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February 10 2011

30 Ideas for 30 Days: Day 25

Nicole Kurokawa Neily

Most people – about 56 percent – receive health insurance through their employer. This setup is a relic of World War II, when companies were subject to pay caps – and thus, had to attract employees based on benefits (which, through a convenient loophole, were not taxed).

Obtaining insurance through your employer means that you don’t get to choose the plan you need – your company does. Would you prefer a high-deductible plan with a savings account? A Cadillac plan with gold-plated benefits? Too bad, because it’s not up to you! As the price of insurance rises, companies have begun to cut back on benefits, pass more of the burden on to employees, or drop coverage altogether – leaving employees with few options.

Suggestion #25: Equalize the tax treatment between employer and individual health care plans.

Sure, people are able to purchase insurance through the individual market – but with money from their paychecks that’s already had payroll taxes deducted (which can total 30% or more, after taking into account FICA taxes of Social Security and Medicare, as well as federal and state income taxes). 

What’s the math?

Let’s say an insurance policy costs $200, and that you earn $2000 per month. If your plan is through your employer, they’ll deduct your portion from your pre-tax earnings – the full $2000 – leaving you with $1800 in taxable income. You’ll pay taxes on that $1800 – which, at 30 percent, would be $540. You have $1260 left.

If you have to buy your plan in the individual market, however, things are a little bit different. For starters, you’ll pay tax on the full amount of income ($2000) off the bat, which at 30 percent, would be $600. You have $1400 remaining – and then use that income to purchase your $200 policy. You only have $1200 left! Over time, that money really starts to add up.

Adding to the complication is the fact that policies in the individual market tend to cost more. According to the Congressional Budget Office, “the average premium per person covered (including dependents) for new nongroup policies would be about 10 percent to 13 percent higher in 2016 than the average premium for nongroup coverage in that same year under current law.” Some of those people will receive subsidies to offset these costs… but not everyone. Suddenly, that $200 policy is $220, and you have a few less dollars in your pocket…

A better way to address health care reform would be to get rid of the current maze of selective tax breaks, subsidies, and other market distortions, and to treat employer and individual health insurance policies the same. Allow everyone to purchase health insurance policies with pre-tax dollars. This will inject a dose of much-needed competition into the market, as companies will be forced to compete with each other for customers. Consumers will have a greater interest in what their policies contain, and whether they’re getting their money’s worth. And in addition, individuals won’t be chained to their jobs because of their insurance coverage – since they’ll be able to purchase a policy with pre-tax dollars, regardless of their employer.

It’s time to create a more dynamic insurance market that can better respond to the needs of the 21st century workforce. Let’s reform the employer-based health insurance program, and give consumers more control over their insurance needs.

Independent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
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