Is Medishare Deductible as Self-Employed Health Insurance?
The tax treatment for Medishare differs from health insurance. For the self-employed, this distinction affects which deductions you can claim and how.
Self-employed individuals often seek ways to manage tax obligations, and a common question is whether monthly payments to health care sharing ministries (HCSMs) like Medishare can be claimed using the self-employed health insurance deduction. HCSMs operate on a model of voluntary, faith-based sharing for medical needs, which differs from regulated insurance.
The Self-Employed Health Insurance Deduction Explained
The self-employed health insurance deduction allows eligible taxpayers to subtract health insurance premium costs from their gross income. This is an “above-the-line” deduction claimed on Schedule 1 of Form 1040, which reduces a taxpayer’s adjusted gross income (AGI). This can help them qualify for other tax deductions and credits and is available whether a taxpayer itemizes or takes the standard deduction.
To qualify, an individual must be self-employed with a net profit for the year, which includes sole proprietors, partners, and shareholders who own more than 2% of an S corporation. The deduction is limited to the earned income from the business and cannot be claimed if the business has a net loss. The deduction covers premiums for medical, dental, and qualifying long-term care insurance for the individual, their spouse, and dependents.
A restriction on this deduction is that it is not available for any month the self-employed individual was eligible to participate in an employer-sponsored health plan. This rule also applies if their spouse was eligible for an employer’s plan. The insurance plan must be established under the business, though the policy can be in the name of either the business or the individual.
Tax Status of Health Care Sharing Ministries
The Internal Revenue Service (IRS) does not classify health care sharing ministries as insurance. Consequently, monthly share payments to an organization like Medishare are not considered insurance premiums and do not qualify for the self-employed health insurance deduction.
Health care sharing ministries are nonprofit organizations where members with common beliefs share medical costs. These arrangements are not regulated as insurance and do not involve a formal contract that guarantees payment for medical bills. This lack of a binding risk-transfer agreement is a primary reason the IRS does not view them as insurance.
The Patient Protection and Affordable Care Act (ACA) acknowledged HCSMs, recognizing them as a separate entity from qualified health plans. However, this recognition does not change their classification for the self-employed health insurance deduction. Under current tax law, payments to Medishare cannot be entered on Schedule 1 as a deduction for self-employed health insurance.
Deducting Payments as an Itemized Medical Expense
Although payments to a health care sharing ministry are not deductible as self-employed health insurance, they may qualify as a medical expense. This provides an alternative path for a tax benefit. These payments can be included with other qualifying medical costs and deducted on Schedule A (Form 1040), which requires a taxpayer to itemize deductions rather than taking the standard deduction.
The deduction is limited by Adjusted Gross Income (AGI), as taxpayers can only deduct the amount of total medical expenses that exceeds 7.5% of their AGI. This threshold means many individuals will not receive a benefit unless their medical costs are substantial relative to their income. Any reimbursements received from the sharing ministry for medical bills must be subtracted from the total expenses claimed.
Consider a self-employed individual with an AGI of $80,000, making their 7.5% threshold $6,000. If this person paid $5,000 in Medishare monthly amounts and had another $2,000 in other out-of-pocket medical costs, their total medical expense would be $7,000. They could deduct $1,000, which is the amount that exceeds the $6,000 threshold. If their total medical expenses were only $5,500, they would not be able to deduct any amount.
Comparing Deduction Methods
The self-employed health insurance deduction is an “above-the-line” adjustment to income that directly reduces your AGI. This can lower your overall tax liability and help you qualify for other tax benefits that have AGI-based limits. It is available even if you take the standard deduction.
In contrast, treating HCSM payments as a medical expense is a “below-the-line” deduction that requires itemizing on Schedule A. This means you must forgo the standard deduction. A taxpayer benefits only if their total itemized deductions, including the portion of medical expenses that exceeds the 7.5% AGI floor, are greater than their available standard deduction.
The self-employed health insurance deduction allows for a 100% deduction of qualifying premiums up to the business’s net income limit. The itemized medical expense deduction is constrained by the 7.5% AGI threshold, which can eliminate the deduction entirely for many people.