cost effective to provide health insurance, leaving a lot more people on their own to find individual health insurance in the “free market.” And for people with pre-existing conditions, that can be a daunting task. Instead, I like Brian’s second suggestion, that we provide more tax deductions for health insurance premiums and health care costs. I think that health insurance premiums should be tax-deductible for group and individual health insurance policies, regardless of who is paying the premiums. I like the idea that anyone be allowed to set up an HSA, without restrictions calling for a specific type of health insurance policy, or a high deductible. Or in lieu of that, at least allow people to deduct all health care expenses, not just the amount that is more than 7.5% of their income. Tax breaks for health care expenses shouldn’t be limited to those who have the means to fund an HSA, or to people who unfortunately have significantly high medical bills relative to their income.

Thanks to Julie at Workers Comp Insider for hosting this week’s Health Wonk Review, where I found Brian’s article.

About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for healthinsurance.org, medicareresources.org, Verywell, Spark by ADP, and Boost by ADP, and Gusto. Follow on twitter and facebook.

Comments

  1. If you own the corporation – couldn’t you arrange for your health insurance premiums to be paid by the corporation and thus completely deductible?

  2. Peggy,
    The accountant we work with told us that we have to have a group health insurance policy, paid by the corporation, in order to deduct premiums. Our individual health insurance has to be paid from a personal account, but I’m looking into the changes in tax law over the last few years regarding reimbursement of individual health insurance premiums. That would allow us to deduct the amount we reimburse, but I’m still working on making sure it’s legit before I set it up. Tax law and accounting isn’t my area of expertise quite yet!

  3. Louise:
    Are you an S corporation?
    Don Levit

  4. Don,
    Yes, we’re an S corp.

  5. Louise:
    A shareholder-employee who owns more than 2% of the outstanding stock of an S corporation is treated like a partner, not an employee. Thus, medical premiums are treated like guaranteed payments made to partners.
    The S corporation can deduct the premiums under section 162, and the shareholder-employee must include the premium payments in income under section 61, and cannot exclude them under section 106.
    However, you may deduct 100% of amounts paid for health insurance premiums for your family per section 162(l).
    Don Levit

  6. Don – Thanks! I’ll look further into this, I appreciate your insight here.

  7. Don,
    I’m wondering if this works for S-Corps. I’m finding that it would work for a sole proprietor, but perhaps not for a business with more than one employee. IRS Publication 535 (Business Expenses) says – “The insurance plan must be established under your business. Partners and more-than-2% S corporation shareholders can claim the self-employed health insurance deduction only if the policy is in the name of the partnership or S corporation. For sole proprietors, the policy does not have to be in the name of the business if it is in the name of the sole proprietor.” So it’s still sounding like a business with more than one employee has to have their health insurance set up under the business name (ie, a group policy) or perhaps set up an HRA in order to reimburse premiums for the employees/shareholders.

  8. Louise:
    Thanks for your reply.
    In publication 535, it states, “If an S corporation pays accident and health premiums for its more-than-2% shareholder-employees, it generally can deduct them, but must also include them in the shareholder’s wages.”
    So, it looks like what is provided at the corporate level is taken away at the personal level.

    In the portion that you cited it ends with “However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amoumts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.”
    So, it doesn’t look like a net deduction for premiums is allowed.

    In addition, in this publication it states, “Do not subtract the health insurance deduction when figuring net earnings for your self-employment tax.”
    So, the self-employment tax is not reduced, even if the deduction was allowed.
    Section 162(l) that I referred to earlier, apparently, allows health insurance deductions in qualified plans that allow health insurance.
    Don Levit

  9. We have a group of two in Fort Collins, a very good accountant, and found the higher premiums for group insurance to negate any tax benefits. Luckily, we are healthy. So individual health insurance worked well for our situation.

    I really, really appreciate all of the good health insurance information on this site. I have had a lot of questions on subjects that I could not find addressed anywhere else that were answered here.

    Mary

  10. Mike Taylor says

    Don, I don’t think you are properly understanding the benefit an S-Corporation owner can get with health insurance premiums. The way it works is like this:

    * The s-corp can deduct the health insurance premium paid to shareholders as a business expense.
    * This expense gets reported as income on the W2, but it is NOT subject to social security/medicare
    * THEN, the shareholder can deduct on his personal tax return the full premium amount as an above-the-line deduction

    So you see, you get essentially a pre-tax treatment of health insurance premiums this way. For more info, see IRS ruling 2008-01:
    http://www.irs.gov/pub/irs-drop/n-08-01.pdf

  11. Mike:
    Thanks for providing Notice 2008-1.
    It definitely makes the situation a bit clearer.
    In regards to Louise’s question, I wonder if the S corporation can selectively choose employees, as opposed to, say, offering to a class of employees that is not discriminatory.
    The Notice seems to say yes, in that the plan is established by the S corporation if the 2-percent shareholder makes the premium payments and furnishes proof of paymenty to the S corporation, and the corporation reimburses the shareholder for the premium in the taxable year.
    According to Example 4, it looks like Louise could do this just for her family, and no other employees.
    However, according to the Notice, the premium is included in wages for Social Security and Medicare taxes if the requirements for exclusion under section 3121(a)(2)(B)are not satisfied.
    This section states that for premiums to not be counted as wages for Social Security and Medicare purposes that the “plan or system is established by an employer for his employees generally or for a class or classes of his employees.”
    So, it looks like the wages would be excluded for income tax purposes, but not for Social Security and Medicare taxes, in Louise’s case.
    What do you think?
    Don Levit

  12. Don and Mike,
    Thanks for all your comments. I’ve been meaning to come back here with an update. I spoke with our accountant a few weeks ago, and did some research on my own, and came up with the same publication that Mike mentioned. Our situation is described in Example 4 (i) on page 4 of the 2008-1 document. I know there will be more than a few late nights for me over the next month or so as I work on our taxes. But at least I have the health insurance portion under control!

  13. Louise:
    Yes, that example does seem to support your being able to exclude the premiums from income taxes.
    But, there may not be an exclusion for Social Security and Medicare taxes, as well as federal unemployment taxes.
    This may apply to your situation,depending on how you interpret my prior post.
    Here is an excerpt from the Congressional Research Service in a recent report, which can be found at:
    http://assets.opencrs.com/rpts/RL34767_20081121.pdf
    “Section 106(a) does not apply to self-employed individuals since they are not considered employees under the code. However, under current law they can obtain roughly the same INCOME TAX SAVINGS from the above-the-line deduction authorized under Section 162(l).
    Self-employed individuals are also considered as more than 2% shareholders of S corporations.
    This excerpt is found on page 4.
    Don Levit

  14. Mike Taylor says

    Don, that congressional research report doesn’t fully touch on the issues that are covered in the 2008-01 revenue ruling. That example 4 definitely includes the social security and medicare tax exclusions because the income reported to the employee-shareholder on the W2 is reported only as gross income.

  15. Mike:
    AS you know, the provisions for exclusion of income tax and FICA do not always coincide.
    In the Notice you cited, it speaks of the premium being included in wages for FICA taxes if the requirements of Section
    3121 (a)(2)(B) are not satisfied.
    Can you explain why the requirements of that section are satisfied?
    Please see my prior post.
    Don Levit

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