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INDIVIDUALLY OWNED HEALTH INSURANCE

1. Although individually owned health insurance does not receive all the tax benefits granted to the employer-paid coverage, it nonetheless receives certain tax advantages pertaining to both premiums and benefits.

ADJUSTED GROSS INCOME DEDUCTION LIMITS

2. Some insureds may be able to take an income tax deduction for the premiums they pay for individually owned health insurance policies. Whether income tax deduction for these medical expenses is available to a taxpayer who itemizes deductions depends on the person's level of adjusted gross income (AGI) and the amount of medical expenses that person incurs during the year.

3. Individuals can take an income tax deduction for medical expenses that exceed 7.5% of their adjusted gross income. Although taxpayers who itemize their deductions can generally take an income tax deduction for medical expense premiums paid, they cannot deduct the premiums paid for other types of health insurance.

a.

These non-deductible health and health related insurance policies include:

i. Critical illness insurance
ii. Hospital income insurance providing a stated benefit for each period of hospitalization irrespective of any other insurance benefits received
iii. Disability income insurance

HEALTH INSURANCE PREMIUMS FOR PARTNERS, S CORPORATION OWNERS, AND THE SELF EMPLOYED

4. Although most itemizing taxpayers made deduct medical expenses-which includes the premium the taxpayer pays for health insurance-to the extent total medical expenses exceed the applicable 7.5% AGI threshold, such a limitation does not apply to taxpayers who are self-employed. Self-employed insureds may be the 100% of their health insurance premiums to the extent of their earned income from the business in which they are engaged without reference to an AGI threshold.

a.

For purposes of the unlimited tax deduction of health insurance premiums, self-employed individuals are:

i. Sole proprietors
ii. Partners
iii. More than 2% S corporation owners

BENEFITS RECEIVED UNDER INDIVIDUALLY OWNED HEALTH INSURANCE

5. Benefits a taxpayer receives under personally paid health insurance coverage are generally exempt from income tax. In fact, a person need not include health insurance reimbursements the individual receives under health insurance in the taxpayer's gross income even if the reimbursement is in excess of his or her total medical expenses.

6. The tax treatment of excess reimbursements received under personally paid health insurance varies from the tax treatment of excess reimbursements under employer paid health insurance. Excess reimbursements received under employer-paid health insurance are includable in the recipients income insofar as they are attributable to the employer's premium payments.

MEDICAL AND HEALTH SAVINGS ACCOUNTS

1. Medical savings account (MSAs) became available through a pilot program under the Health Insurance Portability and Accountability Act (HIPAA) as a way to evaluate the effectiveness of a potential method to reduce the cost of healthcare by giving Insurance a direct financial stake in reducing healthcare utilization. Although the pilot program has ended, MSAs established during the duration of the pilot program continue. The MSA program was discontinued in 2003 and the law authorizing the program expired December 31st, 2007, when Congress failed to reauthorize it. However, based in part on the effectiveness of MSAs and their popularity, legislation passed in 2003 authorized Health Savings Accounts (HSAs).

2. The underlying principle behind MSAs and HSAs is that a participant would purchase a health insurance policy with a high deductible and also make contributions to a trust from which distributions may be taken principally to pay qualified medical expenses that are not reimbursed by the health insurance coverage. Examples of such unreimbursed expenses include qualified medical expenses not paid under the policy due to its high deductible or co-insurance requirement. Let's briefly examine the broad outlines of each program and their tax treatment.

ARCHER MEDICAL SAVINGS ACCOUNTS

3. A Medical Savings Account, also known as an "Archer Medical Savings Account," is a trust into which an eligible taxpayer may make contributions primarily to pay future medical expenses. Because the Medical Savings Accounts program expired, the new Archer Medical Savings Account plans may no longer be established and Medical Savings Accounts have largely been replaced by more flexible Health Savings Accounts.
Funds from Archer Medical Savings Accounts may be rolled over to Health Savings Accounts. However, Medical Savings Account plans established before the program expired may be continued and, in limited situations, new accounts may be opened.

4. In order to participate in a Medical Savings Account, an eligible individual is required to purchase and maintain a high deductible health Insurance policy
(HDHP).

a.

High Deductible Health Plans must comply with certain limits pertaining to the:

i. Minimum plan deductible
ii. Maximum plan deductible
iii. Maximum annual out-of-pocket requirements

5. Based on the type of coverage-that is, self only or family coverage- and the amount of the High Deductible Health Plan deductible, the plane participant can make a limited contribution to a Medical Savings Account. The maximum annual Medical Savings Account contribution for participants with self only coverage is equal to 65% of the deductible; the maximum annual Medical savings Account contribution for participants with family coverage is equal to 75% of the deductible. The participant is not required, however, to make Medical Savings Account contributions in any year.

TAX TREATMENT OF MEDICAL SAVINGS ACCOUNT CONTRIBUTIONS

6. When a plan participant makes a Medical Savings Account contribution that does not exceed the applicable limit (65% or 75% of the Health Deductible Health Plans deductible), the entire contribution is tax deductible without reference to the participants Adjusted Gross income threshold.

7. The contributions made to the Medical Savings Account by the participant are credited with interest, and that interest is tax deferred until distributed.

TAX TREATMENT OF MEDICAL SAVINGS ACCOUNT DISTRIBUTIONS

8. Distributions from a Medical Savings Account are intended primarily to pay qualified expenses that are not reimbursed by health insurance. Accordingly, when is distribution from a Medical Savings Account is used to pay for unreimbursed qualified medical expenses, those distributions are entirely tax-free.

9. If a person takes a Medical Savings Account distribution that exceeds his or her medical expenses, the excess amount must be included in income. In addition, a 20% tax penalty will be imposed, unless an exception applies.

a.

Excess distributions, although includible in income, will not be subject to the 20% tax penalty if they were received:

i. While the participant is disabled
ii. After the participants death
iii. After the participant reaches the age of eligibility for medicare

EMPLOYER ADMINISTERED PLANS SELF-INSURANCE

1. Very large employers may elect to self-insure rather than buy Group insurance coverage. Under self-insured plans, the employer funds and pays for member claims and benefits. The employer can therefore offer specific benefits that are best suited to employees' needs. This grants the employer more control over cost and flexibility over benefits.

2. In some cases, the employer will self-insure up to a certain amount and will carry insurance for anything above that amount under parts of total and individual stop-loss coverage. Premium for this insurance may be paid by the employer or with funds from employer/ employee contributions. Claims may be administered by the company or by a third party administrator hired to process claims and paperwork.