The Hidden Costs of Good Health…

During the recently concluded presidential election, we were consistently reminded of how dysfunctional the relationship between Democrats and Republicans had become.  With the threat of the fiscal cliff looming, it seemed especially important that we, as voters, make the right choices in the election.  At stake were the estate tax, the Bush era income tax cuts, the payroll tax cut, and the fate of Obamacare.  However, now that the election is over, the debate over how to resolve the nation’s financial issues is beginning anew with another iteration of last year’s debt ceiling debate thrown into the mix.

To add to the concerns at the federal level, the states are getting involved as they decide whether to participate in the expansion of Medicaid (MediCal in California) mandated by Obamacare.  As the debate continues, it will largely be a conversation about costs, deficits, and other money matters.  However, after Medicare and Medicaid, the third largest federal health expenditure is a tax break you may not even realize you have!  If you are fortunate enough to have employer-provided health insurance, that benefit is not generally subject to income tax even though it is part of your compensation.  By taxing this benefit and eliminating the “loophole,” the federal government stands to increase revenue by $250 billion.

The main groups of individuals who are taxed on these benefits are same sex married couples and registered domestic partners.  Because the Defense of Marriage Act (DOMA) specifically excludes same-sex relationships from marriage and the word “spouse,” same sex couples who are covered on their partner’s employer-provided health insurance must pay income tax on the value of the benefit received.  In some cases, the increase in taxes is dramatic.  Although there are no serious proposals to begin taxing all Americans’ health insurance benefits, there does appear to be a possibility that this little-known insurance subsidy could be expanded to include same sex married couples and registered domestic partners if DOMA is ruled to be unconstitutional.  The Supreme Court is currently considering whether to take on the cases involving DOMA and California’s Proposition 8, among other similar laws.  Multiple lower courts have ruled that DOMA is unconstitutional.  The effect of this ruling could dramatically impact planning for MediCal  and estate taxes.

Even though there are no proposals to make health insurance coverage taxable as income across the board, Obamacare does include some taxation of health benefits as one of its new tax increases.  The tax will be imposed beginning in 2018 against health insurers on high-premium health insurance policies.

Part of the argument for taxing health insurance or, as Obamacare does, health insurers, is that low income individuals are less likely to be covered by employer-provided healthcare and, therefore, less likely to be harmed by this tax approach.  As states look for ways to cover the existing gaps in Medicaid and to fund an expansion to cover even more individuals while also creating and implementing health insurance exchanges, perhaps the tax reform discussion will turn toward taking back this tax break.  After all, both sides have said everything is on the table!

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