The Affordable Care Act (“ACA” also known as “Obamacare”) has a goal of providing individuals the ability to purchase health insurance coverage much like that available through work based health plans. However, the tax treatment of premiums is an important and unpopular distinction between individual and employer health coverage, and Obamacare did not change this uneven outcome. Consumers believe by a six-to-one margin that health insurance premiums they pay as individuals should be tax-free, just as it is when their employer buys it for them.
Under current tax rules employers deduct health insurance premium payments from their income before they pay tax, and they also exclude these payments from their employees’ taxable income. By contrast when consumers buy health insurance on their own they pay with after-tax dollars. This means that a consumer in a 33% federal income tax bracket must earn $1.50 in order to have $1.00 to pay for health insurance premiums purchased on the individual market. If this consumer spends $6,000 annually on health insurance, then he or she has to earn $9,000 in pre-tax dollars to pay for it. Additionally, most states have income tax requirements that would need to be paid before the funds are available for health insurance payments.
The difference in tax treatment between individuals and businesses with respect to health insurance premiums goes back decades. In the 1950s, employers’ contributions to employee health insurance were formally excluded from taxation to the employee.1 Moreover, during this period these employer contributions to employee health insurance were also affirmed as deductible business expenses.2
Most consumers who purchase health insurance on their own do not enjoy these advantages. The self-employed can treat themselves as employers by deducting health insurance premiums from taxable income if a) they made a profit for the year and b) the self-employed individual was not eligible to enroll in a health plan provided by a former employer, spouse's employer, or former spouse's employer.3 For others privately purchased health insurance is paid with after-tax dollars except for any premium amount that exceeds 10% of adjusted gross income for the year.4
The poll comes at an important time because reforms in the individual market becoming effective on January 1, 2014 will dramatically increase access to coverage. The success of Obamacare rests on a broad group of people coming into the insurance pool. This means that healthy and sick alike need to see the value of health insurance coverage and elect to purchase it. In addition the Administration’s decision to delay the employer mandate to cover workers makes it more likely that individuals who are not self-employed and are not eligible for tax benefits will be entering the individual market in 2014.
When asked “Should consumers’ premium payments to buy health insurance be tax free the same way it is for companies paying for health insurance?” the largest majority of respondents answered “Yes, the payments should be tax-free.” At 47%, this preference for paying for health insurance premiums with pre-tax dollars was over 6 times more popular than the preference to pay for health insurance premiums with after-tax dollars. The same ratio applied for those without an opinion compared to paying for premiums with after-tax dollars.
Given the low level of consumer support for taxing dollars used for health insurance, it is unclear whether the historical tax advantage businesses have in health insurance can continue to be restricted from consumers. This is especially true now when so many other fundamentals of the health insurance market are being reformed.
Results are based on 744 responses to an online survey conducted from August 12, 2013 to August 15, 2013. Respondents were asked, " Should consumers’ premium payments to buy health insurance be tax free the same way it is for companies paying for health insurance?" Respondents had the option of selecting one of the following answers: “Yes, the payments should be tax-free,” “No, the payments should be taxed,” and “I don’t have an opinion.” The answer options were displayed in randomized order. The survey was displayed within a network of over 100 different news web sites and other content sites. Demographic inferencing and methodology to acquire survey respondents who approximate national statistics on age, gender, income, and region was performed by Google-administered technology. Race, education, and health insurance status were not examined. Margin of error across survey responses is estimated at + 4.3/-4.3.
This survey analysis was completed by Kev Coleman, Head of Research & Data at HealthPocket.com. Correspondence regarding this study can be directed to Mr. Coleman at firstname.lastname@example.org.
Feedback and questions are welcome but, given the volume of email, personal responses may not be feasible.
1 http://www.ebri.org/publications/facts/index.cfm?fa=0302fact. Accessed August 16, 2013.
3 Ibid. Deductible eligibility may vary by months during a tax year. Current employer health plans would also disqualify a self-employed individual from the health insurance premium deduction for any month where this eligibility applied.
4 For people age 65 and older, the threshold is 7.5% of adjusted gross income. http://www.irs.gov/taxtopics/tc502.html. Accessed August 16, 2013.
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