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Four Fascinating Consequences of the New Healthcare Law

The Affordable Care Act (Obama Care) has changed the way many will buy and access health insurance. While most employed individuals will simply continue to receive their health insurance via their employer, there will remain times when clients may need to go the health insurance exchange (exchange is just a fancy way of saying "federal or state government website"). For example, in the event of a layoff, career change, or retirement you will want to get a quote from the exchange (www.healthcare.gov).  

The federal law has created various incentives and disincentives designed to ensure everyone participates and buys health insurance. As with any government program, these incentives create consequences - both intended and unintended. There are also those who benefit (which may surprise you) and those who will pay.  Here are four fascinating consequences about the Affordable Care Act (Obama Care) that everyone should be aware of. 

1. The wealthy are being subsidized. You can have $2 million in an IRA, a $700,000 home (paid off), and $300,000 of cash in an investment account and receive a $7,000/yr health insurance policy at a cost of only $230/year (for a single person). The difference is paid by the Premium Assistance Tax Credit which is available only to those of "low income" even if you have "high assets". This is because there is no practical, easy way for the IRS to monitor net worth. Therefore, eligibility for the tax credits are based solely on income.  I have already worked with clients in this situation. 

Let's take a wealthy individual and run through an example of how they will receive a subsidy to buy health insurance. Let's say you are 58, single, and have $2 million stashed in your 401(k), have $300,000 in a taxable investment account, and earn $300,000/year. However, you were laid off (with no severance) at the end of 2013 and find yourself unemployed. Therefore for 2014, your "income" is perhaps $9,000 (interest and dividends). You are now living in "poverty" and are only expected to pay a maximum of $230/year for health insurance (if you purchase it through the exchange).  If you are age 58, the policy may have an actual cost of $7,000/year, yet your payment remains at $230/year even with $3 million in assets (including your home value)! You are subsidized by the government (i.e., taxpayer) to the tune of $6,770/year.

Perhaps, since you no longer need employment to have access to quality health insurance, you will take a few years to travel, turn a hobby into a business, or simply "find yourself". In all cases, your health insurance will remain subsidized. This may even create incentives to keep income low such as moving money into low-cost annuities, delaying the collection of a pension, or making IRA contributions. Perhaps an early retiree will delay collection of Social Security to keep their income low prior to age 65 (Medicare age) so they can continue to receive the tax credits.

2. Employment and insurance access are no longer linked. In the past, for most individuals the only affordable, guaranteed access health insurance (without pre-existing condition limitations), could be found with an employer-sponsored plan. However, now employment and retirement decisions are no longer contingent upon having or losing access to an employer's health plan. In particular, some clients approaching age 65 (Medicare age) would consider staying at a miserable job simply to avoid having to pay the high cost of a COBRA or an individual health insurance policy. Not only are the HealthCare.gov policies likely to be of similar cost, they may even be far less due to the Premium Assistance Tax Credit mentioned above. Not only are you no longer tied to your job, but you may have an (cost subsidy) incentive to leave.   

3. Those with high incomes are being subsidized. If you have a family of four and you buy your policy on the health insurance exchange (i.e., website), you will be subsidized (i.e., you will receive a Premium Assistance Tax Credit) even if you earn as much as $117,000/year!  This is because the tax credits are for those with adjusted gross incomes of "as little" as 400% of the poverty level. For a family of four, 400% of the poverty level is an annual income of $94,200. So, if you earn $117,000/year and defer $23,000 into your 401(k), your AGI (which determines if you get a credit) will amount to $94,000 - which is less than 400% of the poverty level. Amazing!

4. There is a huge incentive for workers with exchange purchased health insurance to keep their income under 400% of the poverty level. Going back to our family of four earning $117,000/year. If they earn $201 more of income, they will lose the tax credit entirely! For example, the maximum premium (according to the law) for this family would be $8,949/year. If their actual premium is $13,000/year, thenearning just $201 more a year will cost them over $4,000 (as they would lose $4,000 of tax credits). How is this for an increase in marginal tax rates - which is a powerful incentive to minimize income at this threshold. 

While there remains a lot to learn about the Affordable Care Act, we do know that there are a series of strange incentives and consequences that will be a boon to some and a bane to others. We have already assisted two clients this year in ensuring that they incur the ideal amount of income to maximize their tax credits without simultaneously losing out on other tax benefits (e.g., low capital gains rates) by not incurring enough income.  It is a delicate balance to navigate the confusing/frustrating tax laws that continue to unfold with each new piece of legislation.

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