HEALTH CONCEPTS AND TAX CONSIDERATIONS

Transcription

1 14 HEALTH CONCEPTS AND TAX CONSIDERATIONS LEARNING OBJECTIVES Upon the completion of this chapter, you will be able to: 1. Recognize the features of health insurance policies that have been mandated by the PPACA 2. Explain the 3 tiers of a Consumer-driven health plan 3. Define a High deductible health plan 4. Compare and contrast the characteristics of an HSA, MSA, HRA, and FSA 5. Identify the requirements to qualify for TRICARE 6. Differentiate between the taxation of personal health insurance and group/business insurance OVERVIEW This chapter provides a summary of the Patient Protection and Affordable Care Act (PPACA), discusses the various consumer-driven health plans, health spending accounts, and includes pertinent information regarding federal taxation of both personal and business health insurance policies Patient Protection and Affordable Care Act (PPACA) The Patient Protection and Affordable Care Act, commonly referred to now as the Affordable Care Act (ACA), was signed into law on March 23, The ACA consists of a combination of measures to control healthcare costs, and an expansion of coverage through public and private insurance which includes broader Medicaid eligibility and Medicare coverage, and subsidized, regulated private insurance. The ACA was enacted with the goals of increasing the quality and affordability of health insurance, lowering the uninsured rate by expanding public and private insurance coverage, and reducing the costs of healthcare for individuals and the government. It is important to remember that the ACA does not mandate that employers provide health insurance to their employees. The Act also established the Health Insurance Marketplace, which is a resource where individuals, families, and small businesses can learn about their health coverage options; compare health insurance plans based on costs, benefits, and other important features; choose a plan; and enroll in coverage. Requirements Beginning in calendar year 2014, individuals are responsible for obtaining minimum essential coverage for themselves and their dependents, or pay a penalty a shared responsibility payment. Obtaining minimum essential coverage can be accomplished in any of the following A.D.Banker&Company 195

2 CHAPTER FOURTEEN ways: Enrollment in a government program such as Medicare, Medicaid, TRICARE, the Children s Health Insurance Program (CHIP), or any other state health plan Purchasing insurance offered by an employer Purchasing insurance through a state exchange Purchasing insurance directly from an insurer in the individual market Eligibility Unless exempt, Americans are required to obtain and maintain minimum essential coverage. The following individuals are exempt from this provision of the ACA: Members of a religion opposed to acceptance of health care benefits Undocumented immigrants Those who are incarcerated (serving time in jail) Members of a federally recognized Indian tribe Those whose household income does not require the filing of a tax return Those who must pay more than 9.5% of their income for health insurance, after application of any employer contributions and tax credits Those eligible for a hardship exemption, such as the homeless and victims of eviction from their homes and natural or human disasters Most legal residents will qualify for federal subsidies to help them pay their insurance premiums or cost sharing obligations (co-insurance, deductibles, and co-payments) under a plan they purchase through a state or federal exchange if they meet the following criteria: They do not have employer-sponsored coverage available to them, or Their household incomes are 133% to 400% of the federal poverty level (FPL) Note In states that have opted to expand Medicaid, the household income levels are between 138% and 400% of the FPL. Individuals who do not obtain or retain qualifying health care coverage will be required to pay a penalty as part of their income tax returns. Essential Health Benefits Package The health insurance benefits of an Essential Health benefits package must provide at least the following: Ambulatory patient services Behavioral health treatment Emergency services Hospitalization Laboratory services Maternity (including prenatal and delivery care) Mental health services Newborn care Pediatric services, including dental and vision care Prescription drugs Preventive, wellness, and chronic disease management 196 A.D.Banker&Company

3 Rehabilitative and habilitative services and devices Substance use disorder services Benefit Categories HEALTH CONCEPTS AND TAX CONSIDERATIONS An Essential Health Benefits package is required by the ACA to provide coverage for at least one of four levels of coverage offered through all health exchanges. These coverage levels are known as Metal Plans and are defined as Bronze, Silver, Gold, or Platinum. The main difference between the plans is the percentage the plan pays of the average overall cost of providing essential health benefits to members. The plan category chosen affects the total amount an individual will spend for essential health benefits during the year. Categories Bronze Plan Silver Plan Gold Plan Platinum Plan Characteristics Covers 60% of the benefit cost of the plan Covers 70% of the benefit cost of the plan Covers 80% of the benefit cost of the plan Covers 90% of the benefit cost of the plan Guaranteed Issue The guaranteed-issue provision in the Act is designed to eliminate discrimination based on health status by insurers. The guaranteed-issue provision mandates that insurers provide health insurance to any person, regardless of medical history or current state of health. The health care premiums must be offered at an average and restricts the ability of the insurer to limit the scope of coverage. Pre-existing Conditions Insurers are required to cover children under 19 with pre-existing conditions and are prevented from dropping policyholders if they get sick. All health plans are prohibited from discriminating against or charging higher rates to any individual on the basis of pre-existing conditions. Termination of Coverage Notice Requirement: Within at least 30 days prior to the last day of coverage, insurers must provide notice of termination/cancellation of coverage and include the reason for termination. If termination is for nonpayment of premium, a 3-month grace period is required (during which any advance payment of tax credits continues to be collected). If premiums remain delinquent at the end of the 3 months, the policy may be terminated provided that the 30 day notice requirement has been met. Appeal Rights Health Plans must have an internal appeals process for beneficiaries to challenge adverse benefits decisions such as a denial, reduction, termination of, or failure to provide or make a payment for a benefit. The plan must also include a notice of the right to an external appeal, together with a description of the external appeal process and the time frames for such appeals. Prohibit Rescissions Coverage may only be rescinded for fraud or intentional misrepresentation of material fact. Notification must be made to the policyholder 30 calendar days prior to cancellation. Dependent Continuation Benefit plans that provide coverage for dependents are required to cover adult children to up A.D.Banker&Company 197

4 CHAPTER FOURTEEN age 26. Eligibility for dependent child coverage may be based only in terms of the relationship between a child and participant, and not deny or restrict coverage based on factors such as: financial dependency, residency, student status, employment, or marital status. Lifetime and Annual Limits Insurers offering group or individual health insurance coverage are prohibited from imposing lifetime or annual limits on the dollar value of health benefits. Emergency Care Benefit plans that cover emergency services must provide coverage without the need for prior authorization regardless of the participating status of the provider. Out-of-network providers are covered for the same cost as in-network providers. Preventive Services Insurance plans must include coverage for preventive health services such as: Well-child care from birth to the age of 19, including necessary immunizations Mammography screening Cervical cytology screening Prostate cancer screening Retention Question 1 By eliminating an insurer s right to refuse to insure anyone under the Affordable Care Act, health insurance in America can essentially be referred to as. a. Guaranteed renewable b. Guaranteed issue c. Free access d. Noncancellable Retention Question 2 One of the changes to take effect following passage of the PPACA was to allow children to remain covered under a parent s policy to age: a. 18 b. 21 c. 26 d Consumer-Driven Health Plans (CDHPs) Consumer-driven health care allows individuals to use a 3-tiered approach to funding the costs of medical services and treatment. The various consumer-driven health plans help individuals control benefit costs by allowing them to decide how their health plan funds are used. Options include: Tier 1: Pretax account, such as a Health Savings Account (HSA), Archer Medical Saving Account (MSA), Health Reimbursement Account (HRA), and Flexible Spending Account (FSA). Tier 2: The amount the individual chooses to pay, out-of-pocket, after the funds in the pretax account have been exhausted and before the health insurance plan s deductible is met. 198 A.D.Banker&Company

5 HEALTH CONCEPTS AND TAX CONSIDERATIONS Tier 3: A high deductible health plan (HDHP), which is a health insurance plan that has been designed to coordinate with pretax accounts to help consumers manage their spending for health care and insurance. High Deductible Health Plan (HDHP) High Deductible Health Plans are similar to other health insurance plans, however they contain restrictions pertaining to the individual and family deductibles, as well as annual out-of-pocket limits. To qualify as high deductible health insurance, the annual deductible must meet a minimum dollar amount, and the maximum out-of-pocket expense may not exceed the maximum dollar amount identified by the IRS. Other than preventive care, which must be made available with no cost-sharing, all covered health care expenses are an out-of-pocket expense until the annual deductible has been satisfied. After that point, depending on plan design, an insured may have little or no out-of-pocket expense, or claims will be subject to coinsurance until the annual outof-pocket limit is reached. HDHPs also limit the contributions an individual may make to an HSA, MSA, HRA, or FSA. Health Savings Accounts (HSAs) HSAs are available to any employer or individual for an account beneficiary (the taxpayer, including spouse and dependents) the individual on whose behalf the account is established who has high deductible health insurance coverage. HSAs are funded with pretax income, grow tax-deferred, and may be used tax-free to pay for unreimbursed qualified medical expenses. Nonqualified withdrawals prior to age 65 are subject to a 20% penalty tax. After age 65, funds may be withdrawn and used for any purpose without a penalty, but if not used to pay for health care expenses, withdrawals will be subject to ordinary income tax. The penalty does not apply when the taxpayer is age 65 or older, or in the event of the account owner s death or disability. There are no income limitations imposed on establishing an HSA, but contributions may only be made in years in which the taxpayer purchases a High Deductible Health Plan (HDHP). An eligible individual or an employer may establish an HSA with a qualified custodian or trustee (typically an insurance company or bank). Generally, account contributions may be made by the individual, the employer, or both. Contributions are deducted or excluded from the employee s income if made by the individual or the employer, respectively. If funds remain in the account at the end of the calendar year, they may be rolled over for use in the following year without a penalty. Medical Savings Account (MSAs) Archer Medical Savings Accounts are similar to HSAs, however they have different contributions limits, minimum annual deductibles, and maximum out-of-pocket limits. MSAs were designed specifically for small businesses and self-employed individuals who cannot establish HRAs or FSAs. An MSA is a plan purchased along with a High Deductible Health Plan. The plan is established by an employer on behalf of the employee. Premiums paid by the employer are tax deductible by the business. Distributions for qualified expenses are not taxable to the employee. Nonqualified distributions are included in the employee s gross income and subject to a penalty tax if withdrawn before age 65. If funds remain in the account at the end of the year they can be rolled over for use in the following year without a penalty. Health Reimbursement Arrangements (HRAs) A.D.Banker&Company 199

6 CHAPTER FOURTEEN An HRA is a type of health insurance plan that reimburses employees for qualified medical expenses. The plans are entirely employer-funded and there is no limit on the amount an employer can contribute. Employees are not allowed to contribute so contributions may not be attributable to any salary reductions. Cash-payouts are not permitted, but a former employee may continue to receive subsequent coverage periods. Employer-provided coverage and medical care reimbursement amounts under an HRA are excludable from the employee s gross income. With an HRA, unused fund amounts may be carried over from year to year. Employers have full control over how the roll-over is managed and determine whether all or only a portion of unused funds carries over to the next year. The employer may determine that all fund balances reset to zero after the close of a HRA plan year. If an employee leaves their place of employment, any remaining funds revert to the employer. An employee does not own any contributions made by the employer. HRA plans do not require coordination with a high deductible health plan. Flexible Spending Accounts (FSAs) This is an employer-established plan that permits the employee to defer up to $2,550 on a pre-tax basis into a specifically designated account from which the employee may withdraw funds to pay for unreimbursed medical expenses such as eyeglasses, elective cosmetic surgery, deductibles, copayments, and coinsurance which are part of the insured s out-of-pocket medical expenses. The IRS sets a limit on the calendar year maximum amount the employee can defer into the account. The employer funds the account in full at the beginning of the year, and withholds a prorated amount of income at each pay period throughout the year until the employee s allocation has been fully received. FSA contributions are considered a use it or lose it form of voluntary salary reduction agreement. In the event that the employee fails to spend all of the designated funds in the account by the end of the plan year, the employer retains the unused funds. A grace period MAY be offered by the employer which can extend up to 3 months of the following calendar year, to spend the unused funds. An FSA may be opened without a high deductible health plan or any other medical care plan. Retention Question 3 What is a High Deductible Health Plan? a. It is a tax-favored savings account established by an employer for each covered employee b. It is a health plan which requires the insured to absorb a relatively high deductible in exchange for a much reduced out of pocket premium c. It is a health plan offered by large companies who are trying to minimize the growing cost of providing employee health insurance d. It is a tax-favored Health Reimbursement Account established by an employer for its highly compensated executives 200 A.D.Banker&Company

7 HEALTH CONCEPTS AND TAX CONSIDERATIONS Retention Question 4 Health Savings Accounts and Health Reimbursement Arrangements are both types of what form of health insurance? a. Employer-sponsored group health plans b. Individual and Group Medical IRAs c. Flexible spending arrangements d. Consumer-driven health plans Retention Question 5 A person may not fund an HSA unless they also do which of these? a. Designate up to $2500 of pre-tax income to be withheld for payment of medical expenses b. Purchase basic health insurance through an Exchange c. Purchase a High Deductible Health Plan d. Fully fund their 401(k), 403(b), or Roth IRA 14.3 TRICARE (The Uniformed Services Health Program) TRICARE is primarily for active duty and retired members of the U.S. military and their dependents. There are three plans now available, depending on the member s service status, such as active duty, National Guard/Reserves, or retired. The plans are Standard, Prime, and TRICARE For Life. As long the person is on active duty, Prime coverage is mandatory with no out-of-pocket expenses for treatment at a military medical facility. Dependent coverage is not mandatory, but most active duty personnel select Prime coverage for their dependents. Standard requires no premiums on the member s part but does require a $12 co-pay for office visits and a 25% co-pay for procedures. Prime requires a premium, but has no out-of-pocket expenses for tests, operations, etc., as long as a primary care manager or a TRICARE approved referral is used. There is a $12 co-pay for office visits and an $11 per day charge for hospitalization. TRICARE for Life serves as a second insurer for those on Medicare, Parts A and B. Medicare will be the primary payor and TFL will be secondary. There are no enrollment fees but the member must pay his own Medicare Part B premiums. Retention Question 6 Active duty members of the military are required to enroll in which TRICARE plan? a. Prime b. Standard c. Select d. Choice + A.D.Banker&Company 201

8 CHAPTER FOURTEEN 14.4 Federal Tax Considerations for Personally-Owned Health Insurance Policies Disability Income Insurance The premiums paid for individual disability income insurance are not tax deductible Disability income benefits received are not taxable Medical Expense Insurance The premiums and unreimbursed medical expenses that exceed 10% of the individual s adjusted gross income may be tax deductible Medical expense benefits received are not taxable Long-Term Care Insurance The premiums paid for individual LTC policies that exceed 10% of the individual s adjusted gross income may be tax deductible For individuals age 65 or older, the premiums paid for individual LTC policies that exceed 7.5% of adjusted gross income may be tax deductible LTC benefits received from a qualified plan are not taxable Retention Question 7 Premiums paid by employees for group health insurance are only deductible to the extent that. a. They exceed what the employer pays for the coverage b. They exceed 10% of adjusted gross income c. They are not offset by contributions to a FSA d. They exceed the national average cost of health insurance Retention Question 8 When an individual pays the full cost of disability income insurance, a disabled employee s benefit will be. a. Taxable in part, up to 60% of the employee s pretax wage b. Nontaxable in full, regardless of the employee s wage c. Nontaxable up to 60% of the employee s pretax wage d. Taxable in full, regardless of the employee s wage 14.5 Federal Tax Considerations for Business and Group Health Insurance Policies Disability Income Insurance Premiums paid by the employer are tax deductible. Under a contributory plan, premiums paid by the employee are made with after-tax dollars Disability benefits received by the employee as a result of employer contributions are taxable as income to the employee based on the percentage of the premium paid by the employer 202 A.D.Banker&Company

9 HEALTH CONCEPTS AND TAX CONSIDERATIONS Example Theresa s employer pays 75% of the premium for her long-term disability benefits. As a result, 75% of the benefits received by Theresa under that policy will be taxable as income to her. She must pay any income tax due from her own resources. Medical and Dental Insurance Group medical and dental expense premiums paid by the employer are tax deductible Self-employed persons may deduct up to 100% of the cost of health insurance for themselves and their dependents An employee s share of premiums paid for group health insurance are deductible only to the extent that all premiums, as well as unreimbursed medical expenses, exceed 10% of their AGI Benefits received under any medical expense and dental plan, regardless of the premium payer, are not taxable Long-Term Care Insurance Premiums paid by the employer are tax deductible Benefits received from a qualified LTC policy are not taxable Accidental Death and Dismemberment Premiums paid by the employer are tax deductible Benefits received are not taxable Retention Question 9 When the employer pays some or all of the cost of health insurance for its employees, the annual amount of each employee s claims is. a. Not taxable to the employee b. Taxable to the employer c. Taxable to the insurance company d. Deductible to the employer 14.6 Medical Expense Coverage for Sole Proprietors and Partners Sole proprietors and business partners qualify for a deduction that lets them write off the entire amount of insurance premiums without worrying about an adjusted gross income threshold. This also includes medical insurance premiums for spouse, dependents and any children who are under age 27. Benefits are not taxable Business Disability Insurance Business Overhead Expense Premiums paid by the business are tax deductible Benefits received are taxable to the business owner and must be reported as income A.D.Banker&Company 203

10 CHAPTER FOURTEEN Key Person Disability Insurance When an employer purchases a disability income policy on a key employee and is also the beneficiary, the premiums are not tax deductible to the business Benefits received are not taxable Disability Buy-Sell Agreement Premiums are not tax deductible The benefits received are not taxable Retention Question 10 When a disability buy-sell is funded by the partnership, what is the tax liability? a. The premiums are tax deductible and the value of the benefit is taxable as income b. The premiums are not deductible and the value of the benefit is not taxable as income c. The premiums are tax deductible and the value of the benefit is not taxable d. The premiums are not tax deductible and the value of the benefit is taxable as income Chapter Fourteen Lightning Facts 1. The Patient Protection and Affordable Care Act ( PPACA ) created a set of national guidelines for the provision of health insurance to persons in America. Under the PPACA, insurers can no longer decline persons with pre-existing conditions that would otherwise affect their insurability. The PPACA is simply referred to now as the ACA The ACA makes all health insurance guaranteed issue. Additionally, the PPACA eliminates all annual and lifetime limits on health care expenses paid for by insurance companies Although most states already had adopted laws limiting the right of insurance companies to rescind coverage primarily to instances of material misrepresentation or fraud, the ACA requires that coverage may be rescinded only for fraud or intentional misrepresentation of material fact. Notification of cancellation must be provided to the policy holder at least 30 calendar days prior to the cancellation effective date The ACA enables most legal residents to qualify for federal subsidies to help pay premiums or cost-sharing obligations under an insurance plan purchased through a state exchange The ACA mandates that most group and individual health plans implement internal appeals mechanisms to handle adverse benefit determinations which deny or limit coverage for any insured. The health plan must inform insureds of the appeals process and the time frame for such appeals. The appeals process allows beneficiaries to challenge adverse benefits decisions such as denial, reduction or termination The ACA also permits children to remain on a parent s health insurance plan to age 26, and amended the provisions of COBRA to allow a child whose group health coverage would terminate at age 26 to continue on that plan up to age Consumer Driven Health Plans ( CDHPs ) place greater emphasis on insureds to seek the most reasonably priced health care services. In the process of paying claims, CDHPs use a 3-tiered approach and gives insureds greater discretion in the expenditure of their health care dollars Health Savings Accounts, Archer Medical Savings Account, Health Reimbursement Account and Flexible Spending Account constitute the first tier funding approach A.D.Banker&Company

11 HEALTH CONCEPTS AND TAX CONSIDERATIONS 9. In order to fund an HSA, the insured must also purchase a High Deductible Health Plan ( HDHP ). Once funds have been contributed to an HSA, they will accumulate tax-deferred and may be used tax-free to pay for unreimbursed qualified health care expenses There is a 20% penalty tax for the use of HSA funds for nonqualified expenses. Beginning at age 65, an HSA owner may withdraw funds for any purpose penalty-free, but will have to pay income tax on the withdrawal if not used to pay for qualified health care expenses Each year, the IRS will announce future contribution amounts, which are indexed for inflation. Employers may contribute to an employee s HSA, and each spouse may have an HSA if covered by an HDHP, but the annual maximum contribution for an individual or family cannot be exceeded Another CDHP option is a Health Reimbursement Arrangement ( HRA ). HRAs are funded exclusively with employer contributions, and there is no limit on the amount the employer may contribute per employee. Employees are not allowed to contribute and reimbursement amounts are excluded from the employee s gross income Lump-sum distributions (cash payouts) to HRA participants who leave the employer are not permitted. Former employees may continue their participation in the HRA under COBRA Flexible Spending Accounts ( FSAs ) are employer-sponsored plans funded with employees pre-tax contributions. The employee may elect to defer any amount up to $2,500 per year, and the funds may be used to pay for unreimbursed medical expenses, including deductibles, prescription drug and service copays, elective surgical procedures, eyeglasses and contact lenses, and certain other allowable expenses (such as the cost of over-the-counter medications if the insured has a physician s prescription). Under current IRS regulations, unused FSA contributions revert to the employer ( use it or lose it ) TRICARE is a PPO form of managed health care provided to active duty members of the military and their family members, to retired members and their families, and to former members of the military honorably separated from active duty who serve in the active reserves, as well as certain members of the National Guard, and other specified beneficiaries Individually owned disability income insurance premiums are not tax-deductible, and any benefits received are tax-free to the extent that they exceed 10% of adjusted gross income. Benefits provided by health insurance are not taxable to the insured Long-term care insurance premiums are deductible to the extent that when added to all other health care expenses, the amount exceeds 10% of adjusted gross income. Additional limits based on age reduce the amount that may be deducted Generally, a business will be allowed to deduct the cost of group insurance premiums and other employee benefits it provides, as long as the business is not the beneficiary of the insurance. Employees are not taxed on the premiums paid by their employers Disability income benefits received by an employee are taxable as income to the extent that the employee did not pay tax on the premiums paid for the insurance. If the employer were to pay 100% of the cost of insurance, but attributes the premiums paid as imputed income to the employee, then any benefit received by the employee will be tax-free, as if the employee paid the premium Like other group health insurance benefits, an employer obtains a tax deduction for premiums paid for a group LTC or AD&D policies, and the employee is not taxed on any benefits paid Premiums for business overhead expense policies are tax-deductible to the business, but because the business is the beneficiary of any claims payable, those benefits are taxable as income to the extent they exceed actual overhead Premiums for a disability buy-sell insurance policy are not tax-deductible, and the business receives the benefits tax-free A.D.Banker&Company 205