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Merritt Personal Lines Manual: Tax Treatment

Group health insurance dominates the market because it receives a number of critical subsidies from the federal government. Most of the subsidies come in the form of tax breaks.

An employer can deduct all premiums paid for group or franchise health insurance on employees as a business expense, provided the employer is not the beneficiary of the policy (benefits are payable to the employees, not the employer). The value of the coverage provided by the employer is not considered taxable income to the employee.

Payments for permanent losses under accidental death and dismemberment coverage (such as loss of a limb or bodily function, loss of sight or hearing or permanent disfigurement) are not included as taxable income to the employee, regardless of who paid the premium.

Effective in 1997, long-term care insurance provided on a group basis enjoys the same tax status as group life and health insurance, meaning premiums paid by the employer are tax deductible and benefits are received tax free up to specified limits.

Medical expense benefits are generally considered to be reimbursements for medical expenses already incurred and therefore are not taxable as income.

A taxpayer cannot deduct medical expenses from income for tax purposes that have been reimbursed by the insurance company. This is true whether premiums for the policy were paid for by an employer or by the individual.

With all of these tax breaks, it's little wonder that so many people get their health coverage through group policies at work. The only question: Will the federal government ever end the subsidies it gives employers -- as part of some larger health insurance reform plan or otherwise?

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