For retirees not yet eligible for Medicare, changes are afoot. The Affordable Care Act (ACA) seeks to make affordable medical insurance and quality healthcare coverage more available to all Americans.
Included is preventive care coverage and continued coverage for individuals who are currently sick or have pre-existing conditions. A key improvement closes the Medicare Part D “donut hole”. The act mandates that everyone has health insurance coverage by 2014 or pay a tax penalty. Health insurance exchanges, both those available to the public or sponsored by employers of covered current and retired workers, are being created to distribute these programs.
Because insurance companies will compete for business, for many, insurance premiums may decrease. However, many experts predict that premiums will remain the same or increase for those who are older or with pre-existing health problems.
One major change that the ACA brings to the forefront is more options for the individual consumer. This may sound like a good thing, but when you increase the options you also increase the risk of not choosing the right plan. The responsibility of due diligence has now been shifted to the consumer.
Public Health Insurance Exchanges
Health insurance exchanges opened for business on Oct. 1, 2013, allowing early retirees and other self-insured people to shop among various insurance carriers and enroll online. Unless an enrollee’s income level qualifies them for special programs, most will apply for coverage via insurance brokers.
Exchanges have four categories of plans with varying levels of coverage: bronze plans will cover 60% of expenses and have the lowest premiums; silver, 70%; gold, 80%; and platinum, 90%, with the highest premiums.
All plans are required to cover 10 groups of “essential benefits”. These are broad categories and include preventive services, lab work, and hospitalization, among others. Prior to the ACA, many of these services were not included in low-priced plans sold in the individual marketplace.
This coverage will become effective January 1, 2014, so early retirees still have time to review all the available plans before selecting the best one for their circumstances. Evaluating available plans carefully may be the most important task, especially if a retiree maintains residences in more than one state. While every state is required to have more than one provider, not every provider must offer every level of plan.
Private Health Insurance Exchanges: A New Frontier for Early Retirees?
Several large corporations have initiated their own exchanges to enable their employees, and now retirees, to enroll in health insurance plans. These exchanges are gaining popularity among large employers as a means to reduce their healthcare costs both for early retirees and actively working employees. Unlike the state public exchanges, the private exchanges are not regulated by the federal government.
Commonly referred to as “defined-contribution health plans”, private exchanges provide both active employees and retirees a fixed dollar contribution toward the cost of health insurance coverage from the private exchange. As with public exchanges, there are multiple carriers from which to choose, and a variety of levels of coverage and costs. The contributions made by an employer may not cover the cost of health insurance for an early retiree and dependents. If this is the case, the retiree will need to make additional out-of-pocket contributions to buy that coverage.
Can Early Retirees Qualify for Premium Subsidies?
The availability of these subsidies depends on a taxpayer’s modified adjusted gross income (MAGI). In order to qualify for a subsidy, MAGI cannot be more than 400% of the federal poverty level. For example, the estimate for 2013 to 2014 for a married couple both age 60 living in a high-cost area is $62,500. The maximum premium cannot exceed 9.5% of income.
The Income Tax Impact
2013 brings three major income tax changes. Whereas medical expenses were previously deductible to the extent they exceeded 7.5% of a taxpayer’s adjusted gross income (AGI), that floor has been increased to 10%. The 7.5% floor still applies to taxpayers age 65 and older.
The other two tax law changes affect only taxpayers in the high income tax bracket. The first of these requires an additional 0.9% Medicare tax be paid when earned income exceeds $200,000 for single, head of household, or qualifying widow taxpayers; $125,00 for married filing separately taxpayers; and $250,000 for married filing jointly taxpayers. Further, a new 3.8% Medicare surtax on net investment income (NII) is assessed on the smaller of the total NII or excess income greater than income thresholds.
Taxpayers who want to minimize the effects of the 3.8% investment tax may want to decrease their investment income and/or taxable earnings. A few examples would be to:
- Maximize your 401(k) or any other retirement plan contribution. Individuals can contribute $17,500 to their 401(k) plan (with $5,500 catch-up contribution for individuals 50 years and older). Money contributed to the retirement plan is considered pre-tax, which will decrease your annual earnings. This would also apply to flexible spending accounts (2013 limit is $2,500) which can be used to pay for co-insurance or co-pays, vision and eye care.
- Own tax-exempt municipal bonds. Interest from muni-bonds is not part of the definition of investment income. Muni-bond interest will not be used to calculate your annual income for purposes of the 3.8% Medicare tax.
- Minimize capital gains by tax loss harvesting. Review your portfolio and sell positions with capital losses. The realized losses will offset any realized capital gains in your portfolio and any net, capital losses in excess of $3,000 can be used to reduce taxable income.
- The timing of your first required minimum distribution (RMD) from your IRA could be critical. The IRS allows taxpayers to delay this first distribution until April 1 after the year the taxpayer reaches age 70½. However, deferring that may cause two distributions to occur in the same income tax year, which may put the taxpayer over the income threshold and bring the surtax into play.
- Taxpayers involved in an S corporation or partnership may want their involvement to qualify as non-passive, in order to counterbalance the losses of other taxable income. In order to qualify, the taxpayer must meet stringent requirements, so be sure to consult with your tax professional.
While enrollment theoretically was initiated in October, thousands were prevented from signing up when the federal program’s glitch-prone enrollment center website, healthcare.gov, crashed again and again. After the federal government partnered with corporate America, the site was reworked and in the first two days, 29,000 people signed up for health insurance coverage—3,000 more than the entire number of applications made in the first month of operation. The good news is that a six-week extension has been granted as a result. The open enrollment period has been extended to March 31, 2014.
On the heels of this debacle, health care reform got another black eye when it became clear that many Americans would lose their existing health insurance because their coverage didn’t meet new standards. In some cases, new coverage was more expensive. Some people also found they wouldn’t be allowed to keep their doctors. In November, President Obama allowed insurers to restart canceled policies if they wish.
While the rollout hasn’t gone as hoped, the point remains that many previously uninsured or underinsured Americans will now have access to coverage. The Affordable Care Act is a broad piece of legislation. How the pieces will fit together remains unknown as we are sailing in unchartered waters. Wescott will stay current, and will alert you to changes in laws and their implications. Please be in contact with your advisor should you have any questions about how the ACA impacts you.
An original article authored by the advisors of Wescott Financial Advisory Group LLC
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