The Health Care Bill and How it Affects Your Investments and Insurance

On Sunday, March 21st 2010, the United States has passed an historic bill (H.R. 3962) that will change not just our health care system but our entire way of life. This article will discuss the facts that are currently available including NEW taxes that will begin due to this bill.

Chapters:

1) Introduction to the Health Care Bill
2) Tax hikes and NEW taxes
3) Some strategies to avoid some of these taxes
4) How will this affect the insurance companies and how to counter a possible problem

1) First off, we will have the option to either have a private or public health insurance. If you are currently are covered AND satisfied with your current insurance company, simply keep it. However, ALL Americans must have health coverage by 2014 otherwise you will pay a minimal fee. However, by 2016 the penalty will be $700 per person. Furthermore, one of the main ideas of this new plan is to also create competition with private insurance companies. This way, premiums will be drastically lower as well as eliminate co-pays for preventive care. Furthermore, cap out-of-pocket expenses will also be eliminated. A family of 4 making under $88,000 will qualify for subsidies to help offset premiums. In other words, possibly not pay anything.

The other idea for this bill is to improve quality of care for every American. The idea is to ensure all ages, including senior citizens, to have access to greater quality of care by focusing on wellness, prevention, and strengthening programs. Children will have health care coverage that dental, vision, and hearing benefits. Citizens will also strength Medicaid and Medicare by closing the “Medicare Part D ‘donut hole'” for an improved quality of care and much lower prescription drug costs. Moreover, the bill will increase the health care workforce to ensure that there are more doctors and nurses to provide care (especially since every citizen will have more coverage which means more patients for them to see).

For employers, this bill will represent the following: If you have coverage for your employees, you can keep it. If you do not, you will be charged a fee of 8% of your payroll. If you as an individual do not take coverage from your employer or accept the public health care, you will pay a penalty of 2.5% of income (unless you can prove hardship exemption). If you are a low to middle income individual/family, the federal government will provide affordability credits to make premiums affordable.

In addition to individual and employer changes, the bill will also change current insurance practice. First off, insurance companies as of March 22nd 2010, will NO LONGER deny coverage to anyone with pre-existing conditions. In addition, transparency in plans MUST be clear and complete in laymen terms. Paperwork must also be simplified including the paperwork that patients, nurses, physicians, and insurance companies must provide. This is to make things simpler and more consumer friendly. In addition to these changes includes enhanced oversight of Medicaid/Medicare programs. However, this cannot be possible without more funding from the American People.

2) The health care plan is a costly one no matter how you see it. In order to not increase taxes on the low to medium income individuals/families, they have created a new way to fund this project and perhaps fix some of the deficit that the United States currently has. This is however not good for high income individuals/families.

Since Medicare/Medicaid will have enhanced oversight, they will require additional funding. If you make over $200,000 per year, you will have an increase of Medicare tax by 1 %. The remainder of the bill requires new funding in which an “Investment Income Tax” will be added to all brokerage accounts (that are taxable, including dividends). This tax will be 3.8% of the total value of the portfolio. Employers will also have a “Cadillac Tax” which an employer will pay $10,000 PER PERSON per year in health care coverage. Employees will pay taxes on anything more than the $10k (which is 40% tax rate!). A flexible spending account which is used like a 401K or IRA (but for health costs rather than retirement) will pay a LARGE penalty if you use it for anything other than health! If you are a union worker or have great private health benefits, you will feel the impact on your coverage in some way due to the high costs to maintain this coverage.

In addition to these tax implications, President Obama plans (and may pass now more than ever to further fund this bill) to increase the long term capital gain that many high-net-worth individuals loved of only 15% to 20%. If this passes you must remember to add the 3.8% of the “Investment income tax” which will be a total of 23.8%. This is slated to take effect in 2013.

3) In order to combat these new tax implications you need to first re-evaluate your net worth and AGI (annual gross income). If you make over $250,000 you need to first stop being 100% in equities (in a brokerage account). This is 100% taxable and with a 23.8% tax including your tax bracket (which is currently not being discuss but I can guarantee they are thinking about it). First thing you must do is contribute the MAXIMUM of your employer’s retirement account. If you are an employer and do not have one, GET ONE!!!!!!!!! Contact an advisor immediately and set one up (It can either be a pension plan, 401k, 403b, etc. Just make sure you create a retirement account). After this, open an individual IRA/Roth IRA and contribute the maximum amount (under the age of 50 is $5,000/ 50 and over is $6,000). You may not be able to deduct the contribution with a traditional IRA depending on how high your AGI. But why am I saying all this? Because retirement plans are tax DEFERRED. You can delay paying Uncle Sam until you retire and your tax bracket drops from the lower income you will receive.

After you have done this, re-evaluate your portfolio again. Depending on your current age you may want to also consider the following: Annuities, treasuries, municipal bonds (from your state). These investments are very tax favored. Annuities are tax deferred, guarantee an income for life (or you can choose a guarantee to a certain amount of years) as well as a death benefit! If the majority of your brokerage and retirement is in equities, only purchase index or fixed annuities (please see my previous article “Annuities in Your Retirement Income Planning” for details). The idea is to diversify your portfolio not just in the markets anymore but also in tax implications! Now more than ever this is vital!

Another strategy is to create a tax free brokerage account. In other words, open a brokerage account and invest only in triple-tax free municipal bonds (it must be in the same state as you reside). Reinvest all dividends to these bonds. Don’t use mutual funds for this strategy! You need to actually own the bonds and you need to know what you are investing in. In a mutual fund that’s not the case most of the time since the manager can change strategizes depending on the investment agreement (Please see my previous article “How to Pay Less Taxes Per Year Using the Feds Own Money!” for details).

4) A concern I do have is the major insurance companies that not only do business in Health insurance but also in Life/Annuities/accidental/Casualty/etc. Health Care insurance is a multi-billion dollar industry and the government is about to take that away from them (if the government is offering the same benefits with lower cost, why not go to them?). Having said that, depending on the company, this may or will affect the other business that they are connected to. Why am I playing “devil’s advocate”? Because if a major portion of this business is about to lose money, this may affect YOUR other insurance that you have with them.

For example: ABC insurance does Life, Health, Accidental, Casualty, property, and annuities. You have ABC life insurance and an annuity contract. ABC makes half of their income from health insurance. Health Care bill takes in affect and most of ABC business is gone since half of their income is devoted from Health insurance. As a result, ABC will have their ranking lower and if they cannot make up the difference, ABC will have to answer to the government for why they do not have the necessary surplus to cover those that have life insurance or an annuity (let’s not forget they have other business too…). Government may force reconstruction or liquidation. In conclusion, your ABC life insurance policy and annuity will be affected!

Some ways to combat this is by first reviewing your current insurance company. If possible, contact your insurance agent and try to get the information on the type of business the insurance company is in (trust me, that information is available!). Secondly, if you are planning on coverage from a insurance company, besides getting this information, don’t be afraid to diversify! For example, you can get a whole life insurance with 1 company, term life with another, and a variable life with another INSTEAD of just having 1 insurance company to rely on your benefit. You can also do this with annuities. If you plan to invest more than $500,000 in annuities, take a portion of that amount and purchase an annuity with another company. You can have as many annuities as you want (including life insurance). An agent can help you diversify these contracts with different insurance companies. If they do not want to do this, most likely than not, they are getting paid BIG commissions by that insurance company he/she wants to sell you and they are not looking out for you! I mentioned $500,000 because most states will cover you for that amount if the insurance company defaults.

The world is changing around us and we need to adapt to our environment in order to survive. This includes the way you invest. The health care reform was needed since the United States was lagging compared to most of 1st and 2nd world countries. However this could not be done without cost and we need to adapt to these costs. Everyone will be affected in some way but in the end it is what you do now that will make a difference in the future. I hope this information was helpful for all of you. If you have any questions please feel free to contact me.

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