Planning for Health Care in 2011 and Beyond

Everything we know about health care is changing and likely will continue to do so for the predictable future.  As a result of the sweeping health care reform passed by Congress in March 2010 and signed into law by President Obama, several key changes took effect on January 1, 2011.  While healthcare reform continues to be a hot topic in Congress, it is expected that repeal efforts will be largely symbolic, and the changes that began in 2011 will continue on course over the coming years.

Medicare Coverage

Many of the healthcare changes affect Medicare recipients.  Beginning in 2011, there is a focus on making preventative health services more attractive to Medicare beneficiaries.  For example, Medicare will now provide preventive care measures, including vaccinations and cancer screenings, for free.  Annual wellness exams will also be offered free of charge for the first time.

The ‘Donut Hole’ phase out, which begins this year, will affect people the most.  Medicare part D enrollees who reach the donut hole (a gap in prescription drug coverage that occurs when spending exceeds the initial coverage limit of $2,830) will receive a 50 percent discount on the cost of brand name prescription drugs.  Medicare will continue to gradually phase in additional subsides in the coverage gap for all prescription drugs, ultimately reducing the co-insurance rates for Part D enrollees in the gap from 100 percent to 25 percent by 2020.   A $250 rebate will also be provided for all seniors who fall into the donut hole beginning in 2011.

One major downside to the Medicare changes is related to Part D coverage, which will now link premium payments to income levels.  Medicare recipients making more than $85,000 (individuals) or $170,000 (married couples) will now pay increased premiums for prescription drug coverage.

Beginning in 2013, the Medicare payroll tax will increase to 2.35 percent (from 1.45 percent previously) for individuals earning more than $200,000, or $250,000 for married couples filing jointly.  In addition to the increased payroll tax, high-income households will be subject to a new 3.8 percent Medicare tax on investment incomeincluding capital gains, dividends, interest, annuities, royalties and rents.  The additional tax will apply to the lesser of a tax payer’s investment income or the amount of modified adjusted gross income (MAGI) that exceeds the high income threshold.  For example, a single person making $250,000 in wages who has $100,000 of investment income will be required to pay the 3.8 percent Medicare tax on the $50,000 of MAGI above the threshold, not the $100,000 of investment income earned.  To illustrate the impact of these tax increases, assume the following example:  Take a single tax payer making $400,000 in wages and $250,000 in capital gains.  This person would pay an additional $9,400 into Medicare under the new law.  ($1,800 due to the increased payroll tax and $7,600 from the new investment tax)  Under previous law, the total tax amount for our single tax payer would have been $5,800.  Their total tax owed under the new law is $15,200.

Flexible Spending Accounts and Other Healthcare Savings Options

Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) have become increasingly popular due to the tax savings generated when using these types of accounts for out-of-pocket medical expenses.  Contributions to these plans can be made with pre-tax dollars and distributions used for qualifying medical expenses can be made tax free, allowing everyday medical expenses to be covered with pre-tax dollars.

The exclusion of over-the-counter medications as a qualified expense under these types of plans is very impactful.  Distributions used to pay for over-the-counter medications will now be considered non-qualified (unless prescribed by a doctor) and, therefore, subject to income tax as well as an early withdrawal tax penalty if the distribution occurs prior to age 65.  In addition, the early withdrawal tax penalties for non-qualified distributions from HSAs and MSAs are increasing from 10 percent to 20 percent.  Beginning in 2013, a cap will be placed on contributions to FSAs in the amount of $2,500.

Coverage for Adult Children

One change in the new legislation that has broad support is the extension of coverage for adult children under their parent’s insurance plan.  Previously, the cutoff age for coverage was 24.  The new law extends this coverage to age 26however, this change does not apply to existing healthcare plans if the child has access to coverage through his or her own employer.  For children pursuing graduate degrees, or for the many recent college graduates who are struggling in a high unemployment economic environment, this change will allow them to remain under their parent’s coverage for a few more years.

Most change has both positive and negative consequences.  Knowing what to expect and how it will affect you and your family is half the battle. Awareness, along with some careful planning where appropriate, may help reduce the impact on your bank account.

Laura Pupillo, CFP®

Laura is the professional consultant for Peter Schick and Don Kukla.

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