	Tax Benefits in Current Law

Current law provides significant tax benefits for health insurance and expenses. In addition, the tax benefits affect the distribution and cost of health care. Health insurance paid by employers generally is excluded from employees' gross income in determining their income tax liability; it also is not considered for either the employees' or the employer's share of employment taxes (i.e., Social Security, Medicare, and unemployment taxes). The exclusion for employer-paid insurance should be distinguished from the tax deduction employers are allowed for the payments they make and other costs they incur. For income taxes, the exclusion applies to employees as individual taxpayers, while the deduction applies to employers. Cafeteria plans may be simple or complex. Health Savings Accounts

Health Savings Accounts (HSAs) are one way that people can pay on a tax-advantaged basis for unreimbursed medical expenses (deductibles, copayments, and services not covered by insurance). Health Coverage Tax Credit

Three groups of taxpayers are potentially eligible for the health coverage tax credit (HCTC):
individuals receiving a Trade Readjustment Allowance under the Trade Adjustment Assistance (TAA) program, including those eligible for but not yet receiving the allowance because they have not yet exhausted their state unemployment benefits; individuals receiving wage subsidies in the form of Re-employment Trade Adjustment Assistance (RTAA) benefits; and individuals aged 55 and older receiving a Pension Benefit Guaranty Corporation (PBGC) pension payment. Coverage under veterans health care programs and the benefits they provide are not considered taxable. However, other specifications differ depending on the plan. Some Consequences of the Tax Benefits60

		Increases in Coverage

By lowering the after-tax cost of insurance, some of the tax benefits described above help extend coverage to more people. Tax benefits also lead some people to obtain more coverage than they might otherwise choose. The uncapped exclusion for employer-paid insurance, which can benefit nearly all workers and is easy to administer, is partly responsible for the predominance of employment-based insurance in the United States. Increases in Health Care Use and Cost

Tax benefits increase the demand for health care by enabling insured people to obtain services at discounted prices. Consumer-driven health care (most commonly associated with high-deductible insurance plans coupled with Health Reimbursement Accounts and Health Savings Accounts) is a recent attempt to help people obtain coverage without driving up costs as much. Even if these individuals itemize their deductions, they may deduct health insurance premiums only to the extent that they (and other health care expenditures) exceed 7.5% of AGI. However, to the extent that health insurance is considered a way of spreading an individual's catastrophic economic risk over multiple years, basing tax savings on marginal tax rates might be justified. Tax Policy for Health Insurance . Consumer-Directed Health Plans: Potential Effects on Health Care Spending and Outcomes .
How tax policy affects health insurance and health care spending is a perennial subject of discussion in Washington. The issue is prompted by the size of the tax benefits, by their effect on the cost and allocation of health care resources, and by interest in comprehensive tax reform.
Current law contains significant tax benefits for health insurance and expenses. By far the largest is the exclusion for employer-paid coverage, which employees may omit from their individual income taxes. The exclusion also applies to employment taxes and to health benefits in cafeteria plans. (The exclusion should be distinguished from the deduction employers may take for the payments they make and other costs they incur.) Other important tax benefits include the following:
Self-employed taxpayers may deduct 100% of their health insurance, even if they do not itemize deductions, and taxpayers who itemize may deduct insurance payments and other unreimbursed medical expenses to the extent they exceed 7.5% of adjusted gross income; Some workers eligible for Trade Adjustment Assistance or receiving a pension paid by the Pension Benefit Guarantee Corporation can receive the Health Coverage Tax Credit (HCTC) to purchase certain types of insurance; Four tax-advantaged accounts are available to help taxpayers pay their health care expenses: Flexible Spending Accounts, Health Reimbursement Accounts, Health Savings Accounts, and Medical Savings Accounts; Voluntary Employees' Beneficiary Association plans (VEBAs) are vehicles for prefunding retiree health benefits on a tax-advantaged basis for certain groups of workers, particularly unionized workers; and Coverage under Medicare, Medicaid, CHIP, and military and veterans health care programs is not considered taxable income.
By lowering the after-tax cost of insurance, these tax benefits generally help extend coverage to more people; they also lead some people to obtain more coverage than they otherwise would. The incentives influence how coverage is acquired: the uncapped exclusion for employer-paid insurance is partly responsible for the predominance of employment-based insurance in the United States. In addition, the tax benefits increase the demand for health care by enabling insured people to obtain services at discounted prices; this in turn contributes to rising health care costs. When insurance is viewed as a form of personal consumption, most tax benefits appear to be inequitable because taxpayers' savings depend on marginal tax rates. When viewed as spreading catastrophic economic risk over multiple years, however, basing those savings on marginal rates might be justified as the proper treatment for losses under a progressive tax system.
This report details the current law for various tax benefits for health insurance coverage and identifies changes in certain provisions affected by the Patient Protection and Affordable Care Act (ACA; P.L. 111-148) as amended.