In the next couple of months, you will be hearing a lot about health insurance. Most aspects of the Affordable Care Act become effective in 2014 but whether they will impact you depends on your unique circumstances. All too often, many consumers receive advice from individuals or companies with biased points of view or who may simply be unaware of the facts.
Debunking some common myths
The Patient Protection and Affordable Care Act is intended to expand access, remove certain limits, and protect customers, but this complex legislation has left consumers confused as to how it may affect them. Below, we debunk some common misunderstandings so that you can better understand the upcoming changes under the new legislation.
Myth: The new law cuts Medicare’s primary benefits.
Fact: The legislation adds benefits, such as annual wellness exams and preventive screenings, incorporated at no cost into Medicare Part B.
- As federal subsidies are reduced for Medicare Advantage plans, insurers may look to cut expenses by scaling back on extra services, such as dental coverage, vision care, or gym memberships.
- Other insurers may increase premiums or co-pays.
- One change that may occur in the future is that higher-income Medicare subscribers may pay higher premiums. Premiums for Parts B and D are based on income; however, according to the new legislation, income levels will not be readjusted until 2020.
- Currently, the income level starts at $85,000 for a single person and $170,000 for married couples. If you are close to these income levels in retirement, you might want to consider diversifying a portion of your retirement income portfolio by converting to a Roth IRA because tax-free withdrawals from a Roth IRA are not added to the Medicare premium income level calculation.
Myth: Medicare will be replaced with a national medical program.
Fact: Health care reform is not a national medical program or universal health care, but those who do not currently have health care insurance should find it easier to get and keep coverage. Ultimately, the intention of reform is to give consumers the opportunity to choose their plans and plan providers.
- Starting in 2014, it is intended that state- and federal-established insurance exchanges will provide consumers and small businesses an avenue for comparing the benefits and costs of a range of private insurance health plans. Insurance purchased through the exchanges cannot be denied due to preexisting conditions and is guaranteed renewable.
- Open enrollment for insurance purchased under the Health Insurance Exchange (HIE) marketplace begins on October 1, 2013, for coverage starting on January 1, 2014.
Myth: Americans are required to buy health insurance.
Fact: Technically, this is not true, but by 2014 almost all U.S. citizens and legal residents (with certain exceptions) must either have health insurance coverage or be prepared to pay a tax penalty.
- Premiums for low- and middle-income individuals who buy insurance through the new exchanges will be subsidized based on their household income. Medicaid will remain the primary health care program for the poor.
- The amount of the insurance subsidy will vary according to income, family size, and plan type.
- Families with incomes up to 400 percent of the federal poverty level who purchase coverage through an HIE will be eligible for a reduction in premium.
- Families with incomes less than 250 percent of the federal poverty level will qualify for lower deductibles and co-pays.
- People will not be required to buy health insurance if the least expensive plan available costs more than 8 percent of their income.
Myth: Small employers are required to subsidize their employees’ health insurance.
Fact: This is not the case, although small business owners are encouraged to provide access to affordable coverage.
- Many businesses with fewer than 50 full-time employees qualify for tax credits based on their contributions to employees’ health insurance. The smaller the business and the lower the average wage, the higher the potential tax credit. In 2014, the tax credit will increase.
- Companies with 50 or more employees will be subject to fines for not offering affordable insurance that covers minimal essential health care. (On July 1, 2013, the Obama administration announced that it was giving employers another year to comply with the new rules.) The legislation considers health insurance affordable if 60 percent of health care expenses are paid by the plan and an employee pays no more than 9.5 percent of household income toward the family’s coverage.
- If your employer provides you with access to health insurance, very little may change. Employer-provided health insurance plans in effect prior to March 23, 2010, are grandfathered under the new law, and some new consumer protections apply to these plans. For example:
- Starting in 2014, these plans cannot have any annual or lifetime limit on benefits nor exclude children due to preexisting conditions.
- Insured individuals cannot lose coverage due to illness or medical conditions, and dependent coverage covers adult children up to age 26 (unless the child has coverage available through his or her own employer).
- In addition, making a claim for a seriously ill employee cannot increase premiums for the employer’s group.
Myth: All taxpayers will feel the tax bite from health care reform.
Fact: The brunt of the taxes associated with reform will impact the highest income taxpayers. Workers with annual adjusted gross income (AGI) of $200,000 ($250,000 if married) will see their payroll tax increase 0.90 percent and may see some investment income taxed an additional 3.8 percent. Some taxpayers will also pay the cost of the new health care reform through the revised threshold for claiming medical expense deductions.
- Starting in 2013, only qualified expenses that exceed 10 percent of AGI are eligible for deduction, up from the previous 7.5-percent threshold.
- In 2018, a new 40-percent tax will take effect for insurers that offer “Cadillac” health insurance plans. For the purposes of the health care bill, Cadillac health care plans are defined as those with premiums of at least $10,200 for single coverage and $27,500 for family plans.
- Although this new tax will be imposed on the insurance companies, the costs will likely be passed along to the insured. Commentators predict that high-deductible plans will become more popular in order to keep certain insurance plans from being categorized as Cadillac options.
- Deductible contributions to health savings accounts (HSAs) may become more popular as a way to bring down taxpayers’ AGI. (Deductible contributions to HSAs are only available to taxpayers who maintain a high-deductible health insurance plan.)
- Tax-exempt bonds, tax-deferred annuities, cash-value life insurance, charitable remainder trusts and Roth conversions may become more attractive to investors in the highest tax brackets to help lower taxable income.
All in all, the health care reform law is intended to expand access, remove certain limits, and protect consumers. Feel free to contact us if you would like to discuss your current health care plans or how the new legislation may affect your financial situation.
Presented by Matthew J. Everson, CFP®, AIF®
MJ Everson financial | Intelligent Financial Guidance
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. Municipal bonds are federally tax-free but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT). The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer. Withdrawals made prior to age 59½ are subject to a 10-percent IRS penalty tax, and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available subaccount portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than the original value. Optional features available may involve additional fees. Cash-value life insurance is a type of life insurance policy that both accumulates value during the policyholder’s lifetime and pays out upon the policyholder’s death. The interest and earnings on the policy are typically not taxable, and while some accrue a cash value that can be borrowed against, certain types may not allow you to withdraw from your cash value at all. Whole life, variable life and universal life are all types of cash-value life insurance.
IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.