Lost Health Insurance Deduction Is a Bitter Pill for Self-Employed

The death of health care reform efforts this year may deal an unexpected blow to millions of self-employed Americans, who are now expected to lose--at least temporarily--a lucrative tax deduction for health insurance expenses.

The lost deduction, which allowed self-employed individuals to deduct up to 25% of the cost of their health insurance premiums, could force them to pay hundreds of dollars in additional taxes or cancel their coverage.

“It’s a crime,” said John Motley, vice president for government affairs of the National Federation of Independent Business. “Not only is there no health care reform, but we lost even the very meager incentive that small, self-employed people had to purchase health insurance.”

Corporations can deduct 100% of the cost of providing insurance for their employees. However, self-employed people cannot. Their health insurance premiums are considered personal expenditures, not business expenses, so their deductions have been severely limited. In past years, self-employed workers were allowed to deduct up to 25% of the cost of their health insurance premiums. But the provision in the federal Tax Code that allowed this deduction expired at the end of 1993.

Lawmakers in both parties had expected to restore it and provide an even more generous break this year as part of health reform.

Many health care reform bills--including those of President Clinton and Senate Minority Leader Bob Dole (R-Kan.)--proposed giving the self-employed a 100% tax deduction, for example. However, other health care reform measures were not as generous, limiting the deduction to between 50% and 80% of health insurance expenses. Expanding the deduction proved troublesome because it was expensive.

The 25% tax deduction, which applied to insurance bought for self-employed workers, their spouses and dependents, cost the Treasury about $500 million a year. Expanding it to 100% would cost $2.5 billion a year.

Some experts maintain that the loss of this deduction could prove debilitating.

More than 12 million Americans are self-employed for part or all of their lives. And almost 3 million--or a quarter of that group--have no health insurance, according to the Employee Benefit Research Institute.

A study conducted last year by the National Assn. for the Self-Employed predicted that 400,000 more self-employed would go without insurance if they lost the 25% tax deduction.

Several lawmakers, including Reps. Fred Grandy (R-Iowa) and Jan Meyers (R-Kan.), are pushing bills to revive the 25% tax deduction. However, some legislative experts maintain the chances of getting it through in the next few weeks--before the current legislative session ends--are slim.

It’s possible that the deduction will be reinstated next year, but if Congress waits until after the April 15 tax filing deadline, it would create headaches for anyone hoping to claim it.

The self-employed health care deduction expired in mid-1992, for example, but wasn’t reinstated until mid-1993. As a result, millions of Americans were entitled to refunds, but because the time and expense of amending their returns was often substantial, some experts maintain that only a fraction of those due refunds actually claimed them.

The 25% deduction is worth $280 a year to a self-employed person in the 28% tax bracket who spends $4,000 a year on health insurance.

* OVER AND OUT

Health reform was declared dead for this year. A1