Planning For the Health Care Plan

by | Jan 11, 2010 | Weekly Column | 1 comment

Whether you support or disagree with the inevitable health care plan coming out of Congress, it will be wise to pay close attention to the financial consequences of the legislation.

Consequence One: Higher Taxes. The House bill puts an additional 5.4% tax on singles earning over $500,000 a year or couples with over $1 million. The top tax bracket is already scheduled to rise from 35% to almost 40% in 2011. With the medical surtax, the top federal bracket will be 45% in 2011.

The tax increase in the Senate bill is a bit smaller but will affect millions more Americans. It increases the Medicare payroll tax for single taxpayers earning over $200,000 and couples earning over $250,000.

Planning Strategy: Regardless of which version becomes law, high income taxpayers will want to accelerate as much income into 2010 as possible. Income from interest, rent, and dividends won’t be subject to the Senate Medicare tax.

Consequence Two: Higher Premiums. Starting in 2013, the Senate bill would impose a 40% tax on health care policies with premiums above $8,500 for individuals or $23,000 for families. This may not affect most Americans today, but it will eventually because the premium cap is not indexed for inflation or increases in health care costs. This will be especially true if the Senate version passes; it raises taxes on insurers, who will pass on the expenses to policy holders.

For example, I currently pay $12,000 a year for a family policy. By most estimates, my health care costs will double within the next five to seven years, meaning I will pay $24,000 a year, which will trigger the 40% tax.

Planning Strategy: One way to keep premiums under the threshold is by dumping “extra” insurances like dental and eyeglass coverage. Consider raising your deductibles and setting up a health savings account. If you are a small business owner, consider adding a cafeteria plan or a medical reimbursement plan (C corporations only) that will make it permissible to write off all qualifying non-deductible expenses.

Consequence Three: Higher Employer Costs. The Senate bill caps what employees can pay for medical insurance at 9.8% of their income. If the employer doesn’t pick up the balance of the cost, the employee would be eligible to purchase insurance through an exchange. The employer would have to pay a fine equal to the lesser of $750 times its total number of employees or $3,000 per employee who enters the exchange.

As a result of this cap, the lower the average salary of its employees, the more likely a company will drop health insurance coverage altogether.

Planning Strategy: Unless your company pays 100% of health insurance premiums, pay close attention to the unfolding legislation. One result is that employers could pick up more of the health care tab. Another is that they could offload the cost onto employees by simply canceling their health coverage benefits altogether. A win/win would be to reduce employees’ current pay or future pay increases to offset that portion of health care costs shifted to the employer. Employers should start educating employees soon about this potential problem, so they aren’t blind-sided.

You may wonder why I haven’t suggested raising your deductible and contributing to a health savings plan. Unfortunately, the effectiveness of these plans is diminished under both bills, which would cap annual contributions at $2,500.

Planning Strategy: If you have an HSA, contribute the maximum in 2010. The limits are $3,050 for a single and $6,150 for family coverage.

These are just a sample of the changes that could come with a health care bill. I’ll cover more in later columns.

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