Portability – Part II

by admin on 06/20/2011 1:04 AM

Problem: Younger Spouses and Retirees on Medicare. The lack of individually owned, portable insurance is particularly burdensome for many women who are married to older men. When a husband retires and enrolls in Medicare, wives may be left without any coverage – and often at vulnerable times in their lives. At the same time, Medicare won’t allow members to sign up underage spouses. Until the wife reaches 65 and can also enroll in Medicare, the couple will have to purchase her insurance with after-tax dollars. She’ll also be at a time in her life when she’s charged higher premiums for health insurance, since health risks tend to rise with age. And she’ll pay even more (or possibly even be denied insurance altogether) if she already has an expensive health problem or is recovering from a disease such a breast cancer.

Problem: Federal Laws Designed to Encourage Portability Have Actually Outlawed It. Under the current system, employers cannot buy individually-owned insurance for their employees. Specifically, lawyers interpret the Health Insurance Portability and Accountability Act of 1996 (HIPAA) to say that if employers purchase employee health insurance with untaxed dollars, the insurance must be group insurance. A better alternative would allow employers to purchase individually-owned, personal and portable insurance for their employees. Even though employers would pay some or all of the premiums, employees could take the insurance with them as they move from job to job.

Source of the Problem: Tax Penalties for Portable Insurance. Tax law is the main reason companies provide their workers with health insurance rather than pay higher wages with which employees could buy their own insurance.

People receiving employer-based health insurance enjoy an enormous tax advantage. Employer-paid premiums avoid federal, state and local income taxes, as well as the (FICA) payroll tax. By contrast, people who buy their own insurance get no tax break unless their medical costs exceed 7.5 percent of their adjusted gross income. Even then they get only a simple deduction and must itemize on their tax return. As a result, genuinely portable insurance is actually penalized under the tax law.

For a typical middle class family, government is effectively paying for half the cost of employer-provided health insurance. To see what this means, suppose that insurance for the family costs $6,000. If the insurance is purchased by an employer, it can be purchased with pretax dollars. This implies that the employee must produce and earn $6,000 that will be set aside as pretax payment for insurance rather than as taxable wages. However, if the insurance were to be purchased directly by the family, the employee must earn $12,000 in order to have enough left over after the payment of taxes to pay for the insurance. In terms of the amount of pretax income needed to purchase insurance, insurance purchased directly with after-tax dollars costs the family twice as much!

To be continued in Section 8 in October 2014

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