A new standard deduction for health insurance would be available to any taxpayer with qualified health insurance, whether provided through an employer or purchased directly from an insurer regardless of the actual cost of the coverage. In general, the current tax exclusion for employer paid coverage, the individual medical expense deduction, and the self-employed premium deduction would no longer be available.
Changes would also be made to the Health Coverage Tax Credit (HCTC) that was created under the Trade Adjustment Assistance Reform Act of 2002. Under this program, refundable tax credits for qualified health insurance are available to eligible individuals whose jobs were lost as a result of competition from foreign trade or whose retiree health benefits were lost as a result of their former employer's corporate insolvency.
Target population(s)
Uninsured individuals under age 65. The proposed changes to the tax treatment of employer and individually-purchased health insurance would affect a much broader population.
Eligibility
Individuals who file federal income taxes and have qualified health insurance. Individuals (and their dependents) enrolled in Medicare, Medicaid or SCHIP would not qualify for the standard deduction for health insurance (SDHI) - see below.
Annual amount of credit/deduction
A standard deduction for health insurance (SDHI) of $15,000 for family coverage and $7,500 for single coverage) would be provided to all families who obtain health insurance that meet minimum requirements. The health insurance could be obtained directly from an insurer or through an employer. The $15,000 or $7,500 SDHI would be available regardless of how much a family or individual actually spent on health insurance. The SDHI would apply for both purposes of calculating income taxes and payroll taxes. Individuals would be eligible to claim the SDHI if they claim the Health Coverage Tax Credit or use-tax preferred distributions from HSAs or Medical Savings Accounts to pay for insurance premiums.
Qualified health insurance coverage
To be qualified for the SDHI, the insurance coverage would have to provide for: (1) a limit on the amount an individual or family could be required to pay out-of-pocket for covered expenses that is not higher than the amounts allowable for HSAs (e.g., for 2007, those limits are $5,500 for single coverage and $11,000 for family coverage); (2) a "reasonable" annual and/or lifetime benefit maximum; (3) coverage for inpatient and outpatient care, emergency benefits, and physician care; and (4) guaranteed renewability. These federal requirements would not preempt state mandated benefit laws. Long-term care insurance and Medicare would not qualify for the standard deduction.
HCTC: State-based coverage that is qualified for the HCTC would be permitted to impose a pre-existing condition restriction for up to 12 months, provided the plan reduces the restriction period by the length of the eligible individual's creditable coverage. (Under current law, the state-based plan must provide coverage without pre-existing condition restrictions if an eligible individual has only 3 months of creditable coverage.) Additional technical changes are proposed.
Tax credit refundability
No provision. (See "Qualified health insurance coverage" for changes to the Health Coverage Tax Credit.)
Availability of tax credit advance payment
No provision.
Requirements on employers to maintain existing coverage
No provision.
Changes to the tax treatment of health insurance
The SDHI would replace the existing tax exclusion for employer-paid health insurance. Employers would be required to report the value of health insurance coverage to their employees on their annual Form W-2 and such amounts would be subject to withholding and payroll taxes.
Under the proposal, most individuals could no longer take an itemized medical expense deduction. Under current law, individuals who itemize their tax returns are allowed to deduct from their income taxes unreimbursed health care expenses and premiums only to the extent that they exceed 7.5% of adjusted gross income. (Medicare enrollees would still be eligible for the itemized medical expense deduction.) In addition, the self-employed premium deduction would also be repealed.
The current deduction for contributions to HSAs would remain as is under current law (see "Other provisions in bill").
Employers would continue to be able to deduct from their taxes as a business expense any health insurance expenses paid on behalf of their employees.
New federal requirements on the health insurance market (e.g., underwriting, rating or marketing)
No provision. (Note, however, that insurers would have an incentive to offer policies that are qualified for the SDHI.
(See "Qualified health insurance coverage" for changes to the Health Coverage Tax Credit.)
Related changes to public insurance programs (Medicare, Medicaid, SCHIP)
No provision.
Effective date
Effective for tax years after December 31, 2008. (Changes to the HCTC effective for tax years after December 31, 2007.)
Other provisions in bill
Changes would be made to the tax treatment of high deductible health plans (HDHPs) that are eligible for Health Savings Accounts. (See "Bush Administration proposal under "Tax Incentives for Employer-Based Health Insurance".) An Affordable Choices Initiative would be established through which the federal government would provide grants to eligible states to make private health insurance available and provide help to Americans who cannot afford insurance or who have persistently high medical expenses. The Initiative would be financed by redirecting portions of existing Medicare and federal Medicaid funding that now goes to disproportionate share hospitals.