1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 21 - 10Copyright 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

11. 21 - 11Copyright 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