Health Insurance Options for 1 Income Families

Trying to come up with a title for this article was a tough one.  As with most of my articles, the basis of this article comes from working with a client.

My client has a job that is offering group insurance.  When he looked at what it would cost to insure him and his family, he just about passed out.  He called me in a panic not sure what to do.  He was smart to call an agent.  He sent me the information for his employer plan and I started digging into the numbers.  Here is what I found:

– the employer coverage for the employee-only was very good.
– the dependent children coverage was comparable to the individual market because he had 3 kids
– coverage for his wife was much higher than what was available in the open market

During my next conversation with him, I explained this.  He then asked about subsidies.  Unfortunately, he doesn’t qualify for subsidies.  This is for 2 reasons:

1.  His employer offers insurance that meets ACA requirements offering the essential health benefits

2.  His employer’s coverage is deemed affordable since the least expensive option for employee-only coverage is less than 9.5% of his income.

So, what are my recommendations for this person:

– Use the employer offered insurance for you and your children.

– Get a separate individual policy for your wife.

There are a lot of assumptions here like:  everyone is in good health, but this will be a common occurrence and we shouldn’t immediately criticize a company for not offering insurance to employee’s spouses.  They may actually be doing you a favor depending on your income level.

Every situation is different, but the message is clear:  Don’t blindly accept what your employer is offering you and your family with regards to health insurance.  There may be better options for you and your family.

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Sole proprietor? Like to save money on taxes?

In this installment of “did you know”, I talk about how you can do something that will save you money on your taxes.

A little background on health insurance premiums and how most sole proprietor business owners deduct the premiums from their taxes. When a business owner completes their taxes (or has someone do it for them), the health insurance premiums are deducted on 1040. This allows the business to deduct the premiums regardless whether they itemize or not. This reduces your AGI, right? Yes, it does, but it does not remove your health insurance premium from your self employment tax calculation. The self employment tax is 15.3%. How would you like to be able to include your health insurance premium as a business expense so you can save 15% of your health insurance premium per year?  In the end, it will come out less than that, but I wanted to get your attention without getting into too much detail.  It actually comes out to 14.1% minus the cost of the HRA.

You are probably wondering… “Wait, this sounds too good to be true.  What are you talking about?”  As you know, our tax code is complicated and is constantly changing.  Currently, if you are a sole proprietor, you can accomplish this by creating a HRA or Health Reimbursement Account.  This is not a HSA.  A HRA can be used to reimburse health insurance premiums (and other health costs) as a business expense.  This means that your health insurance is deducted from your profit calculation on Schedule C and so the health insurance premium is deducted prior to the self employment tax calculation.

Ok, so let’s get down to the dollars and cents of the savings.  First, if your insurance premium is not more than about $3000 per year, then this is probably not for you as the savings would be about zero.  I am going to take a very low-cost insurance premium as the first example and then a more average example, both for a family of 4.

Premium:  6000 annual, $500 per month
Savings with HRA:  about $440 per year

I won’t bore you with the details of the calculation, but know that it takes the cost of the HRA into account and the number will be slightly different depending on what tax bracket you are in.  Also, your business needs to have at least the amount of your premium in profit in order to take full advantage of this.  In other words, if you don’t have a profit, you aren’t paying self employment tax anyway.  Let’s look at a more realistic example for current cost of a family of 4 plan.

Premium:  10000 annual, $833.33 per month
Savings:  about $1000 per year

If you are still with me, the next statement and question is usually “sounds too good to be true” and “what kind of hoops do I have to jump through?”  There is a company that I work with that takes care of all the details and makes this process very easy.  Yes, there is a cost, but I have factored that into my savings calculations above.

Is it stupid that you need to jump through hoops to take advantage of this?  Yes, but I didn’t write the tax code.  I just want to help you take full advantage of what the tax code gives us.  The HRA solution is the way to save money for you and your family for just a little bit of effort.  Would you refinance your mortgage if it would save you $1000 a year?  If so, please contact me so I can help you take advantage of this tool and start saving money.  This will be much easier and less painful than refinancing your mortgage.

As always, more to come…

COBRA and Obamacare

If you have lost your job or chose to quit your job, can you apply for an ACA health insurance plan instead of taking COBRA and, if so, can you qualify for a subsidy and cost-sharing? Also, under what conditions does the ending of COBRA or losing your job qualify as a qualifying event? There are not clear answers to all of these questions. Let’s look at what is clear first and then what isn’t so clear.

The definitive source for ACA information is healthcare.gov. While I don’t guarantee the information is correct, I don’t see how the government could contest information on their own website.

Let’s look at the clear situations:

  • Leaving your job:  You can choose not to receive COBRA during open enrollment or outside of open enrollment in order to apply for an ACA plan.  You can also qualify for a subsidy and cost-sharing plans depending on your family size and income.  https://www.healthcare.gov/what-if-i-am-losing-job-based-insurance/
  • COBRA ending (running out/expiring) outside of open enrollment:  This is the same.  You can get an ACA plan.  This is considered losing minimal health coverage so it is a qualifying event.

That part is clear.  Now let’s look at what isn’t so clear:

So, in summary, when leaving your job, you can qualify for a subsidy and cost-sharing depending on your income and family size.  If you have COBRA, you can switch to an ACA plan during open enrollment or when your COBRA expires, but it appears that you are unable to cancel your COBRA outside of open enrollment and have it be a qualifying event to apply for an ACA plan.

Clear as mud, right?  More to come…

Estimating Income for ACA: What happens if you are wrong?

This area is really murky when it comes to Cost Sharing Subsidies. But I am getting ahead of myself. First, let’s define the different types of subsidies and how they relate to income.

There are 2 different types of subsidies.

  • Premium – This is the subsidy that most people are aware of.  If you are eligible, the government will pay a portion of your premium to lower your effective premium.  You can choose to take the subsidy monthly where the government sends their portion of the payment to the insurance company or you can choose to receive the subsidy as a tax credit at the end of the year.  These subsidies may be available up to 400% of the FPL (Federal Poverty Level).  The closer you get to 400%, the smaller the amount of the subsidy.
  • Cost Sharing – This is the more complicated of the 2.  This subsidy is only available up to 250% of the FPL.  This type of subsidy provides insurance with lower deductibles and lower maximum out of pocket amounts at the same price as insurance plans with higher deductibles.  In this case, the insurance company and the government assign this cost sharing value an agreed upon dollar amount.  The government pays the insurance company this amount.  This amount is not disclosed to the policy holder.

All of these subsidy amounts or classifications are based on the income information you provide to healthcare.gov.  If you are like me and most other self employed individuals, we don’t know what we will make this year.  Our incomes can vary quite a bit.  Also, if you are unable to obtain employment that offers you full time employment, then it is also likely that you aren’t sure how much you will make this year.  So, what happens if you make MORE than what you estimate which, by the way, is the most likely scenario as most people won’t estimate their income high so they receive the highest subsidy possible?

With premium subsidies, it is pretty simple.  In the first quarter of 2015, 2014 tax forms will need to be completed.  The IRS will reconcile your MAGI with the amount you entered when initially qualifying for your subsidy.  In other words, the IRS is supplying a loan in the form of a subsidy.  You don’t actually earn the subsidy until you prove your income for 2014.  This is very similar to witholding taxes on your paycheck and then figuring out if the IRS took much of your paycheck.  If so, you get a tax return.  In this case, it is the other way around unless you setup your subsidy to be received at the end of the year in the form of a tax return.

With the cost sharing subsidy, it isn’t so clear.  I have asked a lot of people what happens if a person estimates their income too low and ends up making more than 250% of the FPL.  I have not found someone that knows the definitive answer.  I spoke with a well informed accountant and he assumes the same thing that I do:  The IRS hasn’t figured this part out yet, but will figure out a way to recover the cost sharing subsidy if someone makes more than 250% of FPL.

As always, more to come….  I will be covering information on public health insurance assistance in IL and how it will affect your eligibility for a subsidy as well as discussing why Rx copays are unnecessary for most people.

Eligible for Subsidy? Maybe NOT.

I have been talking to people that have been misinformed about how their eligibility for a subsidy is calculated.  Some things to remember:

  • If you are married, you must file jointly to be eligible for a subsidy.
  • Income from all of your dependents must be included in household income.
  • Members of the household that are eligible for affordable employer coverage or public coverage (medicare/medicaid) are not included in the number of people in the household.
  • The subsidy is just a loan from the IRS.  If your subsidy is incorrect, the IRS will get it back from you one way or the other.

So, a very important takeaway is this: A family member’s income must be included in household income even though he may not be included in the number of people in the household because he is eligible for other coverage.  Let’s look at 3 specific examples I have come across.

  • Couple where the husband has Medicare and the wife is younger than 65 so isn’t eligible for medicare.  The husband makes 18k  and the wife makes 35k.  So, they make over 50k per year and it is a household of 1 since the husband has medicare.  Not eligible for a subsidy.  Another agent was trying to tell them that she only had to include her income.  This is not true.
  • In Illinois, a family of 4 with 2 kids 18 or younger where the household income is… let’s say… 70k.  Well below the threshold of 95k for a family of 4 subsidy, right?  Yes, but a family of 4 with a household income of 75k or less, the kids are eligible for AllKids.  Since the kids are eligible for this public insurance, they are no longer included in the household so the household is now 2 people.  At 70k, a family of 2 is not eligible for a subsidy.  Healthcare.gov did not even have this programmed correctly on their website until about the 3rd week of November.
  • A single person has a job making 30k a year at the beginning of the year.  They lose their job April 1 and remain unemployed the rest of the year.  This person applied for insurance on healthcare.gov and received a subsidy.  At the end of the year, they won’t have made enough to qualify for the subsidy.  If they remain on the major medical insurance with the subsidy for the entire year, they will have to pay most, if not all, of it back.  In this situation, they should have changed over to Medicare.  So, a person who is already down on their luck will have to figure out a way to pay back the subsidy with money they won’t have.

The moral of the story is: if you want to take advantage of a subsidy, make sure it is being calculated correctly and you know the rules, especially as your financial situation changes.

As always, more to come…

National “Youth” Enrollment Day

UPDATE:  The Social Security Administration is taking down their systems on 2/15, so healthcare.gov will be down for a good portion of the day.  Yeah, I am shaking my head as well.

As if there weren’t enough days to remember, we now have a national day for trying to enroll “youth” in a new ACA health insurance plan.  I think it is important for everyone to be insured, but it is interesting why this date was chosen.  Also, what do they mean by “youth”?

Let’s cover the “youth” question first.  In order for the Affordable Care Act to work the way it was designed, our government needs young people to sign up in order to offset the higher cost of people nearing Medicare.  So, when the government is referring to “youth” enrollment day, they are really referring to 20-somethings, especially to people in their late 20’s that can no longer be on their parents’ policy.  Really… 20-somethings being referred to as “youth”?  Are we trying to make sure they don’t sign up?  Anyway, onto the reason why this date as chosen.

So, why was 2/15 chosen as the date for youth enrollment day?  Because, 2/15 is the last day to enroll in order to avoid a penalty for those that don’t currently have credible coverage.  This may come as a shock to a lot of people.  You may be thinking “why did the government have open enrollment until 3/31?”  Good question and one I can’t answer.  The law reads that one cannot have a gap of more than 90 days of credible (ACA compliant) coverage.  If you already have credible coverage and you want to choose a new ACA plan, why are you waiting?  I suspect people with credible coverage in 2013 either have chosen to keep what they have or have already chosen a new ACA plan.  Will the government modify this time gap?  They might, as change is more the rule than the exception with this law, but it is best to plan for what is currently in the law than to what might be changed.

As always, more to come…

Do you have the right plan?

In my discussions with my clients and referral sources, it has become quite apparent that most people don’t understand what to look for when choosing a health plan.  Basically, there are 4 things to look for:  Type of plan, Network, max out of pocket, and total cost of healthcare.  I will go through each of these in order of complexity.

  1. Type of Plan
    There are 2 basic types of plans:  HMO and PPO.  There are also hybrids called EPO (Exclusive Provider Network).  HMO is managed care where what you doctor says doesn’t always go.  The HMO can dictate how a particular condition is treated.  A PPO is a network of doctors where the insurance company has negotiated rates and that is it.  Doctors have the freedom to treat you as they see fit.  EPO is basically a smaller network PPO, but can have elements of managed care depending on the insurance provider.  While I prefer a PPO for my family, one type is not necessarily superior to another.
  2. Network

    Basically, this is about what doctors are in your network (size does matter).  Also, it involves where you can get coverage in network.  Some networks only have local doctors so if you travel out of state and want access to in network healthcare out of state, keep this in mind when choosing your plan.  Some states only have managed care plans available on their public healthcare marketplace, so even if you are eligible for a subsidy, you may want to go to the private marketplace to get your insurance.  If you choose a plan with a small network, understand that out of network coverage will double or triple coinsurance and max out of pocket amounts.  

  3. Max out of pocket

    This is exactly how it sounds.  This is the maximum amount you will pay in a year before the insurance company will cover you at 100%.  This should be one of the major criteria that is evaluated when choosing a plan.  Can you afford a $6000 expense in 1 year or will it send you to bankruptcy?  What amount can you afford in a year?  Also, remember that the out of pocket max increases for out of network coverage so understanding who is in your network of doctors is important.

  4. Total Cost of Healthcare

    This is one of the most important things to evaluate.  Everyone seems to focus on the cost of insurance.  If you don’t have any medical expenses, this is understandable.  But if you have conditions where you need prescriptions, frequent care, or hospital visits, evaluating your estimated medical costs for the year is extremely important.  Do you see a doctor often where a copay might be important?  Do you need a lot of monitoring where a diagnostic allowance would be helpful?  Do you take a brand new/expensive drug where a drug copay is important?

    Evaluating these costs and adding them to the insurance premium amount will predict which plan will provide you the lowest overall cost for a given year.

When working with my clients, I educate them on each of these items.  Also, when it comes to evaluating the total cost, I work with my clients to determine their medical costs and then use a spreadsheet to show which plan is best given the information.  The feedback I get from clients is pretty much the same everytime:  “No one has ever done this for me before.  Thank you.”  This makes my clients confident that they have chosen the right plan for them.

As always, more to come…  Please call me at 630-204-7486 if you have any questions.