As required by the Affordable Care Act, employers started reporting to the employees the total cost of their group health care coverage. As an employee, the employer’s share of the premium is not taxable to you. Your share of the premium is usually deducted from your paychecks pre-tax. They just want to make you aware of the total cost. Some say it’s laying the groundwork for making it taxable one day. Maybe. For now, we are not there yet.
The total cost of the group health care coverage through your employer is reported on your W-2, in box 12 with a code DD. It includes both the employer’s share and your share of the annual premium. The employer can choose to include only medical or they can choose to include medical plus dental and vision.
I looked at my W-2. The number reported in box 12 code DD was $12,800. When I asked payroll I was told the number was for medical only, not including dental and vision. That was for insuring an employee plus a spouse in a high deductible plan. My share of the annual premium from payroll deductions was $3,300, which was about 1/4 of the total. My employer paid the other 3/4.
What did I get from this insurance? I pulled a list of all the claims and the Explanation of Benefits for services during the year from the health insurance company. Here’s the breakdown:
- Total Billed To Insurance: $2,350
- Insurance Negotiated Rate Discount: $60
- Total Paid By Insurance: $370
- Applied to Deductible: $1,920
In other words, if we had no insurance and we just paid the list price from the health care providers, with no discount whatsoever for paying cash, it would’ve cost us $2,350 instead of $1,920. Having insurance saved us $430. For the privilege of saving $430, between my employer and myself, we paid $12,800 in premiums!
My employer paid 3/4 of the health insurance premium not out of the goodness of their heart. They paid it because I worked for them. It was part of my total compensation. It would’ve been a wash to my employer if they just put their share on my pay and then deducted 100% of the annual premium from my paychecks. Really, I paid that $12,800.
Insurance is for unexpected huge expenses. I know. I pay auto and home insurance every year and I rarely receive any payout. I paid life insurance all these years and I didn’t die. Health insurance is looking more and more like auto and home insurance and life insurance now, except it costs 10 times more. Another difference is, in auto and home insurance and in life insurance, your premium is rated with your risk. If you have teenage drivers, your auto insurance rate will be higher. If you’re addicted to illegal drugs, your life insurance rate will be astronomical if they even insure you. In this sense, health insurance isn’t true insurance. It’s more like a contribution for the greater good.
I can see why the Affordable Care Act marketplaces could only sign up people who get a subsidy or people who already require costly care. If you are healthy and you don’t get a subsidy, it’s very appealing to refuse to pay into the pool, saving that $12,800 every year. This is known as adverse selection. People who stand to benefit self-select into the pool.
Because all employees in the same plan at my employer pay the same premium, thousands of other healthy employees are all paying lofty premiums to cover the unlucky few who incur astronomical health care expenses. To a lower-paid employee, the health insurance premium represents a large percentage of their pay. It works like a regressive tax: the lower your pay, the higher the percentage you pay for health insurance. Every person who gets health insurance through their employer already pays this tax.
I once entertained the idea of taking a job in Europe. When I looked at how income taxes worked in that country, I was shocked to see their tax rate started at 36% on the first dollar/Euro earned and it went up to 52% on income over about $70k. Such rates appear punishingly high, but when you add our federal, state, Social Security, and Medicare taxes plus health insurance, here in the U.S. we are actually paying not that much less.
If you get health insurance through your employer, I encourage you to go through the same exercise. Look at your W-2, box 12, code DD. See how much you are paying for health insurance. Translate it into a tax rate. Add it to your federal and state income taxes and payroll taxes (include the portion paid by the employer because that’s part of your total compensation too). You might see the total approaching the levels in Europe. We are only kidding ourselves in saying we don’t want high taxes as in Europe when we are already paying rates just as high.
It finally dawned on me that employer-based health insurance is single-payer universal health care, only within that employer’s walls. The single-payer is the employer. Every employee who wants health insurance is covered. There is no exclusion for pre-existing conditions. Every employee pays the same for the same coverage regardless of age or health status (some employers set the employee contributions lower for lower-paid employees). It’s funded by a “tax” on all employees in that a part of your total compensation is automatically withheld from you. The younger and the more healthy employees subsidize the older and the less healthy employees. Those who are against single-payer universal health care actually already have it!