Accordingly, the self-employed, the unemployed and people who purchase health insurance on their own should be entitled to a tax deduction or tax credit that is just as generous as the tax treatment they would have received if their policies had been provided by an employer. Fixed-Sum Tax Credits. Employers and their employees would make premium payments and MSA deposits with aftertax dollars, and employees would receive a tax credit for the purchase of insurance on their personal income tax returns. For those with very low incomes, the credit can be refundable - with government providing most of the funds for health insurance premiums through a system of vouchers. Under a frontended MSA, deposits are made with pretax dollars and the funds not spent on medical care are taxed upon withdrawal.
Funds spent on medical care are tax free.
This problem is eliminated with a backended MSA, under which deposits are made with aftertax dollars and withdrawals are made tax free. As Figure I shows, this would allow people to make unbiased choices between medical care and all other uses of money, because they could withdraw the funds at any time, for any reason, without penalty. Tax credits and backended MSAs are consistent with a flat-tax proposal that eliminates the employee exemption for health insurance benefits. Under such a tax reform plan, employee benefits would be taxed, but the federal government could integrate the fixed-sum tax credit with personal exemptions, and all savings, including MSAs, would grow tax free. Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any legislation.