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Tax Free Health Insurance


Today, there are many ways to accomplish tax free health insurance.

Historically, most Americans purchase tax free health insurance from their employers because employer-sponsored health insurance costs can usually be excluded from employees’ income for purposes of calculating income and payroll taxes. This results in significant tax savings and benefits for many employees (20-40% of the health insurance costs). Tax free health insurance also reduces the companies FICA tax liability (~7.65% of the health insurance costs).

History of Tax Free Health Insurance and Employee Health Benefits

The concept of tax free health insurance began in the U.S. in the 1940s. During World War II, the government ruled that company-provided fringe benefits (e.g. health insurance) could be excluded from wartime wage controls. Unable to increase wages due to the wartime controls, many companies decided to increase health insurance benefits as a way to compete for top employees.  

In the 1950s, the Internal Revenue Service (IRS) attempted to put an end to tax free health insurance. However, Congress voted to keep the tax exclusion for employer-sponsored health insurance in place.

As a result, tax free health insurance lead to the growth of employer-sponsored health insurance as we know it today.  

Tax Free Health Insurance Today

Today, there are numerous ways to accomplish tax free health insurance. Individuals can even accomplish tax free individual health insurance.

For example, section 125 POP plans allow employees to contribute tax free dollars to individual health insurance policies.

Also, Health Reimbursement Arrangements (HRAs) and Medical Expense Reimbursement Plans (MERPs) allow employers to contribute tax free dollars toward individual health insurance.

And, self-employed individuals can take a tax deduction for individual health insurance on their Form 1040.

The Comprehensive Guide to the Small Business HRA