21 - 1Copyright 2008, The National Underwriter Company Taxation of Individual Health Insurance Coverage  What is it?  Individual health insurance  Provides reimbursement for certain medical and hospital expenses in the event of an insured’s illness or injury  Generally issued through an insurance company  Many individuals obtain coverage through their employer  Major types  Prepaid plans  Pay health care providers before the care is delivered  Example – Health maintenance Organization (HMO)  Postpaid plans  Pay health care providers or reimburse the individual after the care has been provided  Example – traditional indemnity plans Chapter 21 Risk Management For Financial Planners

21 - 2Copyright 2008, The National Underwriter Company  Business uses  Employer purchased health insurance coverage for employees through a group health insurance policy  First group health insurance policy  Montgomery Ward and Company – 1910  Weekly benefits for employee unable to work due to illness or injury  1940’s – significant rise in employer provided health insurance policies  Employee hard to find and employers prohibited from raising wages.  No such restrictions on providing fringe benefits Chapter 21 Risk Management For Financial Planners Taxation of Individual Health Insurance Coverage

21 - 3Copyright 2008, The National Underwriter Company  Business uses (cont’d)  First major medical coverage  Liberty mutual 1949  Designed to supplement the basic medical expense plan coverage  Originally employers paid the entire cost of the group health insurance premium  Today – costs have increased significantly and employers and employees share the cost Chapter 21 Risk Management For Financial Planners Taxation of Individual Health Insurance Coverage

21 - 4Copyright 2008, The National Underwriter Company  Tax Implications  Taxation of individual health insurance premiums  Medical expenses for medical care insured, spouse and dependants deductible in excess of 7.5% of their adjusted gross income  Premiums paid for medical expense insurance included  Medical care  Amounts paid for “diagnosis, cure, mitigation, treatment or prevention of disease or for the purpose of affecting any structure or function of the body”  Cost of transportation required for medical care also included  Cosmetic surgery  Not included unless necessary to correct an injury resulting from an accident or disfiguring disease Chapter 21 Risk Management For Financial Planners Taxation of Individual Health Insurance Coverage

21 - 5Copyright 2008, The National Underwriter Company  Tax Implications (cont’d)  Taxation of individual health insurance premiums (cont’d)  Premiums for non-medical benefits are not deductible  Disability income  Accidental death and dismemberment  Taxation of individual health insurance benefits  Generally, benefits paid from personal health insurance are exempt from income tax  Benefits are tax exempt not only if received by the insured, but also if received by a person having an insurable interest in the insured  Only un-reimbursed medical expenses are deductible Chapter 21 Risk Management For Financial Planners Taxation of Individual Health Insurance Coverage

21 - 6Copyright 2008, The National Underwriter Company  Tax Implications (cont’d)  Taxation of group health insurance – employees  generally, premiums paid by an employer are excludible from the employee income  Coverage or premiums on medical expense insurance and dismemberment and sigh loss coverage for the employee, spouse and dependants are tax exempt to the employee  There is no specific limit on the value of health insurance coverage that may be excluded from the employee gross income  Retired employees  Can exclude employer paid health insurance premiums from income  Medicare premiums paid by an employer  Excluded from an employee income Chapter 21 Risk Management For Financial Planners Taxation of Individual Health Insurance Coverage

21 - 7Copyright 2008, The National Underwriter Company  Tax Implications (cont’d)  Taxation of group health insurance – employees  Employer reimbursement to employee for personally owned medical expense insurance  Excludible from employees gross income  If employer simply pays a sum to the employee which may be used to pay premiums for medical expense insurance, but is not required  Taxable income to the employee Chapter 21 Risk Management For Financial Planners Taxation of Individual Health Insurance Coverage

21 - 8Copyright 2008, The National Underwriter Company  Tax Implications (cont’d)  Exclusion only available to active employees and not to self employed individuals  Fulltime life insurance agents are treated as employees for this purpose  if they qualify as employees under the social security act  Employer paid premiums for independent contractors  Reported as taxable income by the contractors Chapter 21 Risk Management For Financial Planners Taxation of Individual Health Insurance Coverage

21 - 9Copyright 2008, The National Underwriter Company  Tax Implications (cont’d)  Taxation of group health insurance – employer  Employer can deduct as a business expense premiums paid for individual health insurance and group health insurance for one or more employees  Premiums for medical expenses for the employee, spouse and dependants  Deductible only if benefits are paid to the employee  Sole proprietor or partnership can deduct premium payments for group health insurance for their employees Chapter 21 Risk Management For Financial Planners Taxation of Individual Health Insurance Coverage

Copyright 2008, The National Underwriter Company  Tax Implications (cont’d)  Taxation of group health insurance – employer (cont’d)  Sole proprietor cannot take a deduction for his own health insurance coverage if he/she is eligible for a plan offered by an employer of himself or spouse  Amounts paid to active and retired and retired employees for reimbursement of Medicare premiums are also deductible  To be deductible  Premiums plus all other compensation must be considered reasonable compensation for the employee services Chapter 21 Risk Management For Financial Planners Taxation of Individual Health Insurance Coverage

Copyright 2008, The National Underwriter Company  Alternatives to individually purchased health insurance  Self funding  Group health insurance  Provided through an employer or association  Open enrollment periods – No evidence of insurability  Cafeteria plans  Employee chooses among two or more benefits consisting of cash and qualified benefits Chapter 21 Risk Management For Financial Planners Taxation of Individual Health Insurance Coverage