Current federal tax law allows self-employed individuals to deduct the entire amount they spend on health insurance for themselves and their spouses and dependents. This treatment is similar to the tax exclusion for employer contributions to the health plans of wage earners, with one noteworthy exception: employer contributions are exempt from payroll taxes (e.g., Medicare and Social Security taxes), but health insurance expenditures by the self-employed are not deemed a deductible business expense and thus are subject to the self-employment payroll tax. Several bills in the 111 th Congress would enable self-employed taxpayers to exclude those expenditures from the income base for the tax. This report examines the current tax treatment of these expenditures, the legislative history of the deduction, its effectiveness as a policy tool for improving access to health care for the self-employed, proposals in the 111 th Congress to alter the deduction, and the implications of the leading health care reform proposals in Congress for health insurance coverage among the self-employed. Under Section 162(l) of the Internal Revenue Code (IRC), self-employed individuals are allowed to deduct the entire amount of their spending on health insurance for themselves and their immediate family members. In this case, a self-employed individual is defined as a sole proprietor, a working partner in a partnership, or an employee of a subchapter S corporation who owns over 2% of the firm's stock. The deduction is claimed above-the-line, which means it may be claimed even if a self-employed individual does not itemize deductions on his or her income tax return. Some self-employed individuals hire employees to assist with their trade or business. Any self-employed individual who offers health benefits to employees may deduct the cost of those benefits as an ordinary and necessary business expense. But he or she may not also include the cost of employee health benefits in any deduction claimed under IRC Section 162(l). Use of the deduction is subject to several limitations. First, the deduction may not exceed a self-employed taxpayer's net earned income from the trade or business in which the health plan was purchased, less the deductions for 50% of the self-employment tax and contributions to certain pension plans (e.g., Keogh plans or simplified employee pension plans for the self-employed). A self-employed taxpayer who earns income from more than one business or trade may not sum the profits and losses from those businesses to determine the net income ceiling for the deduction. Second, the deduction may not be claimed for any month when a self-employed individual is eligible to participate in a health plan offered by an employer or a spouse's employer. Third, the expenditures used to compute the deduction may not also be included in the medical expenses eligible for the itemized deduction under IRC Section 213—though health insurance expenditures that cannot be deducted under IRC Section 162(l) may be included in these medical expenses. Finally, health insurance spending by self-employed individuals is not deemed an ordinary and necessary business expense, which means those expenditures must be added to the income base for the self-employment tax of 15.3%. In addition, self-employed individuals may add any payments they make for long-term care insurance to the health insurance expenditures eligible for the deduction. But the amount of long-term care insurance premiums that may be deducted is limited, and the limits, which are indexed for inflation, vary with the age of a self-employed taxpayer at the close of a tax year. In 2009, the deductible amounts range from $320 for those age 40 and under to $3,980 for those over age 70. A self-employed individual has two other options for obtaining health insurance coverage that offer significant tax benefits. He or she may open a health savings account (HSA), which serves as a tax-exempt vehicle for paying medical and dental expenses not covered by insurance or not otherwise reimbursable. An individual can open an HSA and make contributions to it only if he or she is covered by a qualified high-deductible health insurance plan and no other plan, including Medicare (with a few exceptions). In 2009, qualified plans must carry a deductible of at least $1,150 for individual coverage (with a cap of $5,800 on out-of-pocket expenses), and $2,300 for family coverage (with an out-of-pocket cap of $11,600). Total contributions to an HSA in 2009 are limited to the lesser of the deductible or $3,000 for individual plans, and the lesser of the deductible or $5,950 for family plans; the limits are $1,000 larger for individuals age 55 and older. Employer contributions are exempt from income and employment taxes, and account owners may claim a deduction for contributions they make. Self-employed individuals may not contribute to an HSA on a pre-tax basis (unlike employees who contribute to such an account through an employer's cafeteria plan), and they must include their contributions in the income base used to determine the self-employment tax. Withdrawals to pay for medical expenses are not subject to taxation. Unused balances may be carried over without limit to the following year with no tax penalty. Self-employed individuals may also open Archer medical savings accounts (MSAs)—though the total number of such accounts nationwide is currently capped at 750,000. They are similar in design to HSAs but more restrictive in the rules for contributions. For example, annual contributions for individual coverage cannot exceed 65% of the deductible (not less than $2,000 but not greater than $3,000) for such coverage, and for family coverage the limit is 75% of the deductible (at least $4,000 but not greater than $6,050). Holders of MSAs are allowed to own HSAs and transfer their MSA balances to the new accounts. It is not known how many self-employed individuals are covered by MSAs and HSAs. An estimated 14.0 million non-elderly individuals were self-employed in 2007, the most recent year for which reliable data on U.S. health insurance coverage by employment status are available. Of this total population, 9.7 million had private health insurance, 1.6 million received public health insurance (mainly Medicaid), and 3.7 million were uninsured. Over 71% of the self-employed with private health insurance (or 6.9 million) in 2007 were covered through plans offered by a current or former employer, or by a spouse's employer. The remaining 2.8 million (or 20% of the self-employed population) with private health insurance purchased it on their own. According to the Internal Revenue Service (IRS), individual taxpayers filed 3.8 million returns claiming the deduction in 2006; the amount claimed totaled $20.3 billion (see Table 1 ). Individuals with adjusted gross incomes between $30,000 to under $500,000 accounted for 70% of the value of those claims and 67% of the volume. The revenue cost of the deduction could total $4.8 billion in FY2009. This cost represents the tax revenue that would be collected that year under two assumptions: (1) there were no deduction, and (2) self-employed taxpayers instead were to include their health insurance expenditures in the spending eligible for the itemized deduction for medical expenses. The tax deduction for health insurance purchased by self-employed individuals entered the federal tax code as a temporary provision of the Tax Reform Act of 1986 (TRA86, P.L. 99-514 ). Initially, it was limited to 25% of qualified expenditures and was scheduled to expire at the end of 1989. Although the act specified that Congress was to assess the deduction's effectiveness before it expired, no such study was completed. Congress made several significant changes in the rules governing the deduction's use before it considered legislation to extend the deduction beyond 1989. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA, P.L. 100-647 ) added the limitation that the deduction cannot exceed a self-employed taxpayer's earned income from the trade or business in which the health insurance policy was established. TAMRA also added the requirement that the deduction be included in a self-employed taxpayer's income base for the computation of the self-employment tax. A string of laws enacted in the early 1990s extended the deduction for brief periods. The Omnibus Budget Reconciliation Act of 1989 ( P.L. 101-239 ) extended the deduction through September 30, 1990 and made it available to certain subchapter S corporation shareholders; the Omnibus Budget Reconciliation Act of 1990 ( P.L. 101-508 ) extended the deduction through December 31, 1991; the Tax Extension Act of 1991 ( P.L. 102-227 ) extended it through June 30, 1992; and the Omnibus Budget Reconciliation Act of 1993 ( P.L. 103-66 ) extended the deduction through December 31, 1993. For reasons that evidently had nothing to do with the effects of the deduction, Congress allowed it to expire at the end of 1993 and did not extend it in 1994. But a bill adopted in April 1995 ( P.L. 104-7 ) permanently extended the deduction, retroactive to January 1, 1994. It also increased the deductible share of health insurance expenditures by the self-employed to 30%, starting in 1995 and continuing thereafter. The 104 th Congress turned its attention to the deduction again in 1996, when it passed the Health Insurance Portability and Accountability Act of 1996 (HIPAA, P.L. 104-91 ). Among other things, the act established a timetable for raising the deductible share of health insurance expenditures from 30% in 1996 to 80% in 2006 and thereafter.