Excerpted From: State Briefing Book on Health Care
September 23, 1994
W8
Tax Treatment of Post-retirement Insurance
About one-third of all employees work for an employer who provides postretirement health care benefits, covering items not paid for by Medicare. Yet partly because of federal tax law, many of these workers will never collect a dime of those benefits. At the same time, the federal government's Medicare program covers many small items the elderly could easily pay for themselves, while leaving them exposed to catastrophic medical bills. Such policies place the burden of catastrophic coverage on individual families and state and local governments."Federal tax law allows unlimited spending for current health care needs
but discourages saving for postretirement health care."
Although federal tax law allows unlimited spending for current health care needs " and excludes all of it from employee income " it severely limits the ability of the private sector to save for postretirement health care. As a result, most employers have not put aside funds to pay for future promises:
- According to one estimate, unfunded liabilities of employers for postretirement health care now total $332 billion.
- This is equal to about 30 percent of the net worth of all large U.S.-based companies.
Not only does federal tax law discourage employers from saving for postretirement medical expenses, but it also discourages individuals from doing so. Although the tax system generously subsidizes current health care spending, the government taxes personal savings and provides no deduction for long-term care insurance.
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