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The Tax Treatment of Health Insurance: Introduction and History

The Tax Treatment of Health Insurance: Introduction and History. Sherry Glied, Ph.D. Mailman School of Public Health Columbia University sag1@columbia.edu. What is the Tax Treatment of Employer-Sponsored Health Insurance?. Employee compensation paid in the form of health insurance

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The Tax Treatment of Health Insurance: Introduction and History

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  1. The Tax Treatment of Health Insurance: Introduction and History Sherry Glied, Ph.D. Mailman School of Public Health Columbia University sag1@columbia.edu

  2. What is the Tax Treatment of Employer-Sponsored Health Insurance? • Employee compensation paid in the form of health insurance • Deductible as business expense • not considered taxable income for employees • not considered part of the social security and Medicare payroll base.

  3. Jane is paid $40,000 and receives a health insurance policy worth $5,000. • Her employer can deduct $45,000 as a business expense • She pays income tax on $40,000 • She and her employer pay Medicare and Social Security taxes on $40,000 • Dave is paid $45,000 and does not receive health insurance through his employer. • His employer can deduct $45,000 as a business expense • He pays income tax on $45,000 • He and his employer pay Medicare and Social Security tax on $45,000

  4. Related Tax Provisions – Self-Employed • Self-employed people can (since 2003) • deduct 100% of health insurance premiums from net earnings • 1996 – 25% • Self-employed cannot • deduct health insurance premiums from Social Security and Medicare base

  5. Related Tax Provisions -- Flexible Spending Accounts • Can be used by employees to shelter from income and payroll taxes • employee payments for health insurance premiums • Employee payments for out-of-pocket expenses • 2007 – about 1/3 of private sector workers are offered FSAs

  6. Related Tax Provisions – HRA/HSA • HRA/HSA provisions • allow for tax-favored savings accounts in conjunction with high deductible health plans • HRAs began in 2002 • HSAs began in 2004 • About 8% of private sector workers were offered HSAs in 2007

  7. Related Tax Provisions – Deduction for Medical Expense • Deduct premiums and medical expenses that exceed 7.5% of AGI

  8. Cost of tax exclusion for employer group coverage in 2006 ($billions) Total: $208.6 Selden and Gray, Health Affairs, 2006.

  9. Source: CBO, 1994.

  10. Favorable tax treatment for ESI (at least some of the time) • Austria • Belgium • Canada • Denmark • France • Germany • Greece • Italy • United Kingdom (until 1997) Tapay and Colombo, OECD

  11. Thomasson, 2000

  12. Concerns • Not well targeted • Most benefits go to people who would have health insurance • Not progressive • Benefits rise with tax bracket • Inefficient incentives • Noted since 1970s

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