CERTAIN KEY dimensions of the Patient Protection and Affordable Care Act will go into effect in 2014 despite the dogged efforts of congressional Republicans and a decision by the Obama administration to delay the employer mandate a year. Financial advisers may want to talk to their clients about health care options as well as new taxes resulting from the law.
Small-biz exchanges and tax credits
Clients with businesses that employ 50 or fewer full-time-equivalent employees — generally, those who work 30 hours or more per week — can buy health insurance for their firms through the Small Business Health Options (SHOP) program as of Jan. 1. Enrollment begins Oct. 1.
Companies with 25 or fewer full-time workers can qualify for a 50% tax credit — up from the current 35% — for health insurance bought on the SHOP exchange if the employees make less than $50,000 annually and the company pays at least 50% of the premium cost.
The SHOP exchange is designed to “encourage small employers to offer health care coverage to their employees,” said Amy Gordon, a partner at McDermott Will & Emery LLP. But many of them were upset that SHOP will not open to employers with 50 to 100 full-time employees until 2016.
In their first year, SHOP ex-changes may offer a limited menu of plans. Clients are likely to ask advisers for help deciding whether to join an exchange or continue offering their current employee coverage.
“You have the next few weeks to figure out whether you want to apply for coverage,” said Tim Steffen, senior vice president and director of financial planning at Robert W. Baird & Co. Inc. “The problem is we don't know what the premium costs are going to be, or the deductibles, or the co-pays.”
The details may differ between and within states, according to Katy Votava, president of Goodcare.com, a health care consultant for financial advisers. Each state can either set up individual and SHOP exchanges or have the federal government run the exchanges for them. One of the best information resources is the website healthcare.gov.
“Every adviser should become familiar with what's going on in their region,” Ms. Votava said. “Plans can vary down to the county and ZIP code level.”
Rick Kahler, president of Kahler Financial Group Inc., said his small-business clients are having trouble determining how much health care reform will cost them and whether they will have to reduce staff.
“There's a lot of confusion over how the exchanges will work,” Mr. Kahler said. “It leaves me unable to give them a lot of direction until we know what the rules are.”
Individual health insurance exchanges
Open enrollment for health insurance exchanges for individuals will begin on Oct. 1, with the insurance mandate becoming effective on Jan. 1. Forgoing coverage will incur the greater of a $95 penalty per person or 1% of taxable income in 2014 (over certain thresholds).
“For the first time ... we're going to have a marketplace for individuals and small businesses,” said Ms. Votava. “Most people will be able to afford insurance.”
Individuals and families are eligible for subsidies if their income is less than 400% of the federal poverty level, or about $94,000 for a family of four. The Kaiser Family Foundation estimates that the average family premium for a “silver plan” would be $8,250 and it would receive an average tax credit of $2,672.
Although many advisers' clients are in the high-net-worth category, the high ceiling for coverage could mean that the provisions of the Affordable Care Act reach a number of them.
“When you're 400% of the poverty level, you're not poor,” Ms. Votava said. “It certainly could get into the investment-adviser base. There are a lot of people who are subsidizing other family members, when it comes to health insurance.”
Carolyn McClanahan, a financial adviser and president of Life Planning Partners Inc., said the guaranteed coverage ushered in by the health care reform law will give some clients more latitude in their financial planning.
“It's going to allow clients much more freedom to change jobs, or retire or start a business,” said Ms. McClanahan.
If clients want to be eligible for an insurance exchange, advisers should focus on their income stream.
“A one-dollar difference in in-come can mean a significant difference in whether a client gets a good tax credit,” Ms McClanahan said.
Investment and Medicare taxes
Paying for health care reform, which will cost $1.1 trillion over 10 years, will require new taxes, many of which land on advisers' clients.
This year, a 3.8% tax on investment income — capital gains, interest, dividends and other revenue — went into effect for individuals making more than $200,000 and households making more than $250,000 annually. The health care levy will raise the capital gains rate above 20% for high earners. The same thresholds apply for assessing higher Medicare taxes on wages — a jump to 2.35% from 1.45%.
But things could get complicated if a married couple files jointly and one partner makes more than $200,000 but the other partner doesn't work, putting their combined income at less than $250,000. Things could get equally murky if they work at different companies and each makes less than $200,000 but together exceed $250,000.
“You're going to have people up in arms about taxes being withheld that they're not subject to,” Mr. Steffen said. In other cases, “it could result in an underpayment penalty.”
Advisers should devote extra attention to taxes.
“Tax planning is a good way to add value in this environment,” Ms. McClanahan said.
Obamacare also is placing a premium on health care discussions.
“Put the question on your agenda when you meet clients,” Ms. Votava said. “There's evidence that clients want to talk to their advisers about health coverage.”