Medical Plans, Medicare, and Federal Tax Considerations
Medical plans
Indemnity plans reimburse a share of charges. Managed care plans - HMO, PPO, POS - control cost through networks and utilization review. Consumer-directed plans pair a high-deductible health plan with a health savings account, which offers a triple tax advantage: deductible contributions, tax-deferred growth, and tax-free qualified withdrawals. Medicaid is a joint federal-state program for low-income individuals, distinct from Medicare.
Medicare
Part A covers inpatient hospital, skilled nursing after a qualifying stay, hospice, and some home health, financed through payroll taxes and generally premium-free with sufficient work history. Part B covers physician and outpatient care with a premium. Part C is Medicare Advantage, a private plan alternative that must provide at least what Parts A and B cover. Part D covers outpatient prescription drugs. Eligibility generally begins at 65, or after 24 months of disability benefits, or immediately for ALS and end-stage renal disease. Enrollment periods include the Initial Enrollment Period, the General Enrollment Period, and Special Enrollment Periods. Medigap supplements Original Medicare and cannot be used with Medicare Advantage.
Federal tax
Death benefits paid to a named beneficiary are generally income-tax free; the estate-tax exclusion depends on ownership and the applicable exclusion amount. Premiums are generally not deductible for individuals. Transfer-for-value can make proceeds taxable. Loans from a policy are not taxable while the policy is in force. Dividends are taxable to the extent they exceed premiums paid. Employer-paid group term life over $50,000 creates imputed income using the IRS table. Annuity growth is tax-deferred; withdrawals are taxable and may incur a 10% penalty before 59½. Section 1035 exchanges defer gain. Accelerated death benefits for the terminally ill are generally excludable.
Rule of thumb
If a question asks who is taxed on a death benefit, the answer is normally no one - income tax free to the beneficiary - unless the policy was transferred for value.