Biden Hopes to Tax Some Indemnity Health Benefits

What You Need to Know

The change is part of the president's budget proposal for fiscal 2023.
The tax change would apply only to policies purchased with pretax earnings.
The provision would take effect in 2023.

Players in the market for employer-sponsored critical illness insurance and hospital indemnity insurance are facing a tough fight in Washington.

The Biden administration wants to put some of the policy benefits payments in workers’ taxable income.

The Department of the Treasury describes the proposal in the general explanations report, or “Greenbook,” for President Joe Biden’s budget proposal for fiscal 2023.

The federal government’s 2023 fiscal year will start Oct. 1.

The administration put the proposal in the “Improve Benefits Tax Administration” section of the Greenbook, under the heading “Clarify Tax Treatment of Fixed Indemnity Health Products.”

Fixed Indemnity Health Products

Today, most U.S. major medical insurance policies pay doctors and hospitals directly for any care patients receive. Insurers typically pay an amount equal to or less than the billed amount. The insurer never sends any excess cash to the patient.

Fixed indemnity health policies are different. Because of regulations related to the Affordable Care Act, those policies pay a set amount of cash when an insured patient has an illness or injury, or uses health care, in a way that triggers a benefit payment.

A critical illness insurance policy might pay $10,000 when an insured has cancer. An insured will get the $10,000 even if the insured decides to go without care and spend the money on a vacation in France.

Similarly, a hospital indemnity policy might pay the $100 per day when an insured is in the hospital, even if the hospital charges only $50 per day.

Today, workers can keep the benefits payments out of their federal income tax calculations.

Some workers use fixed indemnity products together with the kinds of high-deductible health plans that are compatible with health savings accounts, or with other high-deductible health plans.

The Biden Administration Proposal

The Biden administration wants to require workers to include part of indemnity health benefits payments in their gross income when computing federal income taxes.

The new tax would apply when workers use “pretax” income, or cash deducted from their paychecks before taxes are withheld, to buy the indemnity coverage, and an indemnity policy benefit payment is bigger than the medical expense that triggered the payment.

An affected worker would put the difference between the benefit payment and the medical expense in taxable income.

The Impact

The administration did not predict how much money the proposed tax change might raise.

The amount of revenue raised might be small, because medical expenses are often much bigger than patients’ indemnity health benefits payments.

But the proposed rule could create administrative headaches for indemnity health products, by forcing either the insurers or the insureds to track the gaps between medical expenses and indemnity health benefit payments.

Presidents often propose tax rule changes that go nowhere.

But even if indemnity health insurance issuers, sellers and users fight off the change, the energy they devote to countering the proposal could affect how much energy they have to focus on other legislative and regulatory projects in Washington.