Health Care Reform’s Impact On Your Retirement

OCEAN CITY — While there is still some debate about various aspects of the Patient Protection and Affordable Care Act (ACA), it is highly unlikely to be repealed anytime soon. As its provisions continue to be implemented, this is a good time to take another look at how some of the ACA’s key elements might affect those approaching or thinking about retirement. Additionally, it’s also important to look at some of the things the ACA doesn’t cover.

To meet its goal of near-universal health care coverage, the ACA removes some restrictions that many individuals, including those who retire early, have come up against when attempting to buy private health insurance. Effective January 1, 2014, health insurers will no longer be able to deny coverage or charge higher premiums if you have a pre-existing medical condition, exclude particular benefits based on health status or impose annual or lifetime limits on insurance payments with respect to "essential health benefits."

Additionally, a new system of state-based health insurance "exchanges" will let individuals and small businesses compare the prices and benefits of competing health plans beginning in January 2014. (People will be able to sign up for coverage through the exchanges starting in October 2013.) Some states have already indicated that they will opt out of the system; in those instances, the federal government steps in and builds an exchange for those states.

"In theory, premiums should be more affordable when you buy insurance through the exchanges," says Laura Grogan-O’Mara, director, Legislative and Public Policy, Bank of America Merrill Lynch. "Because everyone is required to have insurance, the pool of insured people should be larger and include younger, healthier people, which should reduce insurers’ risk and result in lower rates." That could help those who retire early or work part time and need to buy private coverage until they reach age 65, when they become eligible for Medicare.

Another issue that the ACA attempts to address is the so-called doughnut hole in Medicare Part D prescription coverage. This gap refers to the fact that beneficiaries who opt for Medicare Part D prescription coverage may be forced to pay a portion of their annual costs entirely out of pocket. In 2009, people age 65 and over spent an average of 8.1% of household income on health care expenses, and medications accounted for more than half that amount, according to a 2012 government report. The ACA has already begun trying to reduce prescription costs for Medicare beneficiaries by gradually closing the gap fully by 2020, leaving Medicare beneficiaries with a 25% copayment for all prescriptions.

There are aspects of the ACA that may affect areas other than health care as well. The ACA is expected to cost an estimated $1 trillion over the next decade, and much of that will be met by higher taxes on earners in the upper brackets. That may require revisiting your asset allocation and your financial strategy.

Starting this year, wages in excess of $250,000 for married couples and $200,000 for individuals are subject to an additional 0.9% Medicare tax, bringing the total Medicare tax rate on that income to 2.35%. The wealthy (those with a modified adjusted gross income of $250,000 if married and filing jointly, or $200,000 if single) may be subject to an additional 3.8% Medicare surtax on investment income, which includes dividends, capital gains, rents, royalties, annuity payments and interest payments. That new surtax took effect on January 1, 2013, at the same time as a provision under the American Taxpayer Relief Act of 2012 (passed at the beginning of 2013) that increased tax rates on long-term capital gains and dividends to 20% from 15% for couples whose taxable income exceeds $450,000 a year and individuals whose taxable income exceeds $400,000. The 3.8% Medicare surtax and higher long-term capital gains and dividends rate could result in a 23.8% rate for some investment income for certain high earners.

As a result, you may want to consider holding dividend-producing stocks in your retirement accounts because taxable distributions from an IRA, 401(k) or qualified pension plan are exempt from the surtax. Growth stocks that don’t pay dividends, meanwhile, may belong in your taxable accounts: Although you will eventually owe taxes for long-term capital gains on potential appreciation of such holdings, that won’t happen until you sell your shares—an event whose timing you can control. High earners may want to realize capital gains during years when their modified adjusted gross income drops below the $200,000-to-$250,000 threshold to avoid paying the 3.8% tax on those gains, suggests Vinay Navani, CPA, a partner at the accounting firm of Wilkin & Guttenplan.

Many of the provisions of the ACA are being phased in gradually, and some have yet to be finalized. Your Financial Advisor can help you stay updated and together you can revisit your retirement savings strategy on a regular basis. You can also consult your tax advisor for more information on the ACA and its impact on your particular circumstances.

(The writer is a senior financial advisor and can be reached at 410-213-8520.)