Obamacare Exchanges To Open 10/1

The healthcare exchanges that were created under the Affordable Care Act (more commonly known as “Obamacare”) are due to open tomorrow, October 1st, 2013. Through these exchanges, anyone who wants to purchase health insurance, should be able to purchase it from a health insurance company, with coverage to begin on 1/1/14. To access the exchanges and a host of additional information around how the exchanges will function, go to www.healthcare.gov. That portal will contains links to the Federal exchange as well as links to the State exchanges in the case that you live in one of the states that have set up their own exchange. The 36 states that will use the Federal exchange are: Alaska, Alabama, Arkansas, Arizona, Delaware, Florida, Georgia, Iowa, Idaho, Illinois, Indiana, Kansas, Louisiana, Maine, Michigan, Missouri, Mississippi, Montana, North Carolina, North Dakota, Nebraska, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Wisconsin, West Virginia and Wyoming. All others, including Washington, D.C. will have their own exchange. The portal will guide you to the right place.

The exchanges will have plans grouped into the following 4 coverage tiers: Bronze, Silver, Gold, and Platinum. All plans must provide essential health coverage including prescriptions, preventive care, doctor visits, emergency services and hospitalization. The characteristics of each plan will fit the general model under one of these tiers so that those exchanges that have multiple insurers providing coverage can present apples-to-apples comparisons among those plans, but some insurers may offer additional coverage in certain areas (e.g. physical therapy). Bronze plans will generally be the lowest cost plan from a monthly premium perspective, but will be the highest cost from an out-of-pocket perspective if you need non-preventative care. Platinum plans are the opposite, with Silver and Gold fitting in between. You can expect a Bronze plan to cover about 60% of out-of-pocket costs after a deductible, Silver to cover 70% after a lower deductible, Gold to cover 80% after a still lower deductible, and Platinum to cover 90% after a low deductible.

The insurers themselves will provide a quote for the monthly cost of coverage based on some basic information that you provide. It’s important to note that pre-existing conditions are not a consideration for coverage or for the cost of coverage. There are a number of other government imposed rules, like not being able to charge older applicants an unreasonable amount more than younger applicants, that influence pricing. Of course the biggest influence, in theory, is that the insurers will be competing with each other for the business.

Once pricing for an applicant is determined, potential Federal subsidies could apply and reduce the cost of the monthly premiums. If you fall under 4x the Federal poverty level for the size of your family (~$46k for individuals + $16k per additional family member), you’ll usually qualify for a subsidy. You’ll have to estimate your income for the following year in order to receive the correct subsidy. If you estimate your income will allow you to qualify, but then your income is actually higher and you don’t qualify, this will be reconciled on your tax return and you will wind up paying back the subsidy amount. Kaiser has a calculator that can help estimate your subsidy.

On the other side of subsidies, those who opt not to purchase insurance and who are not covered by another plan (e.g. an employer-sponsored group plan), will face a penalty starting in 2014 at $95 or 1% of household income, whichever is higher. By 2016, it rises to $695 per individual or 2.5 percent of household income, whichever is greater. This is known as the “Individual Mandate”. The penalty will be paid as a tax when filing your tax return if you can’t prove that you have coverage.

In general, the exchanges will benefit those who are older, have income below the subsidy threshold, have pre-existing conditions, and/or don’t have employer-provided coverage. Most people fall into one of the following four groups as it pertains to health insurance, so I’ll divide the rest of this message accordingly. If you:

1) Have coverage through a large employer’s group plan – you are welcome to shop the exchanges for better or cheaper coverage, but are unlikely to find it. Large employer’s usually provide heavy subsidies for the cost of group insurance that makes that insurance cost less than the individual policies that you’ll find on the exchanges. Still, it doesn’t hurt to look and see what’s out there.

2) Have coverage through a small employer’s group plan or through your spouse’s or parent’s employer’s group plan – since small employers usually provide less of a subsidy for group plan, and many employers, regardless of size, provide less of a subsidy for spouses and dependents, the exchanges could provide a better option for you. Again, it doesn’t hurt to look and you might be surprised to find a better plan, especially is your income is below the subsidy threshold.

3) Have individual or family coverage that is purchased directly through an insurer (not a group plan) – you should definitely re-shop your insurance needs on the exchange. It’s similar to having a website that aggregates all auto insurance information for you so that you can compare between insurers. You’re likely to find a better deal than you’re getting today, especially if you’re over age 50 and have an income below the subsidy threshold. Note that there are no subsidies for individual or family policies that are purchased off-exchange.

4) Have no coverage – if you don’t have coverage because you have a pre-existing condition or because you can’t afford it, you’ll almost certainly benefit from the exchanges and should shop them during the open enrollment period. If you don’t have coverage because you have chosen not to have it, then you’ll need to compare the cost of the tax penalty for not having coverage with the cost of coverage you can obtain from the exchanges. While it may be cheaper to maintain no coverage and pay the tax penalty, when you consider the potentially catastrophic exposure to medical bills, I have to think you’re almost certainly better off with the insurance.

Again, www.healthcare.gov is the starting point for all of this. Expect a few technical glitches in the system over the first few days / weeks, but remember that coverage doesn’t start until 1/1/14 and open enrollment lasts until 3/31/14, and can be extended by certain life events after that date.

American Taxpayer Relief Act (ATRA) a.k.a. Fiscal Cliff Deal

I’ve parsed through the legislation (which can be found here if you want to check it out for yourself), as well as a ton of analysis, and to the best of my ability, here’s a quick summary of the relevant portions of the new law that averted the tax portion of the fiscal cliff. Note that while $400k/450k are getting all the press for paying higher taxes, there are a number of provisions which impact $200k(single)/$250k(married), and one really big one that impacts everyone (Payroll Tax Holiday Ended):

· Income Tax Rates: All existing rates remain the same with brackets increased for inflation (10%, 15%, 25%, 28%, 33%, 35%) and a new 39.6% bracket begins at taxable income over $400k for singles and $450k for joint filers.

· Long-Term Capital Gains: These were set to move from 0% for the bottom two tax brackets and 15% for everyone else to 20% for everyone. The legislation keeps the 0% and 15% rates for everyone except those in the new 39.6% tax bracket. They’ll pay 20% (not including the new Obamacare Medicare Surtax, see below).

· Dividend Rates: These were set to move from 0% for the bottom two tax brackets and 15% for everyone else to ordinary income rates for everyone. The legislation keeps this rate tied to the long-term capital gains rate with the same rules as above.

· Estate Tax Rates & Exemption: Retained the $5M per person exemption (was set to reset to $1M) and kept it portable (each spouse gets $5M instead of the couple getting $10M which forces complicated bypass trusts to be set up to try to use the $5M from the first to die spouse). Set the top tax rate at 40% (up from 2012’s 35%, but down from the 55% to which 2013 was due to revert).

· AMT Exemption: Patched the AMT exemption amount to the 2011 amount, increased for inflation. This was a big one since it was 2012 they were fixing, not 2013. Even better, they permanently fixed this so that each year’s exemption will be indexed to inflation going forward. This means no end of year scramble to get an AMT patched passed each year.

· Phaseout of Itemized Deductions: this was due to happen in 2013 without any new law, but ATRA tweaked the thresholds. If you are Single with AGI over $250k or married with AGI over $300k, your itemized deductions will be reduced by 3% of the amount that your AGI exceeds the threshold, up to a maximum reduction of 80% of your itemized deductions. To simplify, if you’re over the threshold by $10k, you lose $300 of itemized deductions. If you’re over by $100k, you lose $3k.

· Phaseout of Exemptions: this was also due to happen in 2013, but ATRA unified the phaseout level with the Itemized deduction phaseout. If you are Single with AGI over $250k or married with AGI over $300k, your exemptions ($3800 per family member) are reduced by 2% for every $2500 that you’re over the threshold. To simplify, if you’re over by $10k, you lose 8% of your exemptions. If you’re over by $100k, you lose 80% of your exemptions. This can be a pretty big bite.

· Payroll Tax Holiday Ended: this was due to happen in 2011, but was extended for two years and now is finally gone. It impacts everyone with income from work (employment or self-employment) by restoring the employee portion of Social Security (FICA) tax to 6.2% from 4.2%. This means everyone will pay 2% more tax in getting this level back to its pre-2011 setting (which still grossly underfunds Social Security over the long-term).

· Marriage Penalty: The standard deduction for married filers and the 15% tax brackets were due to revert to 1.67x the single amounts. ATRA kept them at 2x the single amount and made that change permanent. There is still a very large marriage penalty in the code anyway, as described here.

· Bonus Depreciation & Higher 1st Year Expensing: For business owners, 50% bonus depreciation on new purchases is extended into 2013 as is the higher limit for immediate expensing of certain purchases (Section 179).

· Misc. Permanent Extensions: Child Tax Credit ($1k per child subject to limits), Exclusion for Employer Provided Tuition Assistance ($5250 tax free reimbursement).

· Misc. Temporary Extensions: American Opportunity Tax Credit (college), teacher’s deduction ($250), exclusion from discharge of debt on primary residence (no income on short-sale or foreclosure), deduction for Mortgage Insurance Premiums, Deduction for State and Local Sales Tax paid (big in no income tax states), Tuition Deduction.

While not included in the ATRA legislation, it’s important to remember that two new fairly large changes also being in 2013 as Obamacare is rolled out. They are:

1) 0.9% Medicare Surtax on earned income (income from work) that exceeds $200k (single) or $250k (married). It’s important to note here that this will cause underwithholding from your employer if you have multiple jobs or are marred and both spouses have income since payroll systems will not realize that your earned income will exceed $200k/250k until you exceed that amount from a single employer.

2) 3.8% Medicare Surtax on investment income (interest, dividends, capital gains, rents collected, passive business income) if your Adjusted Gross Income exceeds $200k (single) or $250k (married). While there is no withholding on most investment income and you’re used to paying tax when filing or making estimated tax payments on that income through the year, the 3.8% additional tax effectively raises the tax rates on interest, dividends, gains, etc., even if you don’t meet the now well-publicized $400k (single) / $450k (married) income from the fiscal cliff deal.

I have no doubt that more tax changes will come in 2013 and/or 2014 since ATRA only reduces the > $1 trillion deficit by ~$60 billion per year, so it’s hard to count on anything above as permanent even where legislation made it permanent. The next major debate, likely to be more focused on spending than taxes will be in February as the Debt Ceiling will need to be raised again at that time. It’s quite possible that taxes, especially beyond 2013, become part of that negotiation as well.