IQ expert Jason Beans: Could my health benefits end up being taxed?

Q: I hear that President Obama wants to tax health insurance benefits from rich Americans. What’s the deal? And could Americans who aren’t rich end up paying taxes on their health insurance benefits down the road?

A: That is a very astute question. First, let’s discuss the current proposal, and then we can show how the government has historically passed a tax on the “wealthy” and then grows that to more and more people over time with a simple technique.

taxes on health insuranceMillions of Americans currently receive health insurance tax-free through employers. Workers who get health insurance through an employer pay no taxes on the ‘‘employer contribution’’ to the premium, and some workers pay no taxes on the ‘‘employee contribution’’ either. The argument from the government is that this is really income, just in a different form, and it should be taxed.

A tempting source of revenue

A quick look at tax codes shows a huge federal government revenue stream could be generated by tapping into two areas: health care and homes. Between 2010 and 2014, the Joint Committee on Taxation estimates that eliminating the exclusion of employer contributions for health care/insurance would generate $659.4 billion in additional government revenue. Meanwhile, the mortgage interest deduction comes in at $484.1 billion – totaling more than $1.1 trillion for those two tax breaks alone. This reportedly is about the same amount that Americans are paying in income taxes ($1.09 trillion).

That’s why President Obama strongly considered taxing employer-sponsored benefits as a way of generating more income for the government. The pitch also was that taxing the health care benefits would prompt everyone to buy cheaper health plans (pay less taxes on a cheaper plan), which would mean more people attempting to control health care costs and which would drive down costs. It was packaged as a health care cost control idea, not a tax increase. That idea was shot down during the health care debate.

Recently, the Obama administration tried resurrecting many of the items from the original health care proposal by sending it to the now GOP-controlled Congress. This time, it came with an expansion on the initial proposal -- excluding employer-sponsored health insurance, among other changes.

Yet at the very same time, “The Buffet Rule,” affectionately named after billionaire investor Warren Buffet, came into play. The Buffet Rule comes on the heels of Obama’s American Jobs Act speech. The Buffet Rule proposes a special tax increase on Americans with income over $1 million. This special millionaires’ tax would affect three of every 1,000 taxpayers. This includes taxation on their health care benefits as additional income.

That leads us to your question. Taxing the health benefits of three out of 1,000 people does not seem to make much of a difference in taxable income. My health benefits, as someone who owns more than 10 percent of the company, already are taxed as income. Most millionaires already have their health benefits taxed.

Long-term consequences

To your second question: Will this tax lead to the non-rich paying taxes on their health care benefits down the road? I would say there's no doubt this will happen if the tax on the rich becomes law.

Here is how the government increases taxes on everyone by targeting the “rich.” It's called inflation. Inflation occurs because the government increases the money supply faster than the GDP per person grows, thereby making your money worth less each year. All the government has to do is keep the taxable threshold the same, and every year inflation will drive more and more people into the taxable level. For example, the three out of 1,000 people will be seven out of 1,000 next year. The next year, it's 25 out of 1,000 (and so on).

Here are a couple examples of inflation being used to increase the number of people taxed. The government passed the “income taxes” targeting the top 2 percent of earners only back when it was established in 1913. Those people were making more than $3,000 a year, and they were taxed at 1 percent. Do I even need to explain what happened over time? Then there’s the more recent example of the Alternative Minimum Tax. This tax was supposed to ensure the “rich” paid their fair share. It now primarily affects the middle to upper middle class.

Quite simply, while these tax increases will trickle down to many taxpayers in one form or the other, small businesses, job creators and companies with employee health insurance plans will feel the biggest hit.

is CEO of Chicago-based Rising Medical Solutions, a medical cost containment/care management company serving the workers' compensation, group health, auto and liability markets. Beans founded Rising in 1999. Since then, Beans has received a number of honors, including Business Council Advisory Man of the Year and Midwest finalist for Ernst & Young Entrepreneur of the Year. Rising has appeared several times on the Private Company Index's Top 10 Growth list and Inc. magazine’s Inc. 5000 list.

Beans earned a master's degree from MIT’s Entrepreneurial Masters Program and a bachelor's degree in finance from Boston College.

For more information, visit www.risingms.com.

If you have a health insurance question for , please send it to john.egan@insurancequotes.com.

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