July 12, 2015 by Tony Novak
The Wall Street Journal ran an editorial last week titled “The Unaffordable Care Act” on the phenomenon of the sharp health insurance price increases in the pipeline for 2016 while the executive branch seems to be in denial. Public support for Obamacare and the Affordable Care Act (ACA) remains high at just above 40% for now but will predictably fall when these cost increases filter down to their pocketbooks in 2016. It seems fair to say that a typical individual or small businesses with Obamacare coverage should plan for an increase of about 20% in premiums and an increase in their out-of-pocket costs. Those without qualifying Obamacare coverage will also face increased costs in the form of tax penalties mostly due to increased utilization. I notice that this isn’t the same as “uninsured” because millions of Americans do have coverage but it doesn’t meet the requirements of the new law so they are penalized the same as if they had no coverage. Businesses that help their employees pay for government-subsidized health insurance may face the worst tax penalties beginning with the filing of their 2015 tax return. The Wall Street Journal (and most other sources) predict that we will see changes in the ACA law ahead.
I’ve always steered away from the abstract political aspects and focus instead on the “here and now” practical approach: How can an individual or small business deal with the cost increase?
It might make sense to begin to approach the problem by breaking down the risks:
1) Managing the insurance premiums
2) Managing known tax penalties
3) Managing uncertain tax penalties
Next, it makes sense to look at the available tools to help address the problem. In this post, I focus on the services of a good adviser and the provisions of the federal income tax code. Certainly there are other tools available that are beyond the scope of this article.
Finally, it also makes sense to begin this planning by recognizing the allocation of your own health care costs between insurance and out-of-pocket costs. Consider how those costs are managed. For example, in my household our portion of the cost of employer-provided insurance runs about $800 per month or about $10,000 per year. That cost is well-managed through the automatic budgeting process of payroll deductions. While we don’t like paying so much, the fact is that we will survive it. But we also face more than $13,000 in out-of-pocket costs not covered by insurance. My family is having a much tougher time managing that expense. This expense does cause us stress and, bluntly, we don’t have a plan to cover it all as quickly as our medical providers demand. I expect our stressful medical cost situation is similar to what many other middle-income families will face this year and next. (I’ve written about the impact of increasing consumer medical debt in other publications).
Here are three rock-solid strategies to consider for dealing with increasing heath care costs under Obamacare:
1) Use supplemental insurance through pre-tax, salary deducted approach. In general, it makes sense for small business employers to offer supplemental insurance and uninsured health benefit plans that shift the out-of-pocket cost from after-tax to pre-tax salary deductions. This strategy is always available. The only obstacles, it seems, are psychological and possibly a lack of good independent advisers who can help develop the best-suited small business health benefit plans.
2) Change employer allocations. A second iron-clad strategy is to shift employer contributions from subsidizing qualified insurance (Obamacare) to paying for those supplemental benefits instead. The obstacle seems to be that some employers are locked onto the old-time concept that their role is to help pay for primary coverage. The sooner we give up on that notion, the better.
3) Consider the tax risks. Some CPAs and advisers have said that they are content to allow their clients to count on proposed easing of Obamacare requirements rather than react to the Obamacare laws as they stand today. The logic is that the government can’t possibly audit and enforce fines against so many millions of Americans who are in violation of ACA. That strategy still seems risky to me. But if you are relying on this strategy, it makes sense to think through who will take responsibility for failure to report tax penalties that may apply for 2015 in the likely event that these changes are not made by tax filing time. At a minimum, it makes sense for a small business to review its employee benefit plan documents (or get them in order if they do not exist!) and at least roughly estimate the “worst case” tax scenario.
I’ve built a career around the concept of putting health care planning at the center of financial planning. To help small businesses deal with the issue, I offer a flat fee consultation that is commonly used by small business owners to review the status and options for their health benefit plans. Additionally, much more information and many free resources are available though my website and Freedom Benefits.