Examples: Cost Impact

Georgia Reforms Make Individual &

Defined Contribution Health Policies Affordable

 

The cost of insurance is really the amount of one’s earnings required to purchase insurance.   Traditionally, employer group health insurance is purchased with significant tax advantages for both the employer and the employee.  The advantages of buying insurance through a group plan with pre-tax dollars versus purchasing individual policies with after tax dollars is the primary reason why less than 5% of the population have individual policies.  It is a major contributor to the high level of uninsureds.

 

A self employed individual would have to earn $26,851.02 to pay federal and state income taxes as well as Social Security and Medicare payroll taxes in order to have $14,419 left over to purchase an individual health PPO insurance policy.  Because a group insurance is paid with pre-tax income, a person getting the same coverage through a group plan would only have to earn $14,419.

 

                                                   Required Earnings (Taxable Income)

                                                     To Pay Health Insurance Costs       .

                                                    Individual                        Group    .

Taxable Income                              $26,851.02                    $14,419.00

-Federal Income Tax       25%            6,712.76                              0

-Ga. State Income Tax    6.0%           1,611.06                               0

-S.S. FICA                    12.4%          3,329.53                               0

-Medicare                       2.9%              778.68                               0         .

After Tax Income                            $14,419.00                     $14,419.00                       

Insurance Cost                                $14,419.00                     $14,419.00

 

Georgia health reforms offer a number of new options to substantially lower the cost of individual health policies:

1.      Individual Premium tax deductibility

2.      Support for expanded use of HSA eligible plans

3.      Removal of state rebate laws to allowed incentives

4.      Defined Contribution plans with Health Reimbursement Arrangements (HRAs)

 

Georgia’s reforms allow for new state income tax premium deduction. A self-employed individual could choose a federally tax advantaged High Deductible (HSA eligible plan) that includes $6,000 deposited into an HSA account to cover the higher deductible.  The self-employed would only have to earn $20,102.18 (versus $26,851.02) to cover the cost of the same insurance.

 

                                                            Required Earnings (Taxable Income)

                                                            To Pay Individual Insurance Costs              .

                                                   HSA                Premium                       Total     .

Taxable Income                          $6,000             $14,102.18                  $20,102.18

-Federal Income Tax       25%          0                    3,525.55                      3,525.55

-Ga. State Income Tax    6.0%         0                          0                                          0

-S.S. FICA                    12.4%        0                    1,748.67                      1,748.67

-Medicare                       2.9%              0                  408.96                         408.96

After Tax Income                       $6,000                $8,419.00                  $14,419.00                

Insurance Cost                                                                                        $14,419.00

 

Defined contribution financing and HSA eligible plans are even more effective in bridging the tax differences.  The Georgia reform allows an otherwise uninsured employee to purchase an individual policy using a Defined Contribution health reimbursement arrangement (HRA) from their employer.   Using an annual employer defined contribution of $2,400 lowers the required earnings to cover the insurance to $18,482.08.

                       

                                                                        Required Earnings (Taxable Income)

                                                                        To Pay Individual Insurance Costs                           .

                                                   HSA              HRA               Premium                          Total     .

Taxable Income                       $6,000             $2,400             $10,082.08                  $18,482.08

-Federal Income Tax       25%          0                 0                      2,520.52                      2,520.52

-Ga. State Income Tax    6.0%         0                  0                           0                                     0

-S.S. FICA                    12.4%        0                  0                      1,250.18                      1,250.18

-Medicare                       2.9%         0                  0                         292.38                         292.38

After Tax Income                       $6,000          $2,400                 $6,019.00                  $14,419.00    

Insurance Cost                                                                                                              $14,419.00

 

By removing the rebate laws and allowing up to the federally allowed 20% of premiums for health status incentives, the cost of insurance can be even lower.  With the allowed carry-over of unused HSAs and incentives, the insurance cost during the year depends on the level of claims applied against the HSA account and the amount of incentives a policyholder qualifies for.

 

For healthy individuals and those qualifying for incentives, the final end of the year cost of insurance may require substantially less earnings than the initial cash flow requirements needed to make HSA deposits and pay premiums.  
 

                                                                Required Earnings (Taxable Income)

                                                           To Pay Individual Insurance Costs                              .

                                                             Required Earnings Under Georgia Health Reforms

                                    Required                                                            No Claims &

Earnings           Maximum         No Claims        20% Incentives

I.         Without Reform

Group PPO Plans                   $14,419.00      $14,419.00        $14,419.00          $11,535.20

Individual PPO                        $26,851.02      $26,851.02      $26,851.02           Not Allowed

 

II.     With Reform

Employer Defined Contribution

Individual HSA/HRA               $18,482.08      $18,482.08      $12,482.08             $10,798.28

 

Self-Employed

Individual HSA                        $20,102.18      $20,102.18      $14,102.18             $12,418.38

 

In summary, federal tax changes are needed to completely equalize the tax treatments between group and individual plan.  However, under the Georgia 2012 health reform legislation employers will have new defined contribution options to help employees purchase individual insurance policies at more affordable net costs.  Under the reforms, individual insurance costs are closer to group insurance costs and depending on claims insured and incentives provided, individual policies could be cheaper than existing group plans.

 

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