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Senator Joe Manchin

Life Health > Health Insurance > Medicare Planning

7 Senate Budget Package Highlights for Retirement Advisors

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What You Need to Know

  • The House could still kill or change the Inflation Reduction Act of 2022 package.
  • The famous Medicare drug price negotiation section would have no direct immediate effect on your clients.
  • The ACA premium subsidy would kick in immediately, and a $2,000 annual Medicare Part D drug spending cap would apply in 2025.

Senate negotiators have cut all sorts of complicated things out of H.R. 5376 — the Inflation Reduction Act of 2022 budget package.

But they left in plenty of relatively easy-to-explain provisions of interest to consumers who are planning for retirement.

What It Means

If you need news you can use to start conversations with retirement planning clients and prospects this week, the Senate’s passage of the Inflation Reduction Act is the news.

H.R. 5376: The Nuts and Bolts

Senate Democrats posted a 755-page version of the package here.

KPMG, an accounting firm, links to copies of the only two amendments approved by the Senate here.

House leaders hope to bring the package up for a final vote there Friday. Democrats and independents who caucus with the Democrats have just 50 seats in the Senate, and they hold just 220 of the 435 seats in the House.

Lawmakers normally need 60 votes in the Senate to avoid a filibuster — an endless round of debate — in the Senate. The Democrats are using a special budget reconciliation process to move H.R. 5376 through the Senate with the votes of the 48 Democrats and two independents there, along with a tiebreaking vote from Vice President Kamala Harris.

The Senate passed the H.R. 5376 budget reconciliation package Sunday with a 51-50 vote.

Negotiators took out many spending provisions, including dental benefits for enrollees in the original Medicare program, to win the vote of Sen. Joe Manchin, D-W.Va., and they took out a proposed change in the tax rules for private equity firms to win the vote of Sen. Kyrsten Sinema, D-Ariz.

Conversation Starters

Here are seven things retirement advisors and their clients might want to talk about.

1. Everything could change.

Democrats in the House who have voted for earlier versions of H.R. 5376 could refuse to vote for the revised package.

If they pass the current package but tweak it, Senate leaders could have trouble getting the tweaked version back through the Senate.

Even if Congress passes the package and President Joe Biden signs it into law, new legislation, lawsuits or executive branch challenges could lead to implementation delays, the death of some H.R. 5376 provisions or changes in how some provisions really work.

If, for example, Republicans end up regaining control of the Senate in January 2023, they might be able to zero out any Inflation Reduction Act taxes, tax break amounts or other Medicare benefits change amounts in future must-pass budget or spending packages.

2. A key Affordable Care Act premium tax credit subsidy expansion measure would help affected clients immediately.

The federal Affordable Care Act provides a tax credit subsidy that consumers can use to pay for major medical insurance bought through the ACA public exchange system.

Before the COVID-19 pandemic, the subsidy was available only to consumers who earned less than 400% of the federal poverty level.

This year, under the pre-pandemic rules, the income cap would have been $51,520 for an individual in most of the country, and $106,000 for a family of four.

Pandemic response legislation has lifted the income cap. Now, consumers can get tax credit subsidies for premiums whenever the cost of a benchmark plan exceeds 8.5% of their adjusted gross income.

The provision on page 246 of the H.R. 5376 PDF file would extend the tax credit subsidy expansion through 2025.

This provision could help affected clients maintain or increase retirement savings arrangement contributions.

3. Two Medicare Part D drug plan benefits changes would take effect in 2024.

A provision on page 168 of of the H.R. 5376 PDF file would require Medicare prescription drug plans, including stand-alone Part D prescription drug policies and the prescription drug benefits bundled into many Medicare Advantage plans, to eliminate additional out-of-pocket costs, starting in 2024, for enrollees who end up with enough covered prescription drug bills to qualify for catastrophic drug coverage.

Today, enrollees using catastrophic drug coverage are responsible for 5% of the bills.

A provision on page 749 would require Medicare drug plans to make a variety of insulin products available to enrollees, for $35 or less per month, starting in 2024. Republicans shot down a similar provision that would have capped insulin prices for the private market.

These provisions could help reduce anticipated post-retirement health care costs for clients who are still planning for retirement, and they could hold down costs in the near future for any clients who will be retired by 2024.

4. Medicare Part D drug plans could cap enrollee out-of-pocket spending at $2,000 starting in 2025.

This provision, described on page 169 of the H.R. 5376 PDF file, would apply to clients with stand-alone drug coverage or in Medicare Advantage plans that provide drug coverage.

In addition to helping clients hold down post-retirement health care costs, it could eliminate a major source of post-retirement health care cost uncertainty.

5. The famous Medicare price-negotiation section could have some direct effects starting in 2026, and indirect effects immediately.

A long section starting on page 43 of H.R. 5376 would authorize Medicare program managers to begin phasing in a drug price negotiation process with drug manufacturers in 2026.

The section is getting publicity because policymakers have been trying for years to give Medicare managers some ability to bargain with pharmaceutical companies.

The section in H.R. 5376 would include many restrictions on Medicare’s negotiating powers, and it could start using its new powers on just 10 drugs per year.

Employer groups could kill the provision, which would not apply to commercial health insurance plans outside the Medicare program and could thus leave enrollees in commercial group health plans vulnerable to huge price increases.

But the idea that Medicare could begin negotiating prices in 2026, and that drugmakers will need allies to stop that from happening, could give health insurers and employers a stronger bargaining position as soon as the provision became law, even if the provision never actually took effect.

This could help retirees and pre-retirees who now have high prescription drug bills save at least some money as early as next year.

6. A new 1% stock buyback excise tax and a new 15% corporate alternative minimum tax could change how life insurers see life and annuity sales.

Today, the publicly traded life insurers that issue some of the annuities and cash-value life insurance policies used in your clients’ income planning arrangements face intense pressure to return capital to shareholders by buying back shares of their own stock.

A provision on page 31 of the H.R. 5376 PDF file would impose a 1% tax on the fair market value of stock buybacks.

If insurers and shareholders find that provision burdensome, life insurers might engage in fewer share buybacks.

Affected insurers might work harder to use revenue growth to make themselves more appealing to shareholders. They could increase agent and broker compensation, spend more on marketing, or sweeten insurance and annuity products features and returns.

Another corporate tax provision, on page 2 of the H.R. 5376 PDF file, would require affected companies to pay taxes equal to at least 15% of “adjusted financial statement income for the taxable year.”

It’s possible that most life and annuity issuers already meet the requirements of that provision.

If some don’t, they might see investing in revenue growth — by increasing producer compensation, spending more on marketing, and sweetening product features and returns — as a good way to add value without driving up current adjusted financial statement income and subjecting themselves to big new income tax bills.

7. Clean energy and manufacturing tax incentives could create new investment opportunities for insurers, and new and improved investment option menus inside products such as variable annuities and indexed universal life policies.

The heart of H.R. 5376 is long sections meant to do things like encourage a shift to electric vehicles, solar power systems and wind power energy systems.

Those sections could have big, unpredictable, long-lasting effects on the investments packaged inside clients’ life insurance policies, annuities, mutual funds, 401(k) plans and other retirement savings arrangements.

Pictured: Sen. Joe Manchin (Photo: Sarah Silbiger/Bloomberg)


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