Why does your employer offer health insurance? Is it because they care about your health?
NOPE. The primary reason companies offer health insurance today is for recruiting and retention purposes. That is, health insurance is a valuable form of compensation because:
- It is tax deductible to the business
- Employees get the benefit 100% tax-free
As a result of this enormous tax advantage, $1 in health benefits may be worth $1.50 - $2.00 in pay to an employee depending on his or her family's tax bracket.
Additionally, the $1 in health benefits costs the company less than $1 in pay. (Remember, it's tax deductible to the business so the company does not have to pay payroll taxes!)
So, when did health insurance become tax deductible to businesses?
Health Insurance Became Tax Deductible in the 1940s
The history of employers providing workers with health insurance goes back for decades. In the early 1940s, the federal government changed the tax laws to allow businesses to provide health insurance coverage as part of an employee's compensation package 100% tax-free.
How World War II Created Employer-Sponsored Health Insurance
During World War II, workers demanded wage increases that were prohibited by wartime wage and price controls. To grant a concession to labor without violating wage and price controls, Congress exempted employer-sponsored health insurance from wage controls and income taxation—in effect allowing off-the-books raises for employees in the form of non-taxable health benefits. This created an enormous tax advantage for employer-sponsored health benefits over health insurance purchased by employees with after-tax dollars (e.g., auto insurance). By the mid-1960s employer-sponsored health benefits were almost universal.
Employer-sponsored Health Insurance Today
Millions of working Americans believe that the only way they can get health insurance is from their employer. Until recently, their belief was accurate. But in the past few years, a quiet revolution has changed the health insurance options available to employees, self-employeds, and small businesses: defined contribution health benefits.