Taxation of health benefits
originally posted: 11/22/2006 reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If in doubt, please send a new question or ask for an update.
Q: Are dental HMOs / PPOs / "dental plans" tax-deductible for self-employed / S-corporation owners (like health insurance)? Are dental HMOs / PPOs / "dental plans" potentially harmful to the eligibility for a HSA, when they are had on top of a high-deductible general health insurance plan?
A: The general rule for self-employed individuals (including S-corporation owner/employees) is that health insurance is always deductible but that uninsured health benefits are not deductible. While there are some possible exceptions to this rule, this discussion will assume the general rule applies. The term HMO always implies health insurance, so yes, this cost is deductible to the business (for salaried employees) or the individual (for self-employed individuals). The terms "dental plan" and "PPO" are used to describe both insured plans as well as uninsured plans, so you must take a closer look and be more specific in order to determine the tax treatment. Health Savings Accounts are available only to individuals who have qualifying health insurance and do not have "other health insurance" as it is defined by the Treasury. The term "other health insurance is discussed in more detail in other articles, but it basically means other comprehensive health insurance. An HMO would be considered as "other health insurance" that cannot be combined with an HSA but dental insurance and supplemental health insurance would not be classified as such and can be combined with an HSA. A Health Savings Account can be combined with uninsured health benefits In the end, it does make sense for a self-employed person to also take advantage of discounts offered through non-insured dental plans and PPO discount plans. The cost is not tax deductible but for this minimal (about $100 per year), the tax consequences are not as important as the discounts in pricing of medical services for a person with significant out-of-pocket costs. Most people should not buy dental insurance anyway because the cost is usually more than the possible benefit so this is not so much a tax issue as a common sense issue. More information on this topic can be found in the Frequently Asked Questions section at www.healthsavingsaccount-hsa.com. An article about the taxation of health insurance benefits can be found at http://www.tonynovak.com/article/taxation-of-health-insurance-benefits.htm.