Your clients face several financial issues that were never covered during whatever “advisor training” you’ve gone through. And as health care has taken center stage in the national debate, one of clients’ biggest concerns is how to handle their ever-increasing and always-confusing health insurance and health care costs.
This month I’ll focus on what can (and should) be done by clients who are currently working, and covered by employer-provided health insurance.
No Dismay Over an HSA
When your employed clients review their at-work benefit package this enrollment season, there is a good chance that many of them will be offered the option of using a high-deductible health insurance plan, paired with a health savings account (HSA).
Forty-three percent of employers are offering the combination of a high-deductible plan and HSA option, up from 35 percent in 2011, according to the 2012 Employee Benefits survey conducted by the Society for Human Resource Management.
Using this combination may mean an increase in what the worker pays for overall health care. But it can also mean lower premiums and taxes for the employee and more flexibility in how he chooses to spend some of his health care dollars.
The option is especially advantageous to high-income workers who are already maxing out contributions to pre-tax retirement plans, and would like to increase their savings and reduce their taxes.
If the client opts for the HSA and high-deductible plan, he funds the HSA account with pre-tax contributions (and perhaps a little help from the employer). For 2013 the limits to HSA contributions are $3,250 for individuals and $6,450 for families, with an extra $1,000 allowed for workers over age 50.
The client then uses funds within the HSA to pay any medical expenses that are included in the deductible portion of the coverage, as well as for any qualified medical expenses not covered by insurance, but incurred at the client’s discretion. In either case, the distributions are tax-free.
Any withdrawals from the HSA prior to reaching age 65 that are not used for qualified medical expenses are taxed as income, and can be hit with an additional 20 percent penalty—unless the insured has passed away or been totally and permanently disabled.
What may surprise you and your clients is that the HSA account funds are not required to be used in a particular year. Any unused balances in the account remain to be used for future expenses, and are still owned by the employee if he leaves his current employment.
HSAs After Employment
Clients who are already maximizing contributions to pre-tax at-work retirement plans (and can afford to do more) get one more potential benefit from using an HSA, besides the initial tax savings and premium reductions.
First, HSAs can be tapped tax-free to pay for such down-the-road expenses as long-term care insurance, health insurance during unemployment, and Medicare premiums.
And if the client reaches 65, money remaining in an HSA can be withdrawn with no penalties and used for any reason. The withdrawals will, however, be taxed as ordinary income (just as if the money were withdrawn from a traditional IRA).
Changes to the FSA
Another method clients can use to direct pre-tax dollars toward health care costs is the Flexible Spending Arrangement or FSA.
If the client’s employer offers the option, the client can deposit up to $2,500 (depending on the limits imposed by the employer) of pre-tax earnings into an FSA in 2013. That amount represents a decline from the current maximum of $4,000.
The funds can be applied tax-free toward out-of-pocket expenses that are deemed “medically necessary,” but not solely for cosmetic purposes. Check out IRS Publication 502 for a comprehensive listing.
Unlike the HSA, the FSA is a “use it or lose it” proposition. Any funds not used for qualified expenses by March 15, 2014 (or earlier, depending on the employer’s rules) will be forfeited.
Your clients can get more information on their specific HSA and FSA plans from their employer’s human resources department, and you should also review IRS Publication 969 for more in-depth background.
The Kids are Alright
No doubt some of your clients’ adult children are technically grown and supposedly on their own, but are still un- or under-employed. Although you and the clients can’t solve the kids’ income shortfall, it is possible to get health insurance for some of these twenty-somethings.
The Affordable Care Act now allows non-dependent adult children under age 26 to be covered by their parents’ health care plan. But the actual options available to a particular family depend on the plan in question.
Some plans are not required to offer this type of coverage until Jan. 1, 2014. The plans may also choose to offer coverage to adult children of employees even after the kids turn 26.
Finally, the periods in which an adult child can be added to her parents’ health insurance can vary, so the clients should check with their employers for more specific details.
Get to the Doc ASAP
Neither you nor your clients want to have discussions about particular health ailments and procedures. But if the clients are either considering early retirement, or concerned that their job (and the related health insurance) could be eliminated, it’s a topic that can’t be ignored.
First, clients who haven’t had a check-up recently (or can’t remember when they last had one) should schedule one immediately.
Any alarming indications found during the examination will certainly not be good news. But it’s better that a potential medical condition be discovered (and hopefully rectified) while the client is covered by the employer-provided health insurance, rather than after the client has lost his job, income, and insurance.
And in the event you find yourself assisting clients who need health care and insurance coverage before reaching Medicare eligibility, I’ll address that topic next month.