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Health Care Reform and Your Financial Health

Even its title is complex. The Health Care and Education Affordability Reconciliation Act of 2010 is so complicated that we can’t know all the ways it will affect our daily lives over the next few years.

The good news is that starting this year, all plans are required to extend dependent coverage to age 26, prohibit rescissions of coverage, eliminate pre-existing condition exclusions, increase coverage of prescriptions under Medicare Part D, and eliminate lifetime and annual limits on coverage.

There is also bad news. The combination means consumers should consider some new planning strategies.

Higher Costs.

Unfortunately, there are no provisions in the bill to significantly contain costs. The benefits listed above, along with new taxes on health care companies, are likely to increase premium costs. Therefore, it will be wise to prepare for higher costs with strategies such as paying off consumer debt, initiating a personal wellness plan, and setting up a personal budget.

Those who have health savings accounts or are in their employers’ flexible savings accounts will see new limits on over-the-counter medications and higher penalties for non-qualifying payments, beginning in 2011. A cap of $2500 on these accounts will begin in 2013, so contributing the maximum and pushing expenditures ahead to this year and next year may be a good idea.

Beginning in 2014, deductibles on personal plans will be limited to $5000 for individuals and $10,000 for families and on employer plans to $2,000 for individuals and $4,000 for families. Existing high-deductible plans will apparently be grandfathered in, so one way to manage future premium costs may be to get a high-deductible plan now.

Starting in 2018, a 40% tax will be imposed on the portion of health insurance premium costs exceeding $10,200 for individuals or $27,500 for families. This will eventually affect many Americans, because the premium cap is not sufficiently indexed for cost increases.

New health insurance exchanges are to be created beginning in 2014; it is possible that these may offer some lower-cost options for those who don’t have group insurance plans available.

Higher Taxes.

In 2014, anyone who does not buy health insurance is taxed/penalized the greater of $95 or 1% of income. This penalty, imposed through the IRS, increases in 2015 to the greater of $325 or 2% of income, and in 2016 to the greater of $695 or 2.5% of income.

There will also be some federal subsidies available beginning in 2014 to help pay insurance costs for individuals earning less than $44,000 and families earning less than $88,000.

Starting in 2013, the bill increases the Medicare payroll tax from 1.45% to 2.35% for high-earning taxpayers (single taxpayers earning over $200,000 and couples earning over $250,000). In addition, these same taxpayers will see a new 3.8% Medicare tax on investment income, including royalties and rents. The tax is on passive income only, so landlords or owners of S-corps who are materially active won’t be subject to the tax.

Before passage of the bill, the CBO projected it would reduce federal deficits by $143 billion during the next 10 years. Now, an April 22 report from the Health and Human Services Department says it will increase national health care spending by $311 billion over the next decade. Funding this deficit will result in new taxes and more borrowing, which eventually could put upward pressure on interest rates and serve as a drag on the economy.

To personally counter these trends you will want to pay down debt quickly, switch some investments to alternative asset classes, and keep your career skills honed. The bottom line is that careful planning will become more important than ever.

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