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Carolyn McClanahan: 7 Health Care Benefits for Your Clients in American Rescue Plan

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There are several health insurance-related benefits in the American Rescue Plan Act that President Joe Biden recently signed into law, and it’s in the best interest of advisors to make sure their clients who qualify for those benefits understand how they can best take advantage of them, according to Carolyn McClanahan, a certified financial planner, physician and founder of financial services firm Life Planning Partners in Jacksonville, Florida.

“The most important thing is they got rid of the cliff for qualifying for subsidies to help pay for health insurance,” she told ThinkAdvisor during a phone interview. Although it is applicable to all ages, it benefits 60- to 65-year-old Americans the most “because their health insurance costs are so expensive,” she said.

Before, if you made more than 400% of the federal poverty level — that’s about $51,000 for an individual or $104,800 for a family of four — “you lost any tax credit towards health insurance” through the Affordable Care Act exchanges, she explained. “Now it just gradually gets phased out so once you’re over 400% poverty level, your health insurance cannot be more than 8.5% of your modified adjusted gross income.”

Another big plus: Americans with an ACA plan won’t have to pay back tax credits they received last year if their income wound up higher than they estimated during enrollment, she said. That has been an issue especially for freelancers and other ACA participants whose incomes were unpredictable and fluctuated even before the pandemic.

Here are seven health-related benefits in the rescue plan that advisors should tell their clients about, according to McClanahan.

1. ACA plans are in a special enrollment period.

A COVID-related special enrollment period for ACA plans ends Aug. 15. Those who miss the deadline won’t be able to sign up until the next open enrollment period, unless they lose their health insurance as a result of losing a job after that or there is some other qualifying life event such as the birth of a baby, McClanahan pointed out.

2. No premiums on COBRA coverage for six months.

Another major health-related benefit in the American Rescue Plan is one that any age group can take full advantage of if they have lost their job or their hours have been slashed and they lose their health insurance, McClanahan noted.

For people who lose their job, COBRA is now “100% covered from April 1 through Sept. 30,” which is significant because COBRA is otherwise quite expensive, she said.

3. ‘Free’ ACA insurance for workers who have lost jobs.

The American Rescue Plan adds a major tax break for unemployed workers — even high earners — who buy insurance through the ACA exchanges.

“If a person is unemployed and they collect unemployment insurance even for one week this year, in 2021,” no matter how much they made this year, “for purposes of the tax credit, their income will be counted as no more than 133% of the poverty level,” she said.

And “what that does is it basically gets them free health insurance” through the ACA “because with that low an income level you’ll qualify for a huge tax credit and also much lower deductibles in cost share — even if you have a client that made $400,000 a year and then they go on unemployment for one week,” she explained.

“For advisors, I think it’s really important for them to make sure their clients understand the different options,” she said. If they’re laid off, “especially if they go on unemployment, then to me it makes more sense for somebody to actually go on an ACA-based plan instead of getting COBRA because once you go on COBRA, you cannot switch to an ACA-based plan unless it’s open enrollment or unless your COBRA ends,” she noted.

People are going to get subsidies for COBRA through the end of September, but they’re still going to have to pay for October through December, she noted. “And COBRA premiums are easily $500 or more a month and so that could end up costing a couple of thousand dollars, whereas if they went on an ACA-based plan because they’ve collected unemployment, their health insurance is going to be free for the whole year,” she explained.

4. Health care savings could have broader financial planning implications.

These American Rescue Plan benefits will “have a big impact” on at least some clients’ retirement and other financial plans because “if you have clients [in] that upper middle income — if they’re making over that 400% poverty level — it’s going to greatly reduce their health insurance costs for the next couple of years,” according to McClanahan.

She has a couple who are clients in their 60s and “are going to be saving about $18,000 a year on their health insurance” as a result of the American Rescue Plan, she pointed out, calling that “huge.”

5.  Fewer clients need to (legally) lower income to qualify.

“The other nice thing is if you have clients that are on ACA plans and they get a tax credit, before we had to really manipulate income to make sure that they didn’t go over that 400% poverty level because they could lose the entire huge tax credit,” according to McClanahan.

Now, however, because the tax credit “just gets phased out … you don’t have to do as much income manipulation to make sure they stay under that 400% poverty level,” she said.

And by “manipulating” income, she is not referring to lying.

“One way you can reduce income is if anybody has earned income and they’re still getting tax credits … you can do a regular IRA contribution and take the deduction for that,” she pointed out. “You can also, if you have a high-deductible plan through the ACA, you can do a contribution to your health savings account.”

When possible, “plan in advance so if you have a client who’s qualifying for tax credits, you have to make sure that they have the cash needed for the year so that they don’t have to either do more IRA distributions or they don’t have to pay capital gains that would inadvertently increase income,” she explained.

Unfortunately, sometimes people get a surprise that messes with the plan. “I had a client get an annuity payout from an inheritance that they weren’t expecting,” McClanahan recalled. “That totally negated their tax credit one year [and] there wasn’t really anything we could do about it after the fact.”

6.  Clients in their early 60s may be able to retire earlier.

“One of my concerns before this last election was, if Trump had been reelected, the ACA almost certainly would have gone away,” according to McClanahan. However, “now that Biden’s been elected, they’ve done the first major repair of the Affordable Care Act since it was passed over 10 years ago.”

Before the November election, “I had clients who wanted to retire early” and she told them she was nervous about them doing that because, if they retired at 60, they would “get COBRA for 18 months and that’s it — and then you have to count on the ACA for health insurance, and if it goes away, you might not have the ability to get decent health insurance,” she recalled.

Therefore, Biden’s win was “a big relief for people who do want to retire early and I think we’re pretty safe for the next four years at least that we’re going to have good health insurance availability and ideally they’re going to improve it in the next few years,” she said.

7. More ACA plans could be available soon.

“I haven’t had any issues with clients” refusing to go on the ACA if they needed it, even those who may have previously had ideological issues with the program, McClanahan said.

However, “it also depends on your area,” she noted. There is a “huge choice” of “great plan” options on the ACA exchange for clients who live in the Jacksonville area.

However, that is not necessarily the case in more rural areas of the U.S., she cautioned. But now that the ACA is being supported by the Biden administration, she predicted health insurance companies will start offering more plans on the exchanges.

Where Does ACA Go From Here?

One reason why ACA has remained alive is that a growing number of Americans have benefited from it, and now “we can repair the issues with it” that remain, according to McClanahan.

As examples, every state should expand Medicaid eligibility and there should be a public option, which “would start bringing down the cost of health insurance,” she said.

The “family glitch” also still needs to be fixed, she added. That is when one person in a household is eligible for employer-based coverage but the other people in the house can’t get a tax credit for ACA insurance and employers will often not cover much —  or any — of the cost of an employee’s spouse or kids under a family health insurance plan they offer, she noted.

That would have to be fixed by the Democrats through reconciliation because the Republicans will likely not support it, she noted.

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