Health Care Re-Formation Is Not Necessarily Reformation
SEARCH BLOG: HEALTH CARE
Received the following via an email from my insurance company [USAA]. Now, doesn't this make you feel better?
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Many Americans could face higher tax bills on Jan. 1, 2013, as a result of four health care-reform law changes. And with the re-election of President Obama, it's likely these and other aspects of health care reform will be in place for some time.
What to Ask
If you have questions about how these changes could affect your bottom line, speak with a USAA financial advisor or your tax specialist. Here are some questions to ask:
- Does my health insurance policy qualify me to contribute to a health savings account?
- Aside from helping mitigate the Medicare investment surtax, would including tax-exempt municipal bonds or tax-exempt bond funds in my portfolio provide other benefits?
- Is there an advantage to buying long-term care insurance compared to paying those costs out of pocket?
- Children can stay on their parents' health insurance policies until age 26, but are there advantages to buying them a separate policy instead?
You can find more information at the official federal site for the Affordable Care Act,HealthCare.gov.
Here's a look at what's about to hit — unless Congress otherwise acts — and how you may be able to minimize the impact to you.
What's Coming Jan. 1
1. Limit on flexible spending account (FSA) contributions. Today, employers set their own caps on how much employees can contribute to these plans that let them use pretax money to pay for health care expenses. For 2013, the government will enforce a $2,500 limit per employee.
2. A new Medicare surtax on investment income. Until now, Medicare taxes have only applied to earned income. For 2013, taxpayers filing individually with wages and self-employment income above $200,000 ($250,000 for married couples filing jointly) will pay a 3.8% surtax on the lower of:
- Their net investment income — which includes interest, dividends, capital gains and other amounts.
- The amount of their modified adjusted gross income that is greater than $200,000 ($250,000 for married couples filing jointly).
3. An additional Medicare tax on wages and self-employment income for some. The existing Medicare payroll tax of 2.9% (of which 1.45% is paid by a taxpayer through payroll deductions) will be increased by 0.9% on wages or self-employment income that exceeds $200,000 for single and qualifying head of household and widow(er) filers ($250,000 for married couples filing jointly).
4. Higher hurdle for deducting medical expenses. Currently, out-of-pocket medical costs only are deductible to the extent they exceed 7.5% of your adjusted gross income. For 2013, that hurdle will rise to 10%. But if you’re 65 or older, that threshold remains frozen at 7.5% through 2016.
What You Can Do Now
Between new taxes and the ongoing rise in medical costs, this is a good time to give your health planning a checkup. Here is some preventive medicine of a financial kind you may consider:
- If you have scheduled medical procedures, don't skip them. It may pay to get them over with — and paid for — in 2012 if you can, before the higher threshold for deducting medical expenses hits in 2013.
- Continue to contribute to your employee-offered FSA. While FSAs face a maximum $2,500 per employee for 2013, they're still a valuable and tax-advantaged way to manage health costs. If you haven’t missed next year's enrollment period, sign up for an FSA to divert money from your salary into this account that you can tap for qualified health-care expenses. Plan carefully, though, because under the current rules you'll forfeit any unused money left in the account at the end of the plan year.
- If you're eligible, contribute to a health savings account (HSA). Available to people with high-deductible health insurance plans, they can be purchased on your own or sometimes through an employer. HSAs give you a tax deduction for contributions and tax-free treatment of qualified withdrawals for health-related expenses. For 2012, annual contributions to HSAs generally are limited to $3,100 for an individual and $6,250 for families. (Individuals age 55 or older can contribute an extra $1,000 a year.) In 2013, the contribution limits increase to $3,250 for an individual and $6,450 for families.
- If you'll be hit by the new 3.8% surtax on investment income, consider making some portfolio moves in 2012. For example, if you're thinking of selling an investment with a $40,000 capital gain that would be subject to the tax, you could save tax dollars by selling or rebalancing this year rather than next. This also may be a good time to consider allocating more of your fixed income investments to tax-exempt bonds or tax-exempt bond funds and taking full advantage of pretax contributions to employer retirement plans.
- Plan for health expenses through every stage of your life. If you're age 45 or older, that means considering obtaining long-term care insurance — and realizing that coverage gets more expensive the longer you wait. As you explore your options, find out if your employer offers a plan, or learn what long-term care solutions are offered through USAA.
- Manage your Medicare benefits wisely. If you're approaching Medicare eligibility at age 65 or are already enrolled, learn how USAA can help you protect yourself against gaps in Medicare coverage.
What's on the Horizon: Health Reform's 2014 Provisions
- Insurance will be universally available. Health insurers won't be allowed to turn down applicants because of their medical history.
- Medicaid eligibility expands. Medicaid is a health insurance program for low-income Americans that's funded by the federal and state governments and administered by the states. In 2014, eligibility will expand to include Americans younger than 65 with income less than 133% of the federal poverty level. Today, eligibility varies by state and the age of the beneficiary. In most states, a parent is only covered if their income is less than 50% of the poverty level, according to the Kaiser Commission on Medicaid and the Uninsured. (For a family of four, the federal poverty level currently is around $23,000 in most states.)
- Federal help with premiums. If your household income for the taxable year is between 100% and 400% of the federal poverty level and you are not eligible for or offered other acceptable coverage, you may be eligible for health insurance premium tax credits that will reduce your out-of-pocket costs.
- Insurance becomes mandatory. If you can afford it but don't buy it, you'll generally be subject to a penalty that's being phased in over three years, starting in 2014 at a maximum of $285 per family or 1% of taxable income, whichever is greater. By 2016, the Congressional Budget Office projects the maximum family penalty will be between $12,000 and $12,500.
- New price rules. Health insurers won't be able to charge a higher premium because of an unfavorable medical history or a lower one if you're especially healthy. Rates will only vary with age, geographic location, family size, participation in a health promotion program and tobacco use.
- Insurance shopping centers. To promote availability and competition, each state will offer an online shopping exchange where consumers can shop for standardized health plans.
- A change for business owners. Employers of 50 or more full-time employees who don't offer health insurance coverage risk paying an annual penalty tax of $2,000 per full-time employee, excluding the first 30 employees. This penalty is triggered if just one employee is eligible for federal premium subsidies.
What You May Have Missed
While there are many new health reform provisions that have yet to hit, many Americans are still trying to catch up with what's already changed. Here are the parts of the Affordable Care Act that already have been implemented:
- Closing Medicare's coverage gap. Out-of-pocket expenses are dropping for those with Part D prescription drug coverage. For now, if you reach the gap in Medicare coverage (sometimes called the "doughnut hole"), you'll get a 50% discount on covered brand-name drugs and a 14% discount on generic drugs. These savings are scheduled to grow over the coming years until the gap is completely eliminated in 2020.
- Small-business tax credit. This credit is valued at up to 35% (up to 25% for qualified nonprofits) of the amount qualified small employers pay for their workers' health insurance.
- A break for early retirees covered by employer plans. Employer health plans may be eligible for reimbursement for some of the cost of providing coverage to retirees age 55 who have not yet reached 65, if they meet certain requirements. Employers have to pass the savings along to those retirees through lower premiums, deductibles or co-payments.
- A first step to help people with pre-existing conditions. Insurance pools have been created to give access to affordable coverage. HealthCare.gov provides a simple tool to help you explore your options.
- Money burned by tanning. A 10% tax is charged for indoor tanning that isn’t performed by a licensed medical professional.
- No more lifetime limits. Insurers may no longer impose lifetime dollar caps on most insurance benefits. In addition, some annual dollar limits also are being phased out.
- New restriction on canceling coverage. If your employer makes an honest mistake on your insurance application, insurance companies can no longer retroactively cancel your coverage. Insurers who want to try to rescind coverage must provide 30 days' notice to give you time to appeal the decision.
- Extended coverage for adult children. Young adults can stay on their parents' health plans until their 26th birthday — with their parents' permission. There's no additional cost beyond the normal family premium. It's a different story if you're covered by TRICARE, where you'll pay as much as $200 a month to keep an adult child between ages 21 and 26 on your policy.
- Guaranteed coverage for children. New health plans and work-based plans can't deny coverage to children younger than 19 with pre-existing conditions.
- Preventive-care changes for new private plans. Many newer plans must cover preventive care without deductibles or co-payments.
- Medicare preventive-care changes. Medicare beneficiaries no longer are charged co-payments or deductibles for many preventive services.
- A new restriction on HSAs and FSAs. Tax-free withdrawals to buy over-the-counter medicine are no longer allowed.
- A stiffer penalty for nonqualified withdrawals from HSAs. The penalty tax for nonqualified withdrawals doubles to 20%.
- Medicare Advantage plans face financial squeeze. The government's reimbursements to Medicare Advantage plans face budget cuts over the next several years. In response, these plans may be forced to raise premiums or reduce benefits, or both.
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