21 Oct 2015

Risk Management 2016: Low cost, minimal risk, health insurance. With tax benefits.

21 Oct 2015

This strategy isn’t for everyone, but for many of our clients, this will be the best financial solution for their family’s health care. Not sure? Please check independently with your financial adviser, accountant, or whomever else you rely on for sound financial advice. But let’s be up front and identify the type of person this might not work for:

  • Has frequent, ongoing medical/Rx needs, but with moderate annual costs in the $5,000 range if paid out of pocket
  • Expected taxable income for 2016 will qualify for an Enhanced Silver 87 or 94 plan
  • Just can’t handle the added complexity of a non-traditional health plan strategy (hey, this is a legit reason)
  • Expects to be in the individual health market for less than a year

That’s it. Everyone else, keep reading.

This strategy has three main components, and builds on our similar recommendation from this time last year.

  1. Pay as low of a monthly premium as possible by purchasing a high-deductible, Bronze plan that is compatible with a Health Savings Account (HSA)
    •  All carriers with PPO networks offer this option, on and off-exchange, except for Health Net
    •  Even HMO plans from Kaiser and Western Health Advantage offer HSA-compatible options
  2. Offset the risk of having the high deductible, by purchasing a separate accident/critical illness policy
    •  Although Assurant is leaving the health insurance market, we are currently vetting new 2016 options from Anthem, United Healthcare, and Cigna
    •  This type of policy can reimburse the patient for a large portion of medical expenses incurred before meeting the medical deductible
  3. Open a tax-advantaged Health Savings Account (HSA) with your bank of choice.
    •  Flexible funding options up to $3,350 (single) or $6,750 (family) for 2016 tax year, can be made until April 15, 2017
    •  Federal income tax deduction for contribution: reduce your Modified Adjusted Gross Income (MAGI) – helps qualify for Covered CA tax credits
    •  Funds grow tax-free, and can be used tax-free for qualified medical, dental, vision and Rx expenses

Not convinced? Let’s look at some numbers.

Example: San Francisco family lives in ZIP 94107. Spouses aged 44 and 42, children aged 8 and 5. Annual household income is $100,000.

At this income level, the family is just above the threshold to qualify for a tax credit/reduced premiums. The 2016 cost for a standard Silver PPO plan from Anthem is $1,422/month, or just over $17,000/year (ouch). The Silver plan has a $2,250 annual deductible, which does get waived for many common services. Copays for common medical services are typically $45 or $70. Silver plans are popular and can be a good choice for some people. But this family would be spending 17% of their gross income on health insurance, which is quite frankly, insane.

Let’s apply our strategy above and see what happens.

1. Instead of the standard Silver PPO, we are recommending this family purchase Anthem’s Bronze PPO (HSA-compatible). Still expensive at $995/month, but reduces annual premium cost to just under $12,000. Let’s hold on to that number for a moment.

2. The Bronze HSA plan has a much higher deductible of $9,000 for the four family members combined. To offset a good portion of that risk (in the event of an accidental injury, heart attack, cancer, or other potentially high-cost, unexpected medical expenses), we will add a supplemental policy for $50/month, or $600/year.

3. This family qualifies to make a maximum 2016 contribution to a HSA in the amount of $6,750. Let’s assume that they can pull together $5,000 to contribute over the year. At this income level, that will be tough. But in this particular scenario, the federal government is going to give them the money to make the contribution. What? Yes. Here’s how:

By making a $5,000 HSA contribution, the family reduces its household taxable income for 2016 to $95,000 — getting them under the threshold to qualify for a tax credit. At $95,000 this family would qualify for tax credits (reduced premiums) of $445 per month or $5,340/year! Their cost of the Bronze PPO + accident/critical illness coverage is just over $7,000/year. They funded their HSA with an additional $5,000. Their total expenditure of a little over $12,000 is about $5,000 less than the cost of the Silver PPO plan. That alone is pretty great. But look at the added advantages:

  • The family has $5,000 in their HSA that belongs to them instead of sending it to the insurance company
    • It rolls over to the next year if unused (and the year after, indefinitely)
    • It can be used for dental and vision out of pocket expenses
  • The family has supplemental coverage that would reimburse them for most of the unexpected medical expenses:
    • Bike, sports, pedestrian accident requiring medical treatment
    • Heart attack, stroke, life-threatening cancer
  • Their total high-end risk (maximum out of pocket) is the same as on the Silver PPO (just over $12,000 annually)

Now, not everyone is going to be able to get under the income threshold to qualify for such large tax credits. But even without that, this strategy is a financial winner for most. Especially if your alternative has been paying for a Gold or Platinum-level plan. The difference in annual premiums going from Platinum to a Bronze HSA plan can be enough to fully fund an HSA for the year and have funds left over.

Need help figuring out how these numbers might apply to you and your family? Please contact us to schedule an appointment.

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