All Things Financial Planning Blog


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Health Care Reform and You


Your Personal Declaration of IndependenceThe Patient Protection and Affordable Care Act, or PPACA, has many facets to it and its implementation will be done over several years. Provisions of the Act have ramifications for businesses and individuals so we will focus on the Health Care Reform Act and its impact on you as an individual. Since we are at about mid-year 2013 I wanted to focus on the Act for this year and next. To summarize 2013 and 2014, I offer the following …

In 2013,

  • Medicare Part A tax rate on wages goes up from 1.45% to 2.35% for certain individuals making more than $200,000 and couples making more than $250,000.
  • ‘Investment Income’ will have an additional 3.8% tax imposed if you make more than the $200,000 or $250,000.
  • Your employer must provide employees with info on employer plans, health exchanges and subsidies.
  • Your flexible spending account ‘set-aside’ will be limited to $2,500 per individual.
  • Medical expense deductions will not be deductible until they exceed 10% of AGI rather than the current 7.5%.

Beginning in 2014,

  • Waiting periods before you can enroll in an employer sponsored plan cannot be more than 90 days.
  • Insurance carriers will be required to cover everyone, even those with preexisting medical conditions.
  • If you are not covered through an employer health plan and do not purchase minimum essential health coverage on your own, you will have to pay a yearly fine of $95 per person ($695 in 2016) or 1% of taxable income (2.5% in 2016), whichever is greater. Individuals who do not have affordable minimum essential coverage from their employer will be eligible for tax credit subsidies for their health insurance purchase on a state exchange if their income is below 400 percent of federal poverty level – about $46,000. Minimum essential coverage includes Medicare, Medicaid, CHIP, TRICARE, individual insurance, grandfathered plans, and eligible employer-sponsored plans. Workers compensation and limited-scope dental or vision benefits are not considered minimum essential health coverage.
  • Group health plans, including grandfathered plans, may not impose cost-sharing amounts (i.e., copays or deductibles) that are more than the maximum allowed for high-deductible health plans (currently these limits are $5,000 for an individual and $10,000 for a family coverage). After 2014, these amounts will be adjusted for health insurance premium inflation. Group health plans, including grandfathered plans, may no longer include more than restricted annual or any lifetime dollar limits on essential health benefits for participants. Limits may exist in and after 2014 for non-essential benefits.
  • Each State must establish health insurance exchanges for individuals and small businesses defined, federally, as employers with less than 100 employees

What will the health insurance exchanges and pricing look like?

Obviously, each State is different. Some States run their own exchanges others have opted to let the Federal government run their State programs. There has been a lot said and predicted about policy pricing given the mandates of coverage and benefits provided for in the Act.

In California, we got our first look at our health care plans to be offered on California’s exchange. Our State will have 19 rating regions which will have 13 health carriers offering four plan types to Californians – Platinum, Gold, Silver and Bronze. California’s Silver Plan will have region costs that will vary for a 40-year-old from the low $200’s per month to the low $400’s per month depending on the region you live in. This is similar to our ‘zip-code-pricing’ currently used by companies in our State. The silver plan, which is expected to cover 70% of an individual’s health care expenses, has a $2,000 deductible, $45 copay for primary care visits, a $250 emergency room co-pay and a maximum annual out-of-pocket expense of $6,350.

According to Chad Terhune of the LA Times, for our 40-year old purchasing a Silver Plan and living in the Los Angeles County region they will be paying somewhere between $242 and $325 a month whereas a similarly designed plan today would cost $321 albeit with more comprehensive benefits. Statewide, considering all counties, the average premium in the State is $177. So the results thus far seem pleasing given the chatter about price increases.

In Ohio they have opted for the Federal government administered program to run the Ohio exchange. Fourteen carriers have submitted 214 different plans to the federal administered exchange. The price ranges for minimum essential health benefits through the federal administered exchanges range from $282 and $577. According to Ohio officials that will be an 88% increase in individual health policy costs for its citizens. . Other preliminary pricing for the 40-year old purchasing a Silver Plan has come in at a low of $205 in one region of Oregon to a high of $413 in a region in Vermont. The Congressional Budget Office had projected nationwide average monthly costs for the second lowest Silver Plan to average about $433. Results are still coming in so stay tuned.

One of the other provisions of PPACA is that health insurance companies must issue rebates to individuals and small businesses if the health insurance company does not spend at least 80% of their annual premiums on medical care. In recent filings with regulators, Blue Shield of California said it owed $24.5 million in rebates to thousands of small firms and similarly Blue Cross of California will be rebating $12 million.

Comments and Planning Implications.

So there is a lot to be played out yet with respect to the law and its implementation and pricing. Businesses have a lot of hoops to jump through with larger companies, publicly traded for example, probably less (a relative term, obviously) impacted than the smaller businesses especially those with more than 50 employees and less than 200. How the pricing and number of carriers willing to provide policies in your state will pan out between now and the end of the year is still a work in progress. For those who do not have insurance currently, or those who have policies that do not provide minimum essential coverage, consult with your advisor to see how the blend of tax subsidies, tax penalties and other issues of PPACA impact you, your family and your financial plans. To your healthy and successful financial future!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


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Flexible Spending Account Changes Looming


What is a FSA?

Health care Flexible Spending Accounts, FSA’s, are benefit plans established by employers to reimburse employees for health care expenses, such as deductibles and co-payments. FSAs are a type of flexible benefit arrangement that generally qualify for tax advantages as a Code Sec. 125 cafeteria plan, under which employees choose between cash (i.e., take-home pay) and certain nontaxable benefits without paying taxes if they select the benefits. Although they are usually funded by employees through salary reduction agreements, employers may contribute as well. 

FSAs are considered part of a cafeteria plan when they are funded through voluntary salary reductions. However, if they are funded by non-elective employer contributions, then they are not governed by the cafeteria plan provisions, but the benefits are excludible under Code Sec. 105 and Code Sec. 106.

Some FSA Statistics

According to the Bureau of Labor Statistics (BLS) National Compensation Survey, 39% of all workers in 2010, and 56% of workers in firms with over 100 employees, had access to a health care FSA. However, in establishments with fewer than 100 employees, only 20% of the workers could choose to participate in an FSA. According to a 2010 Mercer study, 37% of employees with the option of participating in an FSA did so, with an average annual contribution amount of $1,420.

FSA Rules Now and Looming

Contributions to and withdrawals from FSAs are tax-exempt. The federal income tax savings opportunities from health care FSAs essentially depend upon the amount set aside by the employee and the employee’s tax bracket. Since FSAs are funded with pre-tax dollars, the tax savings are the amount of tax that would have been paid on the set-aside amount. So, an employee in the 30% tax bracket who set aside $1,000 would save $300 in federal income taxes. Thus, the higher tax bracket the employee is in, the greater the potential tax savings. 

Unused FSA contributions left over at the end of a plan year have historically been forfeited to the employer under the so-called “use-it-or-lose-it rule.” However, a plan can (but is not required to) provide an optional grace period immediately following the end of each plan year, extending the period for incurring expenses for qualified benefits to the 15th day of the third month after the end of the plan year (i.e., March 15th for a calendar-year plan). Benefits or contributions not used as of the end of the grace period are forfeited. So any tax savings from participating should be carefully weighed against the potential risk of forfeiture under the use-it-or-lose-it rule.

A recent Congressional Research Report highlights the following characteristics of health care FSAs:

  • FSAs are limited to employees and former employees
  • IRS currently imposes no dollar limit on health care FSA contributions, but employers generally do
  • FSAs generally can be used only for unreimbursed medical expenses that would be deductible under the Code, but not for health insurance or long-term care insurance premiums; and
  • Employers may impose additional restrictions.

The report goes on to remind us that there have been changes to the FSA rules as required by the Patient Protection and Affordable Care Act. Significantly, PPACA:

  • Modified the definition of “qualified medical expenses” to remove over-the-counter medicines (except those prescribed by a physician), effective 2011. Effective Jan. 1, 2011, expenses incurred for over-the-counter medicines, with the exception of insulin, will not be eligible for reimbursement under a health FSA, HRA or HSA without a prescription. The penalty for using HSA funds for ineligible expenses increased from 10 percent to 20 percent; and
  • Limited the amount of contributions to health care FSAs to $2,500 per year (indexed for inflation after 2013), effective in 2013 (Code Sec. 125, as amended by PPACA).

Planning Implications for Individuals and Business Owners

So even though the contribution amount will be changing, we should not lose sight of the value of participating in a FSA account if it is available to us. In the 30% tax bracket one has to make a $1.42 before taxes to have $1 of after-tax dollar to spend on medical or other expenses. Wouldn’t you rather pay a $1 ‘cost’ (pre-tax contribution) for a medical expense rather than a ‘$1.42’? Of course, we wouldn’t want to ‘lose’ any overfunded FSA contribution amount so make your deferral election choices judiciously, but, nonetheless, make those choices and participate in this valuable employee benefit!

Employers who offer an HSA may want to consider adding a limited-purpose health care FSA (allowing employees to set aside pre-tax dollars for eligible dental and vision care expenses). Or, employers who aren’t offering HSA-eligible, high-deductible plans may want to consider them. Employers who offer FSAs can reduce their workers’ compensation obligations as well as the employer matching on Social Security and Medicare taxes.

Paired together, limited-purpose FSAs and HSAs allow employees to maximize their tax-advantaged savings for health care. They can use limited-purpose FSA funds to reimburse themselves for dental and vision care, and use HSA funds to pay or reimburse themselves for qualified medical expenses (deductibles and co-insurance, for example) and save for future expenses. HSA contribution limits for 2012 are $3,100 for individual coverage and $6,250 for family coverage. Don’t forget the limits for catch up contributions for persons over age 55 – $1,000 (unchanged from 2011).

Conclusion

In today’s world of spiraling medical costs it is imperative that we make every ‘benefit dollar’ we expend go as far as it can in covering our medical, and other, needs. I don’t know about you, but I would rather pocket that $.42 cents of taxes (referenced above), say into my 401k, than give it to the government. 

Effectively coordinating your family’s personal circumstances with benefit plans and options available to you is just one of the steps in the financial planning process but it is clearly an important one!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA