Summary of State Tax Provisions Relating to Health Insurance

In addition to the Federal tax incentives that cause employees to prefer to receive health insurance through an employer-sponsored plan, state tax incentives may influence the preference for employer-sponsored health insurance. Every state with an income tax system allows self-employed individuals to claim the self-employed health insurance deduction against their income for state income tax purposes. These states also provide an exclusion from income for employer-provided health insurance.

States that do not have an individual income tax do not have a reason to enact special tax incentives for health insurance. The following states do not have an individual income tax (or have a limited income tax, such as an income tax on interest and dividends only): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

In a limited number of cases, states have adopted special small business tax incentives designed to encourage small businesses to offer health insurance coverage to their employees. Some states have adopted nontax programs designed to encourage or make it easier for small businesses to offer health insurance to their employees or to make it easier for employees of small businesses to purchase health insurance.

This section details the provisions enacted at the state level in four categories: (1) general health tax incentives, (2) provisions designed to encourage or require the use of cafeteria plans to offer health insurance, (3) specific provisions relating to small business tax incentives to offer health insurance, and (4) other provisions relating to small business health insurance. If a state does not have all four categories outlined, it means that there are no specific state law provisions in the omitted categories. In general, the rules outlined in this section were in effect on January 1, 2010; thus, this summary does not reflect any changes adopted subsequent to that date. Further, this section will not reflect any changes to state law that may be (or may have been) enacted in response to the enactment of Federal health care reform legislation.

Alabama

General Health Tax Incentives 

Alabama allows a deduction for self-employed health insurance expenses and an exclusion for employer-provided health insurance for state income tax purposes.

Alabama allows an individual to claim an itemized deduction for medical and dental expenses (not including health insurance premiums paid by an employer-sponsored plan (cafeteria plan)) that exceed 4 percent of adjusted gross income.

Small Business Tax Incentives

Alabama permits businesses with fewer than 25 employees to deduct 150 percent of the amount they pay for employee health insurance premiums for state income tax purposes. Employees of businesses with fewer than 25 employees may claim a 50 percent deduction against their personal state income tax for amounts they pay as health insurance premiums as part of an employer-provided health insurance plan. To be eligible, employees must make $50,000 or less in annual wages and report no more than $75,000 in adjusted annual gross income ($150,000 in the case of a married couple filing a joint return). This provision was enacted in 2007 and became effective January 1, 2009.

Alaska

General Health Tax Incentives 

Alaska allows corporations to deduct health insurance premiums paid on behalf of employees as a compensation expense. Alaska does not have an individual income tax, so there are no specific tax incentives provided for self-employed individuals and employees.

Arizona

General Health Tax Incentives 

Arizona allows a deduction for self-employed health insurance expenses and an exclusion for employer-provided health insurance for state income tax purposes. In addition, Arizona generally follows the Medical Savings Account provisions of sec. 220 of the Internal Revenue Code. However, Arizona residents are permitted to set up MSAs in two situations in which they are not permitted under Federal law. A person can set up an MSA even though his or her employer is not a small employer (with 50 or fewer employees) and even if the maximum number of MSAs that can be set up under Federal law (750,000) has been reached.

Small Business Tax Incentives 

Arizona allows a credit against premium tax liability incurred by a health care insurer that provides health insurance to individuals or small businesses certified by the Arizona Department of Revenue. Health insurance must be provided within 90 days after a certificate of eligibility is provided. For health insurance coverage issued to small businesses, the amount of the tax credit allowed is the lesser of $1,000 for coverage of a single person or $3,000 for family coverage; or 50 percent of the health insurance premium. The maximum amount of tax credits allowed to all taxpayers is capped at $5 million per calendar year. Eligible small businesses must have been in existence for at least one calendar year, not provided health insurance to its employees for at least six months, and had between 2 and 25 employees during the most recent calendar year.

Arkansas 

General Health Tax Incentives

Arkansas allows a deduction for self-employed health insurance expenses and an exclusion for employer-provided health insurance for state income tax purposes.

In addition, Arkansas adopted Internal Revenue Code Sec. 106 concerning employer contributions to an employee Medical Savings Plan and IRC Sec. 138 concerning excluding Medicare plus MSA payments from income.

Arkansas also provides incentives for Health Savings Accounts (HSAs), which enable workers with high deductible health insurance to make pre-tax contributions equal to the lesser of the annual deductible or $3,000 for self-coverage ($5,950 for families) for 2009 to cover health care costs.

Other State Health Incentives 

ARHealthNet (formerly called the Arkansas Safety Net Benefit Program) is a group health insurance program for small to medium size businesses (two to 500 employees) that have not offered health insurance for 12 months. This is a limited benefit plan with premiums subsidized for employees under 200 percent of the Federal poverty level. The program has employee participation requirements. Spouses who do not have health insurance are also eligible.

California 

General Health Tax Incentives 

California allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

Colorado 

General Health Tax Incentives 

Colorado allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. In addition, Colorado permits employers (without regard to size) to establish Medical Savings Accounts for employees. The maximum amount that may be contributed on a tax-free basis on behalf of an employee is $3,000 per year.

For tax years during which the state’s fiscal year ends with a qualified surplus, eligible resident individuals can claim a Colorado income tax credit for certain health benefit plan premiums that they pay for themselves, their spouses, or their dependents. The credit is up to $500 for certain low-income individuals. The health benefit plan credit was not available for tax years 2002 through 2010.

Connecticut 

General Health Tax Incentives 

Connecticut allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

State’s Use of Cafeteria Plans to Provide Health Insurance 

Connecticut requires any employer providing health insurance benefits paid partly through payroll deductions to offer a cafeteria plan, effective October 1, 2007.

Delaware 

Delaware allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

District of Columbia 

General Health Tax Incentives 

The District of Columbia allows a deduction for self-employed health insurance expenses and an exclusion for employer-provided health insurance for state income tax purposes.

Florida

State’s Use of Cafeteria Plans to Provide Health Insurance 

The Cover Florida Health Care Access Program, enacted in May 2008, requires that employers who voluntarily choose to participate in the program comply with certain requirements, including establishing a cafeteria plan, Flexible Spending Arrangement or both.

Georgia

General Health Tax Incentives 

Georgia allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. Georgia provides tax incentives to encourage high deductible health plans (HDHPs). Individuals are permitted to deduct premium costs paid for HDHPs. In addition, Georgia provides a specific tax incentive related to HDHPs for small businesses.

Small Business Tax Incentives 

Georgia provides a nonrefundable tax credit for small employer high-deductible health plans up to $250 per year per enrolled employee. The credit is available for employers with 1 to 50 employees that make a HDHP available to employees. Employees must be enrolled in the plan for 12 consecutive months. The tax credit was effective beginning in 2009.

Hawaii

General Health Tax Incentives 

Hawaii allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

Other State Health Provisions 

The Hawaii Prepaid Health Care Act requires all Hawaii businesses to provide health insurance to employees who work at least 20 hours per week for four consecutive weeks.

Although the Employee Retirement Income Security Act of 1974 (ERISA) generally preempts any state laws relating to the regulation of employer health insurance plans, Hawaii received a statutory exception from ERISA for its state mandate.

Idaho 

General Health Tax Incentives 

Idaho allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

Small Business Tax Incentives 

Idaho provides a credit for employer-provided health insurance. The credit is available for any taxable year during which the number of new employees increases above the average employment of the firm in prior years. A $1,000 credit is permitted for each new employee who, in the calendar year ending during the taxable year for which the credit is claimed, received annual earnings at an average rate of $15.50 or more per hour and was eligible for employer-provided accident or health coverage. A $500 credit is permitted per new employee who does not meet the $1,000 criteria, but who is employed in a revenue-producing enterprise.

The total credit allowed cannot exceed 3.25 percent of net income from the taxpayer’s revenue-producing enterprise in which the employment occurred. The amount of this and all other permissible tax credits cannot exceed 50 percent of the taxpayer’s tax liability. Any tax credit can be carried over to the three succeeding taxable years.  

Illinois

General Health Tax Incentives 

Illinois allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. In addition, Illinois adopted Medical Savings Account provisions similar to Federal law.

Indiana

General Health Tax Incentives 

Indiana allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. In addition, Indiana allows a deduction for contributions to Health Savings Accounts, and contributions to Archer MSAs for state individual income tax purposes.

Indiana provides a tax credit for new employer-provided health insurance, effective January 1, 2007. The credit is available to pass-through entities such as partnerships and S corporations. The credit applies to section 125 cafeteria plans. The credit is the lesser of $50 per enrolled employee per year or $2,500 for two years. The employer must not have provided insurance for one year prior to claiming the credit and must offer insurance to eligible employees (those who work at least 30 hours per week) and their dependents. This credit was effective January 2008.

Small Business Tax Incentives 

Indiana provides a small employer wellness tax credit program. The credit is available to S corporations and partnerships. This credit allows employers with 2 to 100 employees to claim a tax credit for 50 percent of the costs incurred in a given year for providing qualified wellness programs to their employees. This provision was enacted in 2007.

Iowa 

General Health Tax Incentives 

Iowa allows an exclusion for employer-provided health insurance for state income tax purposes. In addition, Iowa allows individuals (including self-employed individuals) to deduct 100 percent of the amount paid for health and dental insurance premiums. The deduction is not available with respect to health insurance premiums paid on a pretax basis. Iowa allows taxpayers to claim the Health Savings Account deduction from their Federal individual income tax return.

State’s Use of Cafeteria Plans to Provide Health Insurance 

Iowa enacted a law in 2008 that requires the Commissioner of Insurance to assist employers with 25 or fewer employees to implement and administer a cafeteria plan including medical expense reimbursement accounts. The law also mandates a study of the ramifications of requiring employers with at least 10 employees to adopt and maintain a cafeteria plan.

Kansas

General Health Tax Incentives 

Kansas allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. It also allows a deduction for contributions to Health Savings Account deduction for individual income tax purposes.

State’s Use of Cafeteria Plans to Provide Health Insurance 

Kansas passed a law in 2008 requiring all insurers to offer premium-only cafeteria plans. In 2007, Kansas appropriated $150,000 toward a small employer cafeteria plan development fund.

Small Business Tax Incentives 

Kansas provides a refundable small employer health insurance credit. The employer must have established a small employer health benefit plan or made contributions to a Health Savings Account of an eligible employee after December 31, 2004. The employer must not have contributed within the 2 years prior to claiming the credit to any health insurance premium or Health Savings Account on behalf of an eligible employee. Eligible employees must work at least 30 hours per week. The credit equals $70 per month per enrolled employee; the credit amount decreases for each year of the credit ($70, $50, $35) for a maximum of three years.

For employers that established a small employer health benefit plan after December 1, 1999, and before January 1, 2005, the amount of the credit was $35 per month per eligible covered employee or 50 percent of the total paid by the employer during the tax year, whichever is less, for the first two years of participation. The credit decreases to 75 percent of this amount in the third year, 50 percent in the fourth year, and 25 percent in the fifth year. No credit is allowed after the fifth year. Taxpayers claiming the credit must reduce the amount of the deduction for related expenses by the amount of the credit.

Kentucky 

General Health Tax Incentives 

Kentucky allows an exclusion for employer-provided health insurance for state income tax purposes. Kentucky allows individuals, including self-employed individuals, to deduct from gross income 100 percent of medical and dental insurance premiums paid with after-tax dollars.

Other State Health Incentives 

The Insurance Coverage, Affordability and Relief to Employers (ICARE) program provides a subsidy (decreasing for each year in the program) of $40 to $60 per employee per month to small businesses that pay at least 50 percent of the premium for health insurance, have been uninsured for at least 12 months, and have average employee wages below 300 percent of the Federal poverty level. A small business is one with two to 25 employees.

Louisiana 

General Health Tax Incentives 

Louisiana allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

Maine 

General Health Tax Incentives 

Maine allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

Small Business Tax Incentives 

Maine provides a tax credit for small employer health plans. The credit was the lesser of 20 percent of dependent health benefits paid or $125 per year per enrolled low-income employee with dependent coverage. Credit may not exceed 50 percent of the state income liability. The employer can claim the credit for low-income employees who work at least 30 hours per week or 1,000 hours per year. The employer must provide health insurance for dependents of low-income employees. The employer must have no more than five employees and meet contribution requirements. There is no duration limit; the credit is nonrefundable. The credit was implemented in 2001.

Other State Health Incentives 

Maine’s DirigoChoice covers small businesses with two to 50 employees, self-employed individuals, and other individuals. Small business employers and self-employed individuals must contribute 60 percent of the cost of health insurance premiums to be eligible for the premium assistance subsidy. DirigoChoice is currently open only for small employers.

Maryland 

General Health Tax Incentives 

Maryland allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. In addition, Maryland excludes contributions to Health Savings Account from income for purposes of the individual income tax.

Other State Health Incentives 

The Working Families and Small Business Health Coverage Act offers subsidies to small businesses with two to nine employees and an average wage below $50,000 of up to 50 percent of the premium cost for health insurance. The maximum subsidy per employee depends on the health insurance coverage chosen and the average annual wage for the business. Any planned employer contribution to an employee’s Health Savings Account is treated as an additional employer premium contribution in calculating the premium subsidy. The employer cannot have offered health insurance to employees in the previous 12 months. This program took effect October 1, 2008. The subsidy is shared between the employer and each employee based on the share of the premium that each contributes. Those employers that join are required to offer a cafeteria plan to their employees. Enrollment in the program is capped to stay within a budget of $15 million.

Massachusetts 

General Health Tax Incentives 

Massachusetts allows an exclusion for employer-provided health insurance for state income tax purposes and a deduction for self-employed health insurance. The Massachusetts Health Care Reform Act requires most adults age 18 and over with access to affordable health insurance to purchase it. If an individual fails to comply with this requirement, the penalties are imposed on the individual’s personal income tax return and shall not exceed 50 percent of the minimum monthly insurance premium for which an individual would have qualified. The penalties only apply to adults who are deemed able to afford health insurance.

State’s Use of Cafeteria Plans to Provide Health Insurance 

Beginning in 2007, Massachusetts became the first state to require all employers with 11 or more employees to offer at least a premium-only cafeteria plan. This provision was one of the primary employer responsibilities in a larger universal health plan. Employers must make a “fair and reasonable” contribution toward an employee health plan or pay a state assessment of up to $295 per employee, per year.

Other State Health Incentives 

The Insurance Partnerships in Massachusetts offers premium assistance for small businesses with two to 50 employees that have not offered health insurance in the past six months, will have an employer contribution toward the premiums of at least 50 percent, and have at least one employee who earns below 300 percent of the Federal poverty level.

Michigan

General Health Tax Incentives 

Michigan allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

Minnesota 

General Health Tax Incentives 

Minnesota allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

A nonrefundable credit is provided equal to 20 percent of the health insurance premiums paid during the first 12 months of participation in a cafeteria plan for health care. This credit is allowed only for individuals who did not have health care coverage for the previous 12 months and whose household income falls below the eligible range.

State’s Use of Cafeteria Plans to Provide Health Insurance 

Effective July 2009, Minnesota requires employers with 11 or more employees who do not offer health insurance to establish a cafeteria plan. The employer is not required to establish a health plan or contribute to the cafeteria plan and employees can opt out of participation. Employers may “opt out” of this requirement by certifying to the Commissioner of Commerce that they have received education and information on the advantages of cafeteria plans and have chosen not to establish such a plan.

Other State Health Incentives 

Minnesota offers grants of up to $350 to certain small employers (with 2 to 50 employees) that establish cafeteria plans to help offset the costs of setting up the plan.

Mississippi 

General Health Tax Incentives 

Mississippi allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. In addition, Mississippi allows a deduction for contributions to Health Savings Accounts.

Missouri 

General Health Tax Incentives 

Missouri allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

State’s Use of Cafeteria Plans to Provide Health Insurance 

Effective January 1, 2008, Missouri requires all employers with health insurance plans (other than self-insured plans) and that pay a portion of the premiums to offer a cafeteria plan to employees.

Small Business Tax Incentives 

Missouri provides a self-employed health insurance tax credit. Effective August 28, 2007, a self-employed taxpayer who is otherwise ineligible for the health insurance deduction allowed under IRC section 162 is allowed a personal income tax credit for the federal tax paid on amounts that the taxpayer has paid for self-employed health insurance. The credit allowed is equal to the portion of the taxpayer’s federal tax liability incurred as a result of the taxpayer’s inclusion of such amounts in federal adjusted gross income. To the extent that the allowable credit exceeds the taxpayer’s state income tax liability, the excess will be considered an overpayment of tax and will be refunded. The credit is not transferable.

Montana 

General Health Tax Incentives 

Montana allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. Montana also allows a deduction for contributions to Health Savings Accounts for state tax purposes. Shareholders in S corporations are allowed to deduct the cost of health insurance premiums for state tax purposes.

Montana provides an exemption from state income tax for deposits made into a Montana Medical Savings Account. Annual exclusion from gross income is permitted for up to $3,000 of contributions plus accumulated interest and other earnings. For married couple filing a joint return, exclusion is $3,000 per spouse.

Small Business Tax Incentives 

Montana provides a nonrefundable credit for small business employers (Health Insurance for Uninsured Montanans Credit). To qualify for this credit, the employer must have been in business in Montana for at least 12 months, must employ 20 or fewer employees who work at least 20 hours per week, and must pay at least 50 percent of each Montana employee’s insurance premium. The credit is only available for three years. The tax credit is limited to a maximum of 10 employees and equals 50 percent of the percentage of employer premiums paid times $25 per month per covered employee.

A separate credit is also available (Insure Montana Small Business Health Insurance Credit). Beginning in 2006, a refundable tax credit is available against corporation license (income) tax as part of a program established to provide small businesses with assistance in paying for group health insurance. An eligible employer that does not receive premium assistance payments or premium incentive payments through the small business health insurance pool may claim a credit of not more than $100 each month for each employee and $100 each month for each employee’s spouse (if the employer covers the spouse), if the average age of the group is 45 years of age or older; and not more than $40 each month for each covered dependent, not to exceed two dependents of an employee in addition to the employee’s spouse. An employer may not claim a credit in excess of 50 percent of the total premiums paid by the employer for the qualifying small groups, for premiums paid from a Medical Savings Account, or for premiums for which a deduction is claimed in computing corporation license or personal income tax. If an eligible employer’s tax credit exceeds the employer’s corporation license or personal income tax liability, the excess amount must be refunded. Eligible small employers proposing to apply for a tax credit must be registered each year with the Commissioner.

As of January 2009, both the small business tax credit and the purchasing pool programs were at full capacity because of limited funding. Small businesses applying for either program are being put on a waiting list. The program is funded through increases in Montana’s tobacco tax.

Other State Health Incentives 

Beginning in 2005, Insure Montana offers assistance to small businesses with two to nine employees currently not offering insurance. These businesses can receive monthly assistance payments amounting to roughly $100 per employee for both the employer’s and the employee’s portion of the health insurance premium. To be eligible, the business can have no employee who earns more than $75,000, other than the owner of the business.

Nebraska 

General Health Tax Incentives 

Nebraska allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. Nebraska also allows a deduction for contributions to Health Savings Accounts for state tax purposes.

Nevada

Other State Health Incentives 

Nevada Check Up Plus provides premium assistance to parents or guardians with income below 200 percent of the Federal poverty level or those whose children are eligible for Medicaid or Nevada Check Up. To qualify, the parents must work for a small employer (with two to 50 employees) with an employer contribution of at least 50 percent of health care premiums. The program provides premium assistance up to $100 per month per parent.

New Hampshire 

Other State Health Incentives 

New Hampshire has enacted HealthFirst, which requires major insurance carriers to offer a standard wellness plan to businesses with up to 50 employees. The target premium is 10 percent of the prior year’s median wage, about $262 per month in 2008.

New Jersey 

General Health Tax Incentives 

New Jersey permits a deduction for medical expenses, qualified Archer Medical Savings Account contributions (following Federal rules), and health insurance costs of the self-employed.

Other State Health Incentives 

New Jersey has a small employer health benefits program to ensure that small employers have access to small group health benefits plans. A small employer is defined as one that employs an average of at least two, but not more than 50 eligible employees on business days during the preceding calendar year. Eligible employees are those who work at least 25 hours per week. At least 75 percent of a small employer’s eligible employees must participate in coverage. The small employer is required to pay 10 percent of the total cost of the health benefits plan.

New Mexico 

General Health Tax Incentives 

New Mexico allows a deduction for self-employed health insurance expenses for state individual income tax purposes. New Mexico allows a deduction for individual income tax purposes for medical expenses not included in itemized deductions for Federal return, including unreimbursed and uncompensated medical care expenses. Reimbursed and compensated insurance premiums like those paid with pre-tax dollars under cafeteria and similar benefit plans are not eligible for the deduction.

Other State Health Incentives 

New Mexico provides a premium assistance program (State Coverage Insurance) for individuals with income below 200 percent of the Federal poverty level. The program applies to health insurance offered by small businesses with no more than 50 employees and that have not offered health insurance in at least 12 months. The program sets guidelines for the employer and employee contributions based on the employee income. The program has currently reached its maximum enrollment and, as of December 19, 2009, all employer group applicants were being placed on a waiting list. 

New York 

General Health Tax Incentives 

New York allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

Other State Health Incentives 

Healthy NY, a subsidized reinsurance pool, provides lower cost health insurance for low-income individuals and small businesses (with 50 or fewer employees) that meet specific eligibility criteria concerning low-income employees. The small business must not have provided health insurance to employees in the last 12 months. At least 30 percent of the firm’s employees must earn $40,000 or less in annual wages (adjusted for inflation). In order to participate in the program, employers must contribute at least 50 percent of the employees’ premiums, certify that at least 50 percent of employees offered health insurance will accept it or have health insurance through another source, and must offer health insurance to all employees who work at least 20 hours per week and earn $40,000 per year or less. Healthy NY offers a high deductible health plan that qualifies to be used with a Health Savings Account.

North Carolina 

General Health Tax Incentives 

North Carolina allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

Small Business Tax Incentives 

Effective for the 2007, 2008, and 2009 tax years, small businesses with no more than 25 employees are eligible to claim a small business health insurance credit against North Carolina corporate or personal income tax or corporation franchise tax if they provide health benefits to all eligible employees. For purposes of the credit, a taxpayer provides health benefits if it pays at least 50 percent of the premiums for health care coverage that equals or exceeds the minimum provisions of the basic health care plan of coverage recommended by the Small Employer Carrier Committee or if its employees have qualifying existing coverage. The credit may only be claimed for health insurance premiums paid for eligible employees whose total annual wages received from the business do not exceed $40,000. The credit is equal to the lesser of $250 or the costs incurred. Taxpayers must make an irrevocable election regarding the tax against which the credit will be claimed when filing the return on which the first credit installment is claimed. Any carry forward of a credit must be claimed against the same tax. All Article 3B credits, including carryovers, may not exceed 50 percent of the tax against which they are claimed for the taxable year. Unused credit may be carried over for five years. The credit expires for taxable years beginning on or after January 1, 2010.

North Dakota 

General Health Tax Incentives 

North Dakota allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

Ohio 

General Health Tax Incentives 

Ohio allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. Ohio also allows a deduction for (1) unsubsidized health care insurance premiums and excess health care expenses, and (2) contributions (up to $4,197 for 2009) to, and earnings of, a Medical Savings Account.

Oklahoma 

General Health Tax Incentives 

Oklahoma allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. An exemption from income for state tax purposes is provided for contributions to, and interest earned on, an Oklahoma Medical Savings Account and for contributions to, and interest earned on, an Oklahoma Health Savings Account.

Small Business Tax Incentives 

Oklahoma offers a refundable tax credit for employers in basic health plans. The credit is $15 per month per employee for up to 2 years. An employer is eligible if the employer (1) has done business in Oklahoma for at least one year, (2) has not provided group health insurance in the previous 15 months, (3) offers a state-certified basic health benefit plan to all eligible employees, and (4) pays 50 percent of the premium for the employee. An eligible employee is one who works an average of 24 hours per week or more for the employer and was not covered by a group health insurance policy within the 15 months preceding the offer to purchase health insurance.

Other State Health Incentives 

Oklahoma pays a portion of health plan premiums for eligible employees through its Insure Oklahoma program. This program is offered to businesses with two to 99 employees (but the program may be extended to employers with up to 250 full-time employees). As of September 2008 the program had approximately 10,000 employees enrolled and uses competition among private insurance carriers to keep costs as low as possible. To participate, employees must meet income guidelines (250 percent of the Federal poverty level) and must contribute up to 15 percent of premium costs. The business must offer a qualified health plan and contribute at least 25 percent of employee premiums. The state pays 60 percent of the insurance costs and the employee pays the remaining 15 percent.

Oregon

General Health Tax Incentives 

Oregon allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. In addition, Oregon provides a special medical deduction for taxpayers age 62 or older.

Other State Health Incentives 

Oregon provides rules regulating the sale of health insurance to employers with two to 50 employees, which require insurance companies to sell to small employers irrespective of their employees’ health and using the same rate-setting factors for all small employer groups. Employers who purchase these plans must offer health insurance to all employees who meet minimum service requirements. Insurers may require employers to contribute up to 100 percent of the cost of the health insurance.

Pennsylvania 

General Health Tax Incentives 

Pennsylvania allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. Pennsylvania also allows deductions for personal income tax purposes for Medical Savings Account contributions and Health Savings Account contributions.

Rhode Island 

General Health Tax Incentives 

Rhode Island allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

State’s Use of Cafeteria Plans to Provide Health Insurance 

In 2007, Rhode Island became the first state to require employers (with 25 or more employees) to offer employees the opportunity to purchase health insurance with pre-tax income (a “stand-alone” cafeteria plan). Neither the state nor employers are required to contribute to the purchase price, but the state estimated premium savings of up to 40 percent depending upon an employee’s tax bracket. The plan was implemented in July 2009.

Other State Health Incentives

Rhode Island offers small businesses an affordable product that emphasizes healthier lifestyles. This program offers lower-premium and lower-deductible health insurance through the small group market to businesses of 50 or fewer employees whose workers agree to abide by five preventive health behaviors: complete a health risk assessment; select a primary care physician; pledge to remain at a healthy weight or participate in weight management programs, if morbidly obese; pledge to remain smoke free or participate in smoking cessation programs; and pledge to participate in disease management programs if applicable. Members who opt for these plans participate in regular assessments. If they do not comply with the requirements, their deductibles are increased to non-discounted levels. The programs premiums are about 15 percent to 20 percent lower than comparable plans. Enrollment is limited to 5,000 individuals per insurer with three insurer’s offering insurance.

South Carolina 

General Health Tax Incentives 

South Carolina allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

Individuals are provided a nonrefundable credit for replacement health insurance coverage. Individuals who held a health insurance policy with an insurer that withdrew from writing policies in South Carolina and, as a result, were assigned to the South Carolina Health Insurance Pool, are entitled to a credit for 50 percent of the premium costs paid during a year for health insurance coverage. The credit cannot exceed $3,000 for each qualifying person covered.

South Dakota 

South Dakota does not offer any tax incentives.

Tennessee 

General Health Tax Incentives 

Tennessee allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

State’s Use of Cafeteria Plans to Provide Health Insurance 

Tennessee enacted a law that provides that any employer that has implemented a cafeteria plan must arrange for employee health insurance premiums and dental insurance premiums to be automatically paid through the cafeteria plan beginning January 1, 2008.

Other State Health Incentives 

Cover Tennessee (CoverTN) is a partnership between the state, employers, and individuals to offer small businesses guaranteed, affordable basic health coverage. The state, the employer and the employee each pay one-third of premium costs, which vary depending on the age, smoking status and weight of the employee. Monthly premiums vary from $37 to $109. Plans focus on a basic benefit package and encourage regular doctor visits and preventive screenings. The plans do not have an out-of-pocket maximum. The insurance is portable, so members can continue with the same insurance plan even if their place of employment changes. To be eligible, small businesses must have 25 or fewer full-time employees and half of the workforce must make less than 250 percent of the Federal poverty level. Effective December 1, 2009, CoverTN has been suspended until further notice because the state reached its budget capacity.

Texas 

Other State Health Incentives 

Texas law allows insurance companies to sell a wide array of small employer health care coverage plans and packages. The term “small employer” means a business with two to 50 eligible employees. The law provides these businesses added protections, including a 15 percent annual cap on rate increases related to health factors, a guarantee that carriers cannot arbitrarily discontinue coverage, and a provision that allows small employers to pool their purchasing clout to negotiate lower insurance rates. For employees of small businesses, the law provides several ways to maintain benefits after leaving a job and limits the waiting period before a health plan will cover pre-existing conditions. Beyond these requirements, small-employer carriers may offer a wide variety of plans, with virtually any combination of features and benefits.

Utah 

General Health Tax Incentives 

Utah allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. Under Utah law, individuals may claim a credit of 5 percent of the amount paid for a health benefit plan only if the individual, spouse, or dependent is not insured under a health benefit plan maintained by an employer. The credit is not available for amounts that are excluded from income for Federal tax purposes. The maximum credit is $300 per individual.

A credit is allowed for Utah individual income tax for contributions to Medical Savings Accounts that were not deducted on the individual’s Federal income tax return.

State’s Use of Cafeteria Plans to Provide Health Insurance 

An employer that chooses to establish a defined contribution arrangement to provide a health benefit plan for employees is required to provide a pre-tax contribution including a cafeteria plan.

Other State Health Incentives 

Utah established the Utah Health Insurance Exchange, which allows small employers with up to 50 employees to buy a choice of health insurance policies.

Vermont 

General Health Tax Incentives 

Vermont allows a deduction for self-employed health insurance expenses and an exclusion for employer-provided health insurance for state income tax purposes. In addition, Vermont allows a deduction for contributions to Health Savings Accounts for state individual income tax purposes.

Other State Health Incentives 

Vermont imposes an employer assessment (fee) for every full-time equivalent employee who is either not offered health insurance or is not enrolled in offered insurance and is uninsured. The first eight qualifying full-time equivalent employees are exempt from the assessment in 2007 and 2008, first six in 2009, and first four in 2010 and thereafter. The assessment is based on FTEs at the rate of $102.20 per quarter ($404.80 per year). The assessment rate will increase annually, based upon premium growth.

Virginia

General Health Tax Incentives 

Virginia allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes.

Washington 

State’s Use of Cafeteria Plans to Provide Health Insurance 

Under the Health Insurance Partnership (HIP), participating small business employers are required to offer a cafeteria plan. The state-run partnership provides cafeteria plan “technical assistance” to small employers.

Other State Health Incentives 

The HIP combines contributions from small employers, employees and the State of Washington to make small group health insurance coverage affordable for employees. The program offers a premium subsidy to eligible employees, based on their family income. Eligible small employers are those with two to 50 employees, the majority of whose employees earn no more than $10 per hour, and which does not currently offer health insurance to its employees. Budget constraints delayed program implementation, but a Federal grant allowed the state to resume work on the program and it is expected to be operational on September 1, 2010.

West Virginia 

General Health Tax Incentives 

West Virginia allows a deduction for self-employed health insurance expenses and exclusion for employer-provided health insurance for state income tax purposes. In addition, West Virginia allows a deduction for corporate income tax purposes for employer contributions to Medical Savings Accounts included in Federal taxable income. The amount of the deduction may not exceed the maximum amount that would have been deductible from the corporation’s Federal taxable income if the aggregate amount of the contributions to individual Medical Savings Accounts were permitted under Federal law.

West Virginia offers an Economic Opportunity Tax Credit for Jobs Creation. An employer in an eligible industry (manufacturing, warehousing, information processing, goods distribution, destination tourism, and research and development) creating less than 20 new jobs for a regular employer and less than 10 new jobs for a qualified small business is eligible for an annual credit of $3,000 per new employee for five years. The new jobs must be full-time, pay a minimum salary of $32,000, and offer health benefits. The credit is first applied to the business and occupation tax, then the business franchise tax, the corporation net income tax, and the personal income tax.

Other State Health Incentives 

West Virginia allows small businesses to tap into the purchasing power of the Public Employees Insurance Agency (PEIA) through a public/private partnership with insurance companies. This program saves money by allowing private insurance carriers’ access to PEIA physician and provider reimbursement rates, with the insurance carriers assuming risk and taking smaller administrative fees but potentially gaining more small business customers. Eligible employers must have two to 50 employees, been without a company-sponsored health insurance plan for at least 12 months, been in operation for at least one year, and have a minimum of 75 percent of eligible employees sign up for the plan; the employer must pay at least 50 percent of the cost of individual coverage. Premiums costs in West Virginia’s program are 17 to 22 percent lower than the usual market rate for small businesses.

Wisconsin 

General Health Tax Incentives 

Wisconsin allows a deduction for self-employed health insurance expenses and an exclusion for employer-provided health insurance for state income tax purposes. Wisconsin does not allow individuals to claim deductions for contributions to Health Savings Accounts.

Wisconsin allows a deduction for all or a portion of the amount paid by an individual taxpayer for medical care insurance, but the individual cannot include amounts not included in gross income, such as contributions to a cafeteria plan or flexible spending arrangement.

Wyoming 

No special tax or special health insurance incentives.