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Life Health > Health Insurance

The DRA's Hidden Exposures And Opportunities

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On Feb. 8, 2006, President Bush signed the Deficit Reduction Act of 2005 (DRA). According to a February 2006 article by The Kaiser Commission on Medicaid and the Uninsured, this act is expected to generate $39 billion in federal entitlement reductions over the next five years.

The legislation’s passage creates an even greater need for businesses to consider employer-sponsored plans that offer health benefits during retirement. Single-employer welfare benefit plans provide a pool of funds that can be used to pay post-retirement medical expenses that individuals are likely to incur.

The DRA has two particularly important provisions:

o premium and cost-sharing; and

o asset transfer changes.

Premium and cost-sharing changes

For families with incomes exceeding 150% of the federal poverty level ($24,900 for a family of three in 2006), states may charge unlimited premiums and co-payments up to 20% of the cost of medical services. Although the DRA limits how much consumers pay based on their income, the act supports a continuing trend toward shifting the cost of medical care to the consumer. Combine this with the fact that 30 states have so-called “filial responsibility laws,” which allow a nursing home to seek reimbursement from the resident’s children.

Although they rarely have been enforced, some states have re-enacted laws to make adult children liable for the support of their indigent parents.

Asset transfer changes

The DRA made two significant changes to restrict this type of planning:

The first increases penalties on individuals who transfer assets for less than fair market value to qualify for nursing home care. The act also increases the look-back period for assessing transfers from three to five years.

In addition, the DRA makes individuals with more than $500,000 in home equity ineligible for Medicaid nursing home benefits. And it changes the status of some previously exempt assets, such as certain Medicaid-friendly annuities, promissory notes and mortgages.

As financial services professionals, we need to continue to identify risks that our clients may be exposed to. And we need to provide alternatives to mitigate these risks. Long term care insurance offers significant benefits for individuals, but for those advisors who work with corporate benefits, a single-employer welfare benefit plan may provide a good alternative for many small to midsized employers.

This type of plan offers tax-deductible contributions for an employer and tax-free or tax-favored benefits to employees. It addresses a growing concern for most employees by offering life insurance and/or post-retirement health benefits. Of course, there are rules and guidelines that must be followed when offering this employer-sponsored benefit program.


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