On March 21st, change arrived in the form of the Patient Protection Act, as amended by the Health Care & Education Reconciliation Act of 2010. Health care reform has stirred anger, fear and relief, depending on what newspaper you read or whom you are talking to. There are so many initiatives in the 2,409 pages of the Act that it is impossible to cover them all here. However, after reading the Act as well as web sites, blogs, tax briefings and newspapers, I have attempted to sort out the issues that will impact you the most in the near future:
If you have college age kids or grandkids – They will be allowed to stay on their parent’s group plan or individual policy until they are 26 years old. So if they get out of school and can’t find a job, or their new job has no benefits, they will be covered.
If you are planning to retire early – You will have access to an insurance risk pool if you are retired, between 55 and 64 years old, and not in a retiree group plan. In 2014 health insurance exchanges will be available for you to acquire coverage.
If you are already retired and covered by Medicare – If you are covered by the Medicare Part D prescription drug plan and you reach the prescription drug coverage limit (currently $2,700) you are responsible for your drug costs until you reach a maximum out-of-pocket of $6,154. At this point Medicare coverage resumes. This gap is referred to as the “donut hole.” If you reach it in 2010, you will receive a $250 rebate. Beginning in 2011, there will be a 50% discount on brand-name drugs in the donut hole, and in 2020 the donut hole will be eliminated completely. Beginning January 2011, the co-payments and deductibles for preventative services such as check-ups will be eliminated as well.
If you have a seriously ill family member – Health insurance plans can no longer place lifetime limits on coverage, and the use of annual insurance limits will be restricted as well. By 2014, the use of any annual limits will be prohibited.
If you have a child or grandchild born with serious health problems – Plans can no longer deny coverage to children with pre-existing conditions.
There are other provisions of the Act that are far more controversial, such as requiring every person to have health insurance coverage by 2014 or pay a penalty; the expansion of Medicaid to cover many more people; and the requirement of states to create American Health Benefit Exchanges and Small Business Health Options Programs when state governments are already under financial pressure. These changes will not take effect immediately, so their financial impact will be felt more slowly. Which brings us to the next issue: How will we pay for this?
The threshold for itemized medical deductions is going up – Beginning in 2013 your medical expenses must exceed 10% (versus 7.5%) of your adjusted gross income before you can deduct them as an itemized expense. If you are over 65 you are exempt from the rule for tax years 2013 until 2016.
Medicare payroll taxes are going up – Beginning in 2013, there will be an additional .9% on earned income in excess of $200,000 for individuals and $250,000 for married couples filing jointly. It is not yet known how deferred compensation arrangements will be affected.
A new “unearned income Medicare contributions” tax has been created – Beginning in 2013, there will be a new 3.8% tax imposed on the lesser of your (i) net investment income or (ii) the excess of your modified adjusted gross income (AGI) over the threshold amount. The thresholds are $200,000 for single individuals, $250,000 for married filing jointly and surviving spouses, and $125,000 for married couples filing separately. Net investment income includes interest and dividends, as well as rents and gains from a passive activity. Distributions from IRAs are not included.
Example: Karen has a modified AGI of $220,000 and a net investment income of $40,000. The tax would apply to the lesser of her (i) net investment income of $40,000 or (ii) her modified AGI over the threshold amount for a single person ($220,000 – 200,000 = $20,000). In her case, the tax is 3.8% of $20,000 or $760.
There are other revenue enhancements that will impact you to a lesser extent:
• The cost of over-the-counter drugs not prescribed by a doctor can no longer be reimbursed through a Health Savings Account or Health Reimbursement account. This would include common allergy drugs such as Zyrtec. Any withdrawals from an HSA or HRA that are not used for qualified medical expenses will be penalized with a 20% tax.
• Some medical devices will incur an additional excise tax of 2.3%, but eyeglasses and hearing aids will be excluded.
We are still learning what this all means, and there will be additional debate and possible adjustments as we approach the many enactment deadlines. As always, we will work with you one-on-one to determine how these changes impact you personally, and will help you decide if any changes need to be made to your financial plan.