How to Evaluate a High-Deductible Healthcare Policy

Transcription

1 How to Evaluate a High-Deductible Healthcare Policy According to an August survey from America s Health Insurance Plans, an industry trade group, as of January 2010, 10 million Americans were covered by high-deductible health plans with a health savings account (HSA) feature. That s up from 8 million in January 2009 and 6.1 million in January A 2008 report by the Kaiser Family Foundation and the Health Research & Educational Trust pointed out that the number of workers with high-deductible plans has nearly tripled in firms with fewer than 200 employees between 2006 and 2008 to a total of 11.7 million. The advantage? These companion policies allow individuals and families to keep monthly premiums relatively low while being able to deposit pre-tax dollars into its companion HSA account that allow account holders to use those pre-tax dollars to pay out-of-pocket medical costs. Earnings on those accounts are also tax-free as are withdrawals used for qualified medical expenses. But is this choice right for you? Here are some considerations: Numbers you need to know: HSAs are only available with qualified high-deductible health insurance policies. To get the combo, you must be enrolled in a qualified health insurance plan with an IRS-required deductible of at least $1,200 for an individual or $2,400 for a family. This year and in 2011, individuals may contribute a maximum of $3,050 to an HSA and families can deposit up to $6,150. Assess the health plan properly: Check lifetime limits for claims (don t go under $5 million) and make sure the health plan provides first-dollar coverage on preventative care because the new healthcare law requires it. Regular preventative care may end up in significant savings. If you have a particular health history, it may be tougher to qualify for that insurance. Note the fees: HSA accounts are offered at banks and other kinds of financial institutions. You ll be charged a onetime setup fee of anywhere from $25 to $75 and annual fees that might be as much. Since these are investment accounts, fees might potentially eat up any gains you ll earn, so keep them as low as possible. While many employers pick up these fees, selfemployed people are generally stuck with them. Check the investments: Assess the investments in your HSA just as you would a mutual fund or CD (you ll have a range of investment choices). Whatever option you choose, check what commercial returns are and see if your investment will be competitive. But remember that this account needs to be something of an emergency account to cover your deductible and any other medical costs. So you ll have to balance higher earnings against safety. Keep good records: It s important to track all medical spending from these accounts and to make sure they re qualified. That s a particularly important thing to do with upcoming changes due to the health reform law non-prescription medicines won t qualify after January 1. Also, weigh carefully the decision of asking a doctor for over-the-counter antacids and pain relievers some health insurers may accuse you of failing to report a pre-existing condition, which could lead to them dropping your coverage. -more-

2 2-2-2 Price procedures: If your HSA is going to cover any uninsured procedures or uninsured portions of healthcare costs, make sure you re comparing costs for procedures. It s always OK to discuss prices for various procedures with doctors and to walk away from doctors who won t discuss them. There are also online resources that might help you make a decision including Healthcare Blue Book [ a nationwide site that offers averages on hundreds of medical, dental, laboratory test, surgical and medical equipment costs by zip code. At the very least, these services offer ways to start the pricing discussion. Watch how you spend HSA funds: Health care reform in Washington has changed the rules on what may be paid for out of funds in HSAs as well as flexible savings accounts. As of Jan. 1, 2011, over-the-counter medications will no longer be considered eligible medical expenses, and the IRS has a full list. Also, there are some insurance premiums that may be eligible medical expenses, including some long-term care insurance plans December 2010 This column is produced by the Financial Planning Association (FPA ), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. Please credit FPA if you use all or part of this column. To connect with a member of FPA for your story, call FPA s Public Relations Department at , ext The Financial Planning Association (FPA ) is the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA demonstrates and supports a professional commitment to education and a client-centered financial planning process. Based in Denver, Colo., FPA has 95 chapters throughout the country representing tens of thousands of members involved in all facets of providing financial planning services. Working in alliance with academic leaders, legislative and regulatory bodies, financial services firms and consumer interest organizations, FPA is the community that fosters the value of financial planning and advances the financial planning profession. For more information about FPA, visit or call

3 Set your Money Resolutions for 2011 The holiday season brings considerable focus on money issues. People are generally spending more around this time of year, and if one s financial circumstances are precarious, it s a time of considerable stress. In fact, the American Psychological Association s Stress in America survey, released last month, revealed that money (76 percent), work (70 percent) and the economy (65 percent) remain the most often-cited sources of stress for Americans. That s why it s a good idea to make some specific money resolutions for If financial stress is part of your life, resolve to extinguish it over the next year. Consider the following resolutions to lead a better financial life in To put your most important goals on paper: What do you really want out of life? Granted, all great dreams don t cost money, but many of them do. Money buys freedom to travel, to retire early, to start a business, to change careers. Putting goals in writing gives them formality and a starting point for the planning you must do. 2. To understand how much risk you can really tolerate: One of the most beneficial things financial planners do is help you articulate your financial goals and establish (or re-establish) your tolerance for risk. Even though the market has recovered from the crash of 2008, it s worth revisiting your capacity for risk. 3. To track your spending: If you haven t purchased financial accounting software or set up a reliable accounting method of your own, this is the year to do it. Diligent expense tracking is the first critical step to getting personal finances in order. Free resources like Mint.com also offer financial planning software, but always check the security of your data. By tracking your spending, you will be able to distinguish the fixed committed expenses from the discretionary expenses. 4. Cut back on non-essential spending: Whether it s designer coffee, nightly carryout or too many trips to the mall, once you start to track your spending, it will be easier to identify areas from which where you can make adjustments. You don t have to give up treats completely just make them treats. 5. Get some professional advice: Maybe you ve always completed your taxes alone and put your faith in your employer s retirement plans to chart your financial future. If you re like most people in this position, your goals are still far from reach. Get references for qualified tax professionals and consider consulting with a financial planning professional to discuss your current retirement savings and what steps you can take to improve your situation. 6. Put the credit cards away: If you can t ever seem to get yourself completely out of credit card debt, make this the year to do it. Take inventory of your balances, figure out if you can consolidate them under your lowest-rate card, and resolve to pay off an amount that exceeds the minimum -- on time, every month. Once your cards are paid off, don t close them that could have an adverse effect on your credit score. Just put small repeat purchases on them that you can pay off in total at the end of the month to keep them active. Oh, and pay cash from now on. -more-

4 To save: If you haven t signed up for your employer s 401(k) plan or begun a savings plan tailored for the self-employed, this is the year. And resolve to save at least 5 to10 percent of your take-home pay based on your cash flow, and place the maximum in whatever retirement savings plans you qualify for, especially if your employer will match all or part of that contribution. 8. To get ahead on your mortgage: This advice isn t for everybody, but if you ve paid off your credit cards, apply the same principle to your mortgage payment. Every dollar you prepay will potentially save thousands in interest over the life of the loan if you plan to stay in your home long-term. In fact, if you make one extra payment a year, either at once or in equal monthly shares over the course of a year, you can cut at least five years of payments on a 30-year loan. Just don t short your retirement investment plans to accomplish this. 9. To invest in yourself: If going back to college or taking specific coursework will help you advance in your career, plan to do it. If investing in a health club membership that you actually use makes sense for your health as well as your insurance costs, do it. 10. To redefine the way you shop for essentials: Most people were forced to change their shopping habits during the recession, but there are still ways to fine-tune. As a suggestion, get a legal pad and create a centralized shopping list use a single page for groceries, stock-up goods (it s wise to start buying essentials in bulk if you can measure the savings), and note bigger expenditures you ll need to make at specific times. Taking that pad with you wherever you spend money is a good way to keep a grip on your wallet as long as you don t stray from the list. 11. To attack that miscellaneous column: Do you really need premium cable? How much are you paying for your Internet service? Consider bundling your Internet, cable and telephone service with one provider. Can you wear a sweater around the house and lower the thermostat? In every budget, there are items that can be cut or at least trimmed. Take a hard look at all your essentials to see how essential they really are. Aim for a target of at least 10 percent in savings every time you cut and start setting that money aside on a regular basis. 12. Bid out your insurance: All insurance you buy for yourself home, auto, health and beyond should be bid out once a year. Home and auto should be bought together because the savings are generally better. 14. Prescription drugs: Consult with your primary care physician to determine if any of your medication has generic formulary available December 2010 This column is produced by the Financial Planning Association (FPA ), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. Please credit FPA if you use all or part of this column. To connect with a member of FPA for your story, call FPA s Public Relations Department at , ext The Financial Planning Association (FPA ) is the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA demonstrates and supports a professional commitment to education and a client-centered financial planning process. Based in Denver, Colo., FPA has 95 chapters throughout the country representing tens of thousands of members involved in all facets of providing financial planning services. Working in alliance with academic leaders, legislative and regulatory bodies, financial services firms and consumer interest organizations, FPA is the community that fosters the value of financial planning and advances the financial planning profession. For more information about FPA, visit or call

5 Favorable Tax Treatment on Roth IRAs Set to Expire Dec. 31 While individuals with adjusted gross income of more than $100,000 have been eligible to convert their traditional IRAs to Roth IRAs since the beginning of the year, there s a tax consideration that may make it a good idea for some who haven t made the move to do so by the end of the year. Anyone who makes a Roth conversion by Dec. 31 will have a three-year window to pay those taxes, a potentially substantial issue for those converting sizable amounts of assets to a Roth. Keep in mind that conversion might be a good idea for people in lower income tax brackets. A tax expert or a qualified financial planner can help you decide Traditional IRAs allow investors to save money tax-deferred with deductible contributions (within certain income limits if either spouse is eligible for a qualified plan at work) until they re ready to begin withdrawals anytime between age 59 ½ and 70 ½. Roth IRAs don t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well. If you leave your savings in the Roth for at least five years and wait until you're 59 1/2 to take withdrawals, you'll never pay taxes on the gains. You can convert a traditional IRA to a Roth, but you must pay taxes on any pre-tax contributions, plus any gains. Remember that when you do a conversion, you must pay income tax on the amount you are converting. Since you received a tax deduction on your initial contributions to most traditional IRAs, you must pay the taxes due on those initial contributions and any growth in your IRA. But, subject to certain restrictions, you won t pay tax when you finally need to withdraw your money. That s where the silver lining comes in for you, or for your heirs if you pass that money on to them. The conversion issue is a potentially attractive retirement and estate-planning idea for all Americans who want to make sure they maximize the assets they have for themselves and for their heirs on a tax-free basis. And the conversion option isn t available just for traditional IRAs it can be used for retirement assets held at other employers and 401(k) holdings. But anyone considering such a move regardless of his or her income status should first review their current retirement asset strategy with qualified tax and financial planning professionals. Things to consider: How close is retirement? If you have more than five years until you plan to withdraw your retirement funds, conversion of traditional IRA assets to a Roth IRA might make sense. The longer the time span where earnings can grow tax deferred, the greater the benefit of being able to withdraw those earnings without paying tax on them. What will your tax rate at retirement be? Many people, such as business owners, may be paying taxes now at a fairly low rate. So they might pay higher taxes at retirement. If that s the case, converting to a Roth might make a lot of sense. Additionally, with Social Security benefits being taxable at certain income levels, Roth IRAs can allow you to limit or eliminate such taxes. Medicare premiums are also based on modified adjusted gross income if converting to a Roth now will allow a taxpayer to minimize income in retirement, the taxpayer can also save by having lower Medicare premiums and reducing the taxes owed on Social Security income. -more-

6 2-2-2 Will you absolutely need to use all the money? Converting to a Roth is a good idea for those who won t need to tap the account every year (Roth s don t require minimum distributions as do traditional IRAs). Heirs will inherit the money income tax-free, but that inheritance may be subject to estate transfer taxes. A Roth conversion can be expensive can you afford it? You ll have to pay taxes today rather than defer the taxes until the future taxes will be due on contributions that you previously deducted, as well as on the accumulated earnings. Also, you need to be aware that conversion could push you into a higher tax bracket, especially if you've accumulated sizeable earnings over the years. This is why a conversion needs to be planned with a tax expert. Why? It may trigger the Alternative Minimum Tax (AMT) due to those high earnings. Know how the conversion window will work: Keep in mind that 2010 is the only year that a taxpayer can elect to defer the income from a Roth conversion. The Internal Revenue Service has granted taxpayers the option to claim 50 percent of conversion amount as income in 2011 and the remaining 50 percent in Also, you have to understand that if you choose the conversion period, your tax will be based on the bracket you fit that year. That means swings in income will affect what you pay. Be careful about your child s college financial aid: Converting to a Roth will increase your taxable income for the year of the conversion -- or for 2011 and 2012 if you make a 2010 conversion and choose to spread the tax bill over those years. Check with your tax expert and your child s financial aid office it could affect your child s ability to qualify December 2010 This column is produced by the Financial Planning Association (FPA ), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. Please credit FPA if you use all or part of this column. To connect with a member of FPA for your story, call FPA s Public Relations Department at , ext The Financial Planning Association (FPA ) is the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA demonstrates and supports a professional commitment to education and a client-centered financial planning process. Based in Denver, Colo., FPA has 95 chapters throughout the country representing tens of thousands of members involved in all facets of providing financial planning services. Working in alliance with academic leaders, legislative and regulatory bodies, financial services firms and consumer interest organizations, FPA is the community that fosters the value of financial planning and advances the financial planning profession. For more information about FPA, visit or call