Tax Subsidies for Private Health Insurance

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).
Please also see TPC companion paper Tax Incentives for Health Insurance

Policy-makers are considering a variety of new tax credit proposals to expand health insurance coverage. Understanding how current tax subsidies work and their role in supporting employer-sponsored insurance (ESI) is important when designing such policies.

This brief presents essential information about the structure and distribution of existing tax subsidies for ESI and the implications for new policy options.

HOW DOES THE FEDERAL GOVERNMENT SUBSIDIZE PRIVATE HEALTH INSURANCE?

• The largest subsidy is the tax exemption for employer contributions to ESI. When employers purchase or provide insurance for their employees, their contributions to the premium are exempt from income and payroll taxes.
• Employees' contributions to ESI are also tax-exempt if workers use flexible spending accounts (FSAs). Once established by employers, workers can use these tax-exempt accounts to set aside a portion of their income to pay for health insurance and expected medical expenses.
• People who buy insurance outside of work do not have the same tax advantages. They can deduct medical expenses, including premiums, that exceed 7.5 percent of their adjusted gross income. However, many people never reach that threshold. Special rules apply to self-employed people, who can deduct a portion of their health insurance costs without meeting the threshold. This year, these costs become fully deductible.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Usage and reprints: Most publications may be downloaded free of charge from the web site and may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact [email protected].

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.

Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute.