This past week brought about some of the most contentious political rancor to date about the Affordable Care Act. The website problems of Healthcare.gov and the looming deadline have caused the defection of a number of Democrat congressmen who are fearful of the mid-term elections next year. The challenge is that the decision that the president announced on Thursday to require insurance companies to allow those individuals, who were to lose their coverage effective Jan. 1, to retain their old plans could shake the foundation of the new system.
Despite all of the debating, it seems very unlikely that the whole program will be repealed anytime soon. If you need insurance, or are being forced to change policies, you need to review the program’s offering to see how you will be affected.
First, coverage is available directly through participating companies or through the government website. Non-compliance will result in a penalty equal to the greater of 1 percent of income or $95. This penalty will escalate each year in an effort to require all citizens to have health insurance.
Second, rates will no longer be based on gender or health condition. In fact, it will be illegal for insurance companies to discriminate based on pre-existing conditions. The goal of the program is to balance the premiums paid by all those covered. This means that younger people will pay more for coverage and older people will pay less. The costs for insurance for older people will be limited to no more than three times that of younger people. The implication of this is that small businesses with younger workers will see a significant increase in their health insurance costs. In fact, it is quite likely that many small businesses will abandon their health plans as they realize that many of their employees will be eligible for tax credits by purchasing policies on the exchanges.
How will people with low incomes afford to pay for insurance? Many will be eligible for a tax credit from the government. These credits can be taken in the form of direct payments to the taxpayer’s chosen insurance company or can be retained to cover out-of-pocket costs incurred throughout the year. These credits will be calculated by analyzing household income relative to the Federal Poverty Level. Credits will be available for incomes up to a maximum of 400 percent of the FPL. Those with income levels below 138 percent of the FPL will be permitted to enroll in Medicaid. An added benefit is in place for those with incomes below 250 percent of the FPL in that they will be allowed to enroll in plans with lower deductibles, co-pays and out of pocket limits. The calculation of the credits caps a family’s premium costs at 9.5 percent of income. What does this mean in terms of numbers? Here are a few examples:
- Family of 4 with an income of $94,200 will have their insurance premium capped at $746 per month. A premium credit will be provided for the additional premium needed for a Silver level plan.
- Family of 4 with an income of $58,875 will have a premium cap of $395.
- Family of 4 with an income of $35,325 will have a premium cap of $118.
The premium caps are based on the number of people in a household and the combined family income. The household is based on the number of total dependents that appear on a tax return. The income also depends on the combined value of all income earned by those dependents. This is important because it includes income earned by children in the household (if they file a return seeking a refund of any federal tax paid). The calculation of income is based on the calculation of Modified Adjusted Gross Income, which is defined as Adjusted Gross Income plus tax-free investment income, foreign income and any untaxed Social Security income not included in your Adjusted Gross Income.
If you decide to go through the process of selecting your own coverage and choosing your tax credit, please understand that you need to be very thoughtful about the income you expect to earn in 2014. If you are a higher income earner and your income comes in $1 above the 400 percent FPL threshold, you will have to repay your entire credit. The reconciliation of your credit will be completed each year when you file your tax return. A miscalculation of your income can be very costly at tax time. Those with an income above the 400 percent FPL will not be eligible for any tax credits.
Finally, we did not discuss it, but the system will offer coverage in four levels — Platinum, Gold, Silver and Bronze. These plans will come with deductibles and co-pays that increase as you go down the metal spectrum. The premiums will also be lower as you go down the line. Our entire discussion about the tax credits that will be available was based on the requirement of using a Silver plan.
The entire process of applying for one of these new plans is as much a tax planning exercise as it is a health care decision. If you are the least bit uncomfortable about how to manage through this process, I encourage you to engage an insurance agent who is certified in the new law (there is a federal training course required of agents who work with the exchanges). Doing so will not cost you anything as he/she will receive a commission from the company you select for coverage. One word of caution, make sure that they have a good understanding of the tax implications of the tax credits and how to properly estimate your income for 2014. You do not want to be in position to have to return any tax credits when you file your tax return in 2014.
Good luck with your planning!
The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security.
Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC 8725 Frankford Avenue Philadelphia, PA 19136 firstname.lastname@example.org 215-332-4968
Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.