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CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1

I. OVERVIEW ....................................................................................................................... 2

II. PRESENT LAW ................................................................................................................. 3

A. Employer-Provided Health Care .................................................................................. 3

1. General Rules .......................................................................................................... 3 

2. Flexible Spending Accounts and Health Reimbursement Arrangements ............... 4 

B. Deduction for Health Insurance Premiums of Self-Employed Individuals .................. 6

C. Itemized Deduction for Medical Expenses ................................................................... 7

D. HSAs and Archer MSAs............................................................................................... 8

E. Refundable Credit for Health Insurance Expenses of Certain Classes of 

Individuals................................................................................................................... 11

F. Other Tax Rules .......................................................................................................... 12

1. Welfare Benefit Funds, VEBAs, and Retiree Medical Accounts ......................... 12 

2. Long-term care ...................................................................................................... 12 

3. Distributions for public safety officers ................................................................. 14 

APPENDIX A: COMPARISON OF TAX BENEFITS FOR HEALTH EXPENSES ................ 15
1 

INTRODUCTION 

The House Committee on Ways and Means has scheduled a public hearing for October 

29, 2008, on economic recovery, job creation, and investment in America. Among the issues the 

Committee will consider is the increase in the cost of health care. This document,1

 prepared by 

the staff of the Joint Committee on Taxation, provides a description of the rules relating to the 

taxation of health insurance and healthcare related expenses. 

 1

 This document may be cited as follows: Joint Committee on Taxation, Present Law Tax 

Treatment of the Cost of Health Care (JCX-81-08), October 24, 2008. This document is available at 

www.jct.gov. 
2 

I. OVERVIEW 

The Internal Revenue Code (the “Code”)2

 provides for a number of tax rules in the case 

of health insurance and healthcare-related expenses. Such rules include the following: 

 The exclusion of employer-provided health insurance coverage and the benefits 

received pursuant to such coverage (for income and payroll tax purposes). 

 The tax deduction for self-employed individuals for the cost of health insurance 

coverage (for income tax purposes). 

 The itemized deduction for unreimbursed medical expenses to the extent that such 

expenses exceed 7.5 percent of adjusted gross income (for income tax purposes). 

 The ability of a taxpayer covered under a high deductible health plan to maintain a 

tax-exempt savings account, funded with deductible (or excludable) contributions, for 

tax excludable reimbursement of health-related expenses (HSAs and Archer MSAs) 

(for income tax purposes and, in the case of employer contributions, for payroll tax 

purposes). 

 A refundable tax credit equal to 65 percent of the cost of the qualified health coverage 

paid by certain displaced individuals (for income tax purposes). 

Appendix A contains a table that compares the tax benefits described in this pamphlet by 

the taxpayers eligible for the benefit, the dollar limit on the benefit, and expenses that qualify for 

the benefit. 

 

 2

 Except as is otherwise noted, references in this document are to sections of the Code. 
3 

II. PRESENT LAW 

A. Employer-Provided Health Care 

1. General Rules 

The Code generally provides that employees are not taxed on (that is, may “exclude” 

from gross income) the value of employer-provided health care. As with other compensation, 

the amount paid by employers for employer-provided health care of employees is deductible. 

Unlike other forms of compensation, however, if an employer contributes to a plan providing 

health coverage for employees (and the employees’ spouses and dependents), the contribution 

and all benefits (including reimbursements) for medical care under the plan are excludable from 

the employees’ income for income tax purposes and are excludable from the employees’ wages 

for payroll tax purposes.3

 The exclusion applies both in the case in which an employer absorbs 

the cost of employees’ medical expenses not covered by insurance (i.e., a self-insured plan) as 

well as employer payments to purchase health insurance. There is no limit on the amount of 

employer-provided health coverage that is excludable. 

Active employees participating in a cafeteria plan may be able to pay their share of 

premiums on a pre-tax basis through salary reduction.4

 Such salary reduction contributions are 

treated as employer contributions and thus also are excluded from gross income and wages for 

payroll tax purposes. 

 3

 Secs. 104, 105, 106, 125, 3121(a)(2), and 3306(a)(2). Health coverage provided to active 

members of the uniformed services, military retirees, and their dependents are excludable under section 

134. That section provides an exclusion for “qualified military benefits,” defined as benefits received by 

reason of status or service as a member of the uniformed services and which were excludable from gross 

income on September 9, 1986, under any provision of law, regulation, or administrative practice then in 

effect. 

4

 If an employer offers employees a choice between taxable benefits (which include cash 

compensation) and qualified benefits (which include employer-provided accident and health coverage), 

the choice must generally be provided under a cafeteria plan that satisfies section 125. Otherwise, 

providing this choice may result in income inclusion even if the employee chooses an excludable benefit. 

See sec. 125 and proposed Treas. Reg. secs. 1.125-1 through -7, published in the Federal Register on 

August 6, 2007, 72 F.R. 43938. 

A cafeteria plan must be in writing and must not provide for deferred compensation except as 

specifically provided in section 125(d). Certain excludable benefits are not permitted to be provided in a 

cafeteria plan, including long-term care benefits, contributions to Archer MSAs, qualified scholarships 

under section 117, benefits under educational assistance programs under section 127, and certain fringe 

benefits under section 132. HSA contributions are allowed through a cafeteria plan. If benefits provided 

under a cafeteria plan discriminate in favor of highly compensated participants, any exclusion from 

income for benefits under the plan may not apply to such highly compensated participants. Any qualified 

benefit must also satisfy any specific requirements under the section that allows its exclusion. 
4 

The Employee Retirement Income Security Act of 1974 (“ERISA”) preempts State law 

relating to certain employee benefit plans, including employer-sponsored health plans.5 While 

ERISA specifically provides that its preemption rule does not exempt or relieve any person from 

any State law which regulates insurance, ERISA also provides that an employee benefit plan is 

not deemed to be engaged in the business of insurance for purposes of any State law regulating 

insurance companies or insurance contracts. As a result of this ERISA preemption, self-insured 

employer-sponsored health plans need not provide benefits that are mandated under State 

insurance law. 

Distinct from the exclusion, certain rules relating to coverage apply in the case of group 

health plans.6 The Consolidated Omnibus Reconciliation Act of 1985 (“COBRA”) requires that 

a group health plan must offer continuation coverage to qualified beneficiaries in the case of a 

qualifying event (such as a loss of employment). In addition, in the case of group health 

coverage, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) imposes a 

number of requirements that are designed to provide protections to health plan participants.7

 For 

example, HIPAA provides rules that prohibit discrimination with respect to eligibility and 

premium contributions on the basis of health status. HIPAA also provides rules relating to 

specific coverage (e.g., rules for minimum hospital stays following the birth of a child). 

The Code imposes an excise tax on group health plans that fail to meet HIPPA and 

COBRA requirements.8

 The excise tax generally is equal to $100 per day per failure during the 

period of noncompliance and is imposed on the employer sponsoring the plan if the plan fails to 

meet the requirements. 

2. Flexible Spending Accounts and Health Reimbursement Arrangements 

In addition to offering health insurance (or self-insurance), employers often agree to 

reimburse medical expenses of their employees (and their spouses and dependents). These 

arrangements are commonly used by employers to pay or reimburse employees for medical 

expenses that are not covered by health insurance. These arrangements include health flexible 

spending arrangements (“FSAs”) and health reimbursement arrangements (“HRAs”). 

 5

 ERISA sec. 514. 

6

 A group health plan is defined as a plan (including a self-insured plan) of, or contributed to by, 

an employer (including a self-employed person) or employee organization to provide health care (directly 

or otherwise) to the employees, former employees, the employer, others associated or formerly associated 

with the employer in a business relationship, or their families. 

7

 The COBRA and HIPPA requirements are enforced through the Code, ERISA, and the Public 

Health Service Act (“PHSA”). 

8

 Secs. 4980B, 4980D. ERISA also generally permits the Secretary of Labor and plan 

beneficiaries to enforce these requirements through a civil action. 
5 

Health FSAs typically are funded on a salary reduction basis under a cafeteria plan, 

meaning that employees are given the option to reduce their current cash compensation and 

instead have the amount made available for use in reimbursing the employee for his or her 

medical expenses. Health FSAs that are funded on a salary reduction basis are subject to the 

requirements for cafeteria plans, including a requirement that amounts remaining in a health FSA 

at the end of a plan year must be forfeited by the employee (referred to as the “use-it-or-lose-it 

rule”).9

 If the health FSA meets certain requirements, the compensation that is forgone is not 

includible in gross income or wages for payroll tax purposes. 

Health reimbursement arrangements (“HRAs”) operate in a manner similar to health 

FSAs, in that they are an employer-maintained arrangement that reimburses employees for 

medical expenses. Some of the rules applicable to HRAs and health FSAs are similar (e.g., the 

amounts in the arrangements can only be used to reimburse medical expenses and not for other 

purposes), but the rules are not identical. In particular, HRAs cannot be funded on a salary 

reduction basis and the use-it-or-lose-it rule does not apply. Thus, amounts remaining at the end 

of the year may be carried forward to be used to reimburse medical expenses in following 

years.10 Unlike a health FSA, an HRA is permitted to reimburse an employee for health 

insurance premiums. 

Unlike the section 213 itemized deduction for medical expenses which (as discussed 

below) in the case of drugs is limited to prescribed drugs,11 tax-free reimbursement for nonprescription drugs is permitted in the case of an employer-provided health plan. Thus, for 

example, amounts paid from an FSA, HRA, or health savings account (described later in the 

pamphlet) may be used to reimburse the employee for nonprescription medicines. 

 9

 Sec. 125(d)(2). See proposed Treas. Reg. secs. 1.125-1 through -7. However, if a plan 

chooses, a grace period not to exceed two and one-half months immediately following the end of the plan 

year during which unused amounts may be used is allowed. Notice 2005-42, 2005-1 C.B. 1204. Health 

FSAs are subject to certain other requirements, including rules that require that the FSA have certain 

characteristics similar to insurance. 

10 Guidance with respect to HRAs, including the interaction of FSAs and HRAs in the case of an 

individual covered under both, is provided in Notice 2002-45, 2002-2 C.B. 93. 

11 Under section 213(b), in the case of medicine or drugs, an expenditure is taken into account 

only if it is incurred for a prescribed drug or insulin. 
6 

B. Deduction for Health Insurance Premiums 

of Self-Employed Individuals 

Under present law, self-employed individuals may deduct the cost of health insurance for 

themselves and their spouses and dependents.12 The deduction is not available for any month in 

which the self-employed individual is eligible to participate in an employer-subsidized health 

plan. Moreover, the deduction may not exceed the individual’s self-employment income. The 

deduction applies only to the cost of insurance (i.e., it does not apply to out-of-pocket expenses 

that are not reimbursed by insurance).13 The deduction does not apply for self-employment tax 

purposes. For purposes of the deduction, a more than two percent shareholder-employee of an S 

corporation is treated the same as a self-employed individual.14 Thus, the exclusion for 

employer-provided health care coverage does not apply to such individuals, but they are entitled 

to the deduction for health insurance costs as if they were self- employed. 

 

 12 Sec. 162(l). 

13 Premiums for a self-insured plan are eligible for the deduction if the self-insured plan actually 

constitutes an insurance arrangement, which generally means that the arrangement must result in adequate 

risk-shifting and not merely reimburse the individual for health expenses. For example, the IRS has ruled 

that a self-insured health plan of a law firm covering 200 self-employed partners and 800 employees 

demonstrated adequate risk shifting where the plan charged premiums that were determined on the basis 

of the actuarial costs of the plan and each partner was liable for a pro-rata share of plan experience losses. 

Pvt. L. Rul. 200007025. Self-employed individuals are not eligible to participate in HRAs. See Notice 

2002-45, 2002-2 C.B. 93. In addition, self-employed individuals are not eligible to participate in a 

cafeteria plan, including a health FSA funded by elective contributions, because cafeteria plan 

participation is limited to employees. See sec. 125(d)(1)(A). 

14 Sec. 1372. 
7 

C. Itemized Deduction for Medical Expenses 

Individuals may claim an itemized deduction for unreimbursed medical expenses to the 

extent that such expenses exceed 7.5 percent of adjusted gross income.15 This deduction is 

available both to insured and uninsured individuals. Thus, an individual with employer-provided 

health insurance (or another form of tax-subsidized health benefits, as summarized in this 

section) may also claim the itemized deduction for the individual’s medical expenses not covered 

by that insurance if the 7.5 percent adjusted gross income threshold is met. Moreover, an 

individual’s nonsubsidized health insurance premiums can be counted toward the 7.5 percent 

threshold. 

Medical expenses that qualify for deduction are narrower than medical expenses for 

which a flexible spending arrangement or health savings account can be used. For example, nonprescription medicines such as aspirin are not deductible under the medical deduction, but could 

be purchased using dollars set aside in an HSA, HRA or an FSA. 

 

 15 For alternative minimum tax purposes, the itemized deduction is calculated using a floor of ten 

percent of adjusted gross income. Sec. 56(b)(1)(B). 
8 

D. HSAs and Archer MSAs 

Present law provides that individuals with a high deductible health plan (and generally no 

other health plan) may establish and make tax-deductible contributions to a health savings 

account (“HSA”).16 Like opening an individual retirement account (“IRA”), the decision to 

create and fund an HSA is made on an individual-by-individual basis. Unlike the case of an 

IRA, however, an HSA is subject to a condition that the individual is covered under a high 

deductible health plan (purchased either through the individual market or through an employer). 

Subject to certain limitations, contributions made to an HSA by individuals are deductible for 

income tax purposes, regardless of whether the individuals itemize. Moreover, individuals can 

exclude from income (and from wages for payroll tax purposes) contributions that their 

employer, including contributions made through a cafeteria plan through salary reduction, makes 

to the individuals’ HSAs. 

A high deductible health plan is a health plan that has an annual deductible that is at least 

$1,100 for self-only coverage or $2,200 for family coverage and that limits the sum of the annual 

deductible and other payments that the individual must make in respect of covered benefits to no 

more than $5,600 in the case of self-only coverage and $11,200 in the case of family coverage.17 

Earnings on amounts in an HSA accumulate on a tax-free basis. Distributions from an 

HSA that are used for qualified medical expenses are excludable from gross income regardless of 

the individual’s age. 

Distributions from an HSA that are not used for qualified medical expenses are includible 

in gross income and are subject to an additional tax of ten percent. The additional ten-percent 

tax does not apply, however, if the distribution is made after death, disability, or the individual 

attains the age of Medicare eligibility (i.e., age 65). 

In contrast to a flexible spending arrangement or health reimbursement arrangement, both 

of which require substantiation for tax-free reimbursement of a medical expense, individuals are 

not required to provide substantiation to the trustee or custodian of an HSA that a distribution is 

 16 An individual with other coverage in addition to a high deductible health plan is still eligible 

for an HSA if such other coverage is “permitted insurance” or “permitted coverage.” Permitted insurance 

is: (1) insurance if substantially all of the coverage provided under such insurance relates to (a) liabilities 

incurred under worker’s compensation law, (b) tort liabilities, (c) liabilities relating to ownership or use of 

property (e.g., auto insurance), or (d) such other similar liabilities as the Secretary may prescribe by 

regulations; (2) insurance for a specified disease or illness; and (3) insurance that provides a fixed 

payment for hospitalization. Permitted coverage is coverage (whether provided through insurance or 

otherwise) for accidents, disability, dental care, vision care, or long-term care. With respect to coverage 

for years beginning after December 31, 2006, certain coverage under a health FSA is disregarded in 

determining eligibility for an HSA. 

17 These dollar amounts are for 2008 and are indexed for inflation. 
9 

for a qualified expense in order to be entitled to the exclusion.18 Instead, the individuals simply 

maintain books and records with respect to the expense and claim the exclusion for a distribution 

from the HSA on their return if it is used for a qualified expense. 

The maximum aggregate annual contribution that can be made to an HSA is $2,900 in the 

case of self-only coverage and $5,800 in the case of family coverage (even if the corresponding 

health plan deductible is lower than these amounts).19 The annual contribution limits are 

increased for individuals who have attained age 55 by the end of the taxable year (referred to as 

“catch-up contributions”). In the case of policyholders and covered spouses who are age 55 or 

older, the HSA annual contribution limit is greater than the otherwise applicable limit by $900 in 

2008, and $1,000 in 2009 and thereafter. Contributions, including catch-up contributions, cannot 

be made once an individual is enrolled in Medicare. 

If an employer makes contributions to employees’ HSAs, the employer must make 

available comparable contributions on behalf of all employees who have comparable coverage 

during the same period. Employer contributions are not includable in employees’ incomes or as 

taxable wages for payroll tax purposes. Contributions are considered comparable if they are 

either of the same amount or the same percentage of the deductible under the plan. If employer 

contributions do not satisfy the comparability rule during a period, then the employer is subject 

to an excise tax equal to 35 percent of the aggregate amount contributed by the employer to 

HSAs for that period. The comparability rule does not apply to contributions made through a 

cafeteria plan. 

Individuals may not combine the benefits of an HSA with those of an Archer MSA. 

Amounts can be rolled over, however, into an HSA from another HSA or from an Archer MSA. 

One-time rollovers are permitted from IRAs to HSAs. 

Like an HSA, an Archer MSA is a tax-exempt trust or custodial account to which taxdeductible contributions may be made by individuals with a high deductible health plan.20 

 18 Qualified medical expenses include expenses for diagnosis, cure, mitigation, treatment, or 

prevention of disease, including prescription drugs, transportation primarily for and essential to such care, 

and qualified long-term care expenses. Qualified medical expenses do not include expenses for insurance 

other than for (1) long-term care insurance, (2) premiums for health coverage during any period of 

continuation coverage required by Federal law, (3) premiums for health care coverage while an individual 

is receiving unemployment compensation under Federal or State law, and (4) premiums for individuals 

who have attained the age of Medicare eligibility, other than premiums for policies that provide 

supplemental coverage for individuals whose primary insurance is Medicare. 

19 These amounts are for 2008, are indexed for inflation, and are the same as the maximum 

deductible amounts permitted under a high deductible plan for purposes of Archer MSAs. In the case of 

individuals who are married to each other, if either spouse has family coverage, both spouses are treated 

as only having the family coverage with the lowest deductible and the contribution limit is divided 

equally between them unless they agree on a different division. Limitations based on the amount of the 

deductible under the high deductible plan applied to years beginning before January 1, 2007. 

20 Sec. 220. 
10 

Archer MSAs provide tax benefits similar to, but generally not as favorable as, those provided by 

HSAs for individuals covered by high deductible health plans. The main differences include: 

(1) only self-employed individuals and employees of small employers are eligible to have an 

Archer MSA; (2) for Archer MSA purposes, a high deductible health plan is a health plan with 

(a) an annual deductible of at least $1,950 and no more than $2,900 in the case of self-only 

coverage and at least $3,850 and no more than $5,800 in the case of family coverage and (b) 

maximum out-of pocket expenses of no more than $3,850 in the case of self-only coverage and 

no more than $7,050 in the case of family coverage;21 and (3) the additional tax on distributions 

not used for medical expenses is 15 percent rather than 10 percent. After 2007, no new 

contributions can be made to Archer MSAs except by or on behalf of individuals who previously 

had made Archer MSA contributions and employees who are employed by a participating 

employer. 

 21 These deductible and out-of-pocket expenses dollar amounts are for 2008 and are indexed for 

inflation. 
11 

E. Refundable Credit for Health Insurance Expenses 

of Certain Classes of Individuals 

Under the Trade Adjustment Assistance Reform Act of 2002,22 certain individuals are 

eligible for the health coverage tax credit (“HCTC”).23 The HCTC is a refundable tax credit 

equal to 65 percent of the cost of qualified health coverage paid by an eligible individual. 

In general, eligible individuals are individuals who receive a trade adjustment allowance 

(and individuals who would be eligible to receive such an allowance but for the fact that they had 

not exhausted their regular unemployment benefits), individuals eligible for the alternative trade 

adjustment assistance program, and individuals over age 55 who receive pension benefits from 

the Pension Benefit Guaranty Corporation. The credit is available for “qualified health 

insurance,” which includes certain employer-based insurance, certain State-based insurance, and 

in some cases, insurance purchased in the individual market. The credit is available on an 

advance basis through a program established by the Secretary of the Treasury. Persons entitled 

to Medicare and certain other governmental health programs, covered under certain employersubsidized plans, or with certain other specified coverage are not eligible for the credit.24 

 

 22 Pub. L. No. 107-210, secs. 201(a), 202 and 203 (2002). 

23 Sec. 35. 

24 Sec. 35(f). 
12 

F. Other Tax Rules 

1. Welfare Benefit Funds, VEBAs, and Retiree Medical Accounts 

Generally, an employer (including an employer that self insures) is not able to prefund 

employer-provided health care coverage for active employees, whether through a welfare benefit 

fund or otherwise.25 In contrast, the Code permits an employer to deduct contributions to a 

welfare benefit fund for retiree medical benefits that generally are funded over the working lives 

of the covered employees.26 For retirees, deductible contributions can be made to two types of 

tax-exempt funding vehicles, either to a voluntary employees’ beneficiary association (VEBA)27

or, if an employer sponsors a tax-qualified pension plan, to the tax-exempt trust that funds the 

pension plan (referred to as a “retiree medical account”).28 In addition to direct deductible 

contributions, a retiree medical account under a defined benefit plan may be funded by transfers 

to the account of excess pension assets under the pension plan of which the account is a part.29 

2. Long-term care 

Present law also provides tax subsidies for qualified long-term care insurance contracts 

and expenses for qualified long-term care services. A qualified long-term care insurance 

contract is defined as any insurance contract that provides only coverage for qualified long-term 

care services, and that meets additional requirements.30 Per diem-type and reimbursement-type 

 25 Secs. 419(c)(3) and 419A(c)(1). The Code generally limits the deductions that may be taken 

with respect to contributions to a “welfare benefit fund” for active employees to (1) the amount which 

would have been allowable as a deduction for the benefits provided during the taxable year as if the 

employer had provided such benefits directly and (2) claims for benefits incurred but unpaid as of the 

close of the taxable year (and administrative costs with respect to such claims). However, special rules 

apply for collectively bargained plans, employee pay-all plans, 10-or-more employer plans, and bona fide 

association plans. 

26 Sec. 419A(c)(2) and Treas. Reg. sec. 1.404(a)-3(f)(2). 

27 Secs. 419(e) and 501(c)(9). Contributions also may be made to a VEBA to fund health 

coverage benefits for active employees. Section 512 coordinates the tax-exemption for a VEBA with the 

section 419 limitations on contributions to a welfare benefit fund. This coordination limits the amount of 

a VEBA’s income that is treated as tax-exempt. 

28 Sec. 401(h). Except for the exclusion for distributions from governmental retirement plans for 

health insurance premiums for public safety officers, excludable employer-provided health coverage 

generally may only be provided under a tax-qualified retirement plan through a retiree medical account 

under a tax-qualified pension plan. Rev. Rul. 2005-55, 2005-2 C.B. 284; Prop. Treas. Reg. sec. 1.401(a)-

1(e), published in the Federal Register on April 20, 2007, 72 FR 46421. 

29 Sec. 420. 

30 Sec. 7702B(b). For example, the contract is not permitted to provide for a cash surrender 

value or other money that can be paid, assigned or pledged as collateral for a loan, or borrowed (and any 

premium refunds must be applied as a reduction in future premiums or to increase future benefits). 
13 

contracts are permitted. Qualified long-term care services are necessary diagnostic, preventive, 

therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal 

care services that are required by a chronically ill individual and that are provided pursuant to a 

plan of care prescribed by a licensed health care practitioner.31 

A qualified long-term care insurance contract is treated as an accident and health 

insurance contract.32 Thus, amounts received under the contract generally are excludable from 

income as amounts received for personal injuries or sickness.33 In the case of per diem contracts, 

the excludable amount is subject to a dollar cap of $270 per day (for 2008), as indexed. If 

payments under such contracts exceed the dollar cap, then the excess is excludable only to the 

extent of actual costs in excess of the dollar cap that are incurred for long-term care services. 

An employer’s plan that provides employees with coverage under a long-term care 

insurance contract generally is treated in the same manner as employer-provided health care. As 

a result, the employer’s premium payments are generally excludable from income and wages, 

and benefits payable under the contract generally are excludable from the recipient’s income.34 

This exclusion does not apply, however, to long-term care insurance provided under a cafeteria 

plan.35 As a result, a cafeteria plan cannot offer long-term care coverage as a tax-favored option. 

As noted earlier, an employee’s share of employer-provided health care, by contrast, can be 

funded through a cafeteria plan. 

Long-term care insurance expenses of a self-employed individual are deductible under 

the self-employed health deduction.36

Premiums paid for a qualified long-term care insurance contract37 and unreimbursed 

expenses for qualified long-term care services are treated as medical expenses for purposes of the 

itemized deduction for medical care (subject to the floor of 7.5 percent of adjusted gross 

 31 Sec. 7702B(c)(1). A chronically ill individual is generally one who has been certified within 

the previous 12 months by a licensed health care practitioner as being unable to perform (without 

substantial assistance) at least two activities of daily living (ADLs) for at least 90 days due to a loss of 

functional capacity (or meeting other definitional requirements). Sec. 7702B(c)(2). 

32 Sec. 7702B(a)(1). 

33 Secs. 104(a)(3), 105, and 106. 

34 Secs. 105, 106, and 3121(a)(2). 

35 Section 106(c) provides that gross income of an employee will include employer-provided 

coverage of qualified long-term care services (as defined in section 7702B(c)) to the extent such coverage 

is provided through a flexible spending or similar arrangement. 

36 Sec. 162(l). 

37 Premiums paid for long-term care coverage are deductible only to the extent that the premiums 

do not exceed a dollar cap measured by the insured’s age at the end of the taxable year. Sec. 213(d)(10). 
14 

income). Unreimbursed expenses for qualified long-term care services provided to the taxpayer 

or the taxpayer’s spouse or dependent also are treated as medical expenses for purposes of the 

itemized deduction. 

3. Distributions for public safety officers 

Present law provides an exclusion from income for distributions from governmental 

retirement plans that are used to pay for health insurance premiums for eligible retired public 

safety officers and their spouses and dependents.38 The exclusion is limited to $3,000 annually. 

An eligible retired safety officer is an individual who, by reason of disability or attainment of 

normal retirement age, is separated from service as a public safety officer with the employer that 

maintains the retirement plan from which the distributions are made. The premiums do not have 

to be for a plan sponsored by the employer; however, the exclusion does not apply to premiums 

paid by the employee and reimbursed with pension distributions. Amounts excluded under this 

provision are not taken into account in determining the itemized deduction for medical expenses 

or the deduction for health insurance expenses of self-employed individuals. 

 38 Sec. 402(l). This rule is effective for taxable years beginning after December 31, 2006. 
15 

APPENDIX A 

COMPARISON OF TAX BENEFITS FOR HEALTH EXPENSES1

Provision Tax Benefit Class Eligible Maximum Dollar Limit on Tax Benefit 

1. Employer contributions to an accident or health plan (sec. 106) 

Exclusion from gross income and wages. 

Employees (including former employees). 

No limit on amount excludable. 

2. Employer reimbursement of medical expenses (sec. 105) 

Exclusion from gross income and wages. 

Employees (including former employees). 

No limit on amount excludable. 

3. Employer-provided health benefits offered under a cafeteria plan (sec. 125) 

Exclusion from gross income and wages (for salary reduction contributions). 

Employees. No limit on amount 

excludable. 

4. Health reimbursement arrangements (secs. 105 and 106) 

Employer-maintained arrangement providing exclusion from gross income and wages for amounts used to reimburse employees for medical expenses. Amounts remaining at the end of the year can be carried forward to reimburse medical expenses in later years. 

Employees (including former employees). 

No limit on amount excludable. 

5. Health flexible spending arrangements (secs. 105, 106, and 125) 

Typically employee salaryreduction arrangement providing exclusion from gross income and wages for amounts used to reimburse employees for medical expenses. 

Employees. No limit on amount 

excludable. 
16 

Provision Tax Benefit Class Eligible Maximum Dollar Limit on Tax Benefit 

6. Deduction for health insurance expenses of selfemployed individuals (sec. 162(l)) 

Income tax deduction for cost of health insurance expenses of self-employed individuals. Deduction does not apply for selfemployment tax purposes. 

Self-employed individuals. No specific dollar limit; 

deduction limited by amount of taxpayer’s earned income from the trade or business. 

7. Itemized deduction for medical expenses (sec. 213) 

Itemized deduction for unreimbursed medical expenses to extent expenses exceed 7.5 percent of adjusted gross income (10 percent for alternative minimum tax purposes). 

Any individual who itemizes deductions and had unreimbursed medical expenses in excess of 7.5 percent of adjusted gross income. 

No maximum limit. 

8. Health Savings Accounts (“HSAs”) (sec. 223) 

Contributions are deductible if made by an eligible individual and excluded from gross income and wages if made by an employer (including contributions made through a cafeteria plan through salary reduction). Distributions used for qualified medical expenses excludable from gross income. Earnings on amounts in the HSA accumulate on a tax-free basis. 

Individuals with a high deductible health plan and no other health plan other than a plan that provides certain permitted coverage. High deductible health plan is a plan with a deductible of at least $1,100 for self-only coverage and $2,200 for family coverage (for 2008). Out-of-pocket expense limit must be no more than $5,600 for self-only coverage and $11,200 for family coverage (for 2008). 

Maximum annual contribution is $2,900 for self-only coverage or $5,800 for family coverage (for 2008). Additional contributions permitted for individuals age 55 or older. No limit on the amount that can be accumulated in the HSA. 
17 

Provision Tax Benefit Class Eligible Maximum Dollar Limit on Tax Benefit 

9. Archer Medical Savings Accounts (“Archer MSAs”) (sec. 220) 

Contributions are deductible if made by an eligible individual and excluded from gross income and wages if made by an employer. Distributions used for qualified medical expenses are excludable from gross income. Earnings on amounts in the Archer MSA accumulate on a tax-free basis. 

Employees of small employers who are covered under an employersponsored high-deductible health plan (and no other health plan other than a plan that provides certain permitted coverage) and selfemployed individuals covered under a highdeductible health plan. Definition of high-deductible health plan differs from that for HSAs. No new contributions may be made after 2007 except for individuals who previously had an MSA or work for an employer that made MSA contributions. 

Maximum annual contribution is 65 percent of the annual deductible under the high-deductible health plan in the case of self-only coverage, and 75 percent of the annual deductible in the case of family coverage. No limit on the amount that can be accumulated in the MSA. 

10. Health Coverage Tax Credit (sec. 35) 

Refundable tax credit of 65 percent of the cost of qualified health insurance coverage. 

Individuals receiving trade adjustment assistance and certain individuals receiving benefits from the PBGC. 

Limited to 65 percent of the cost of qualified health insurance. No specific dollar limit. 

1 The table describes the legal limits that apply under present law. Employers may establish rules and limitations consistent with those under 

 it is common for employers to place a limit on the amount of expenses that may be reimbursed through an FSA or HRA.