Health-Care Reform: Looking Back and Ahead

Three years ago, on March 23, 2010, President Obama signed the Affordable Care Act (ACA) into law. While several substantial provisions don’t take effect until 2014, many of the Act’s requirements already have been implemented, including: Insurance policies must allow young adults up to age 26 to remain covered on their parent’s health insurance. Insurers cannot deny coverage to children due to their health status, nor can companies exclude children’s coverage for pre-existing conditions. Lifetime coverage limits have been eliminated from private insurance policies. State-based health insurance Exchanges intended to provide a marketplace for individuals and small businesses to compare and shop for affordable health insurance are scheduled to be implemented by October 1, 2013. Insurance policies must provide an easy-to-read description of plan benefits, including what’s covered, policy limits, coverage exclusions, and cost-sharing provisions. Medical loss ratio and rate review requirements mandate that insurers spend 80% to 85% of premiums on direct medical care instead of on profits, marketing, or administrative costs. Insurers failing to meet the loss ratio requirements must pay a rebate to consumers. The ACA provides federal funds for states to implement plans that expand Medicaid long-term care services to include home and community-based settings, instead of just institutions. The ACA provides funding to the National Health Service Corps, which provides loan repayments to medical students and others in exchange for service in low-income underserved communities. Medicare and private insurance plans that haven’t been grandfathered must provide certain preventive benefits with no patient cost-sharing, including immunizations and preventive tests. Through rebates, subsidies, and mandated manufacturers’ discounts, the ACA reduces the amount that Part D Medicare drug benefit enrollees are required to pay for prescriptions falling in the donut hole. Major provisions coming in 2014 Several important provisions of the ACA are due to take effect in 2014, such as: U.S. citizens and legal residents must have qualifying health coverage (subject to certain exemptions) or face a penalty. Employers with more than 50 full-time equivalent employees are required to offer affordable coverage or pay a fee. Premium and cost-sharing subsidies that reduce the cost of insurance are available to individuals and families based on income. Policies (other than grandfathered individual plans) are prohibited from imposing pre-existing condition exclusions, and must guarantee issue of coverage to anyone who applies regardless of their health status. Also, health insurance can’t be rescinded due to a change in health status, but only for fraud or intentional misrepresentation. Policies (except grandfathered individual plans) cannot impose annual dollar limits on the value of coverage. Individual and small group plans (except grandfathered individual plans), including those offered inside and outside of insurance Exchanges, must offer a comprehensive package of items and services known as essential health benefits. Also, nongrandfathered plans in the individual and small business market must be categorized based on the percentage of the total average cost of benefits the insurance plan covers, so consumers can determine how much the plan covers and how much of the medical expense is the consumer’s responsibility. Bronze plans cover 60% of the covered expenses, Silver plans cover 70%, Gold plans cover 80%, and Platinum plans cover 90% of covered expenses. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013.

Understanding the New Medicare Tax on Unearned Income

Health-care reform legislation enacted in 2010 included a new 3.8% Medicare tax on the unearned income of certain high-income individuals. The new tax, known as the unearned income Medicare contribution tax, or the net investment income tax (NIIT), took effect on January 1, 2013. Who must pay the new tax? The NIIT applies to individuals who have "net investment income," and who have modified adjusted gross income (MAGI) that exceeds certain levels (see the chart below). (Estates and trusts are also subject to the new law, although slightly different rules apply). In general, nonresident aliens are not subject to the new tax. Filing Status MAGI over … Single/Head of household $200,000 Married filing jointly/ Qualifying widow(er) $250,000 Married filing separately $125,000 What is MAGI? For most taxpayers, MAGI is simply adjusted gross income (AGI), increased by the amount of any foreign earned income exclusion. AGI is your gross income (e.g., wages, salaries, tips, interest, dividends, business income or loss, capital gains or losses, IRA and retirement plan distributions, rental and royalty income, farm income and loss, unemployment compensation, alimony, taxable Social Security benefits), reduced by certain "above-the-line" deductions (see page one of IRS Form 1040 for a complete list of adjustments). Note that AGI (and therefore MAGI) is determined before taking into account any standard or itemized deductions or personal exemptions. Note also that deductible contributions to IRAs and pretax contributions to employer retirement plans will lower your MAGI. What is investment income? In general, investment income includes interest, dividends, rental and royalty income, taxable nonqualified annuity income, certain passive business income, and capital gains–for example, gains (to the extent not otherwise offset by losses) from the sale of stocks, bonds, and mutual funds; capital gains distributions from mutual funds; gains from the sale of interests in partnerships and S corporations (to the extent you were a passive owner), and gains from the sale of investment real estate (including gains from the sale of a second home that’s not a primary residence). Gains from the sale of a primary residence may also be subject to the tax, but only to the extent the gain exceeds the amount you can exclude from gross income for regular income tax purposes. For example, the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence is generally excluded for regular income tax purposes, and is therefore also excluded from the NIIT. Investment income does not include wages, unemployment compensation, operating income from a nonpassive business, interest on tax exempt bonds, veterans benefits, or distributions from IRAs and most retirement plans (e.g., 401(k)s, profit-sharing plans, defined benefit plans, ESOPs, 403(b) plans, SIMPLE plans, SEPs, and 457(b) plans). Net investment income is your investment income reduced by certain expenses properly allocable to the income–for example, investment advisory and brokerage fees, investment interest expenses, expenses related to rental and royalty income, and state and local income taxes. How is the tax calculated? The tax is equal to 3.8% of the lesser of (a) your net investment income, or (b) your MAGI in excess of the statutory dollar amount that applies to you based on your tax filing status. So, effectively, you’ll be subject to the additional 3.8% tax only if your MAGI exceeds the dollar thresholds listed in the chart above. Example: Sybil, who is single, has wages of $180,000 and $15,000 of dividends and capital gains. Sybil’s MAGI is $195,000, which is less than the $200,000 statutory threshold. Sybil is not subject to the NIIT. Example: Mary and Matthew have $180,000 of wages. They also received $90,000 from a passive partnership interest, which is considered net investment income. Their MAGI is $270,000, which exceeds the threshold for married taxpayers filing jointly by $20,000. The NIIT is based on the lesser of $20,000 (the amount by which their MAGI exceeds the $250,000 threshold) or $90,000 (their net investment income). Mary and Matthew owe NIIT of $760 ($20,000 x 3.8%). Note: The NIIT is subject to the estimated tax rules. You may need to adjust your income tax withholding or estimated payments to avoid underpayment penalties.
		Health-care reform legislation passed in 2010 included a new additional 0.9% Medicare tax on wages, compensation, and self-employment income over certain thresholds. This new tax also took effect on January 1, 2013. The 0.9% tax does not apply to income subject to the NIIT. So while you may be subject to both taxes, the taxes do not apply to the same types of income.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013.

Looking Backward and Forward on Entitlement Programs

Last year’s presidential election, along with the more recent fiscal cliff and debt ceiling negotiations, have put the spotlight on our nation’s tax policy, deficit, and entitlement programs. For some, entitlement programs are necessary–a social compact for America in an era of longer life spans, the decline of employer-provided pensions and health insurance in retirement, and a widening gap between the haves and the have-nots. For others, the current level of entitlement spending is jeopardizing our country’s fiscal health and creating an "entitlement lifestyle." No matter where you stand in the debate, do you know the basic facts on our country’s largest entitlement programs? Where the money goes All entitlement spending isn’t created equal. The "Big Three" of Social Security, Medicare, and Medicaid account for more than two-thirds of all federal entitlement spending. Social Security and Medicare are primarily age-based programs, whereas Medicaid is based on income level. According to the U.S. Bureau of Economic Analysis, in 2010, the federal government spent a total of $2.2 trillion on entitlement programs, with the Big Three accounting for $1.6 trillion of this total. The largest expenditure was for Social Security ($690 billion), followed by Medicare ($518 billion) and Medicaid ($405 billion). A history of growth Alexis de Tocqueville, the famous French political thinker who traveled to the United States in the early 1830s and wrote about the uniqueness of our young nation’s individual self-reliance in his famous book, Democracy in America, would likely be surprised to observe the growth in spending on entitlement programs that has occurred in the United States over the past 50 years. According to the Bureau of Economic Analysis, in 1960, U.S. government transfers to individuals totaled about $24 billion in current dollars. By 2010, that figure was $2.2 trillion, almost 100 times as much. Current status Let’s look at our two main entitlement programs–Social Security and Medicare. Social Security. Created in 1935, Social Security is a "pay-as-you-go" system, meaning that payments to current retirees come primarily from payments into the system by current wage earners in the form of a 12.4% Social Security payroll tax (6.2% each from employee and employer). These payroll taxes are put into two Social Security Trust Funds, which also earn interest. According to projections by the Social Security Administration, the trust funds will continue to show net growth until 2022, after which, without increases in the payroll tax or cuts in benefits, fund assets are projected to decrease each year until they are fully depleted in 2033. At that time, it’s estimated that payroll taxes would only be able to cover approximately 75% of program obligations. Medicare. Created in 1965, Medicare is a national health insurance program available to all Americans age 65 and older, regardless of income or medical history. It consists of Part A (hospital care) and Part B (outpatient care)–which together make up "traditional" Medicare; Part C (Medicare Advantage, which is private insurance partly paid by the government); and Part D (outpatient prescription drugs through private plans only). Medicare Part A is primarily funded by a 2.9% Medicare payroll tax (1.45% each from employee and employer), which in 2013 is increased by 0.9% for employees with incomes above $200,000 (single filers) or $250,000 (married filing jointly). In addition, starting in 2013, a new 3.8% Medicare contribution tax on the net investment income of high-earning taxpayers will take effect. Looking ahead, Medicare and Medicaid are expected to face the most serious financial challenges, due primarily to increasing enrollment. The Congressional Budget Office, in its report Budget and Economic Outlook: Fiscal Years 2012 to 2022, predicts that federal spending on Medicare will exceed $1 trillion by 2022, while federal spending on Medicaid will reach $605 billion (state spending for Medicaid is also expected to increase). According to the CBO, reining in the costs of Medicare and Medicaid over the coming years will be the central long-term challenge in setting federal fiscal policy. Reform There has been little national consensus by policymakers on how to deal with rising entitlement costs. At some point, though, reform is inevitable. That’s why it’s a good idea to make sure your financial plan offers enough flexibility to accommodate an uncertain future.
		An unsustainable path The bipartisan Bowles/Simpson Deficit Reduction Commission stated that "our nation is on an unsustainable fiscal path" in regard to entitlement spending.

Copyright 2013 by Broadridge Investor Communication Solutions Inc. All Rights Reserved.

Quarterly Market Review: January-March 2013

Watch our Quarterly Market Review for the quarter ended March 31, 2013

Quarterly Market Review: January-March (Video)

Four Retirement Mistakes to Avoid

1. Putting off planning and saving Because retirement may be many years away, it’s easy to put off planning for it. The longer you wait, however, the harder it is to make up the difference later. That’s because the sooner you start saving, the more time your investments have to grow. The chart below shows how much you could save by age 65 if you contribute $3,000 annually, starting at ages 20 ($679,500), 35 ($254,400), and 45 ($120,000). As you can see, a few years can make a big difference in how much you’ll accumulate. Note:   Assumes 6% annual growth, no tax, and reinvestment of all earnings. This is a hypothetical example and is not intended to reflect the actual performance of any investment. Don’t make the mistake of promising yourself that you’ll start saving for retirement as soon as you’ve bought a house or that new car, or after you’ve fully financed your child’s education–it’s important that you start saving as much as you can, as soon as you can. 2. Underestimating how much retirement income you’ll need One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll need to accumulate by the time you retire. It’s often repeated that you’ll need 70% to 80% of your preretirement income after you retire. However, depending on your lifestyle and individual circumstances, it’s not inconceivable that you may need to replace 100% or more of your preretirement income. With the future of Social Security uncertain, and fewer and fewer people covered by traditional pension plans these days, your individual savings are more important than ever. Keep in mind that because people are living longer, healthier lives, your retirement dollars may need to last a long time. The average 65-year-old American can currently expect to live another 19.2 years (Source: National Vital Statistics Report, Volume 60, Number 4, January 2012). However, that’s the average–many can expect to live longer, some much longer, lives. In order to estimate how much you’ll need to accumulate, you’ll need to estimate the expenses you’re likely to incur in retirement. Do you intend to travel? Will your mortgage be paid off? Might you have significant health-care expenses not covered by insurance or Medicare? Try thinking about your current expenses, and how they might change between now and the time you retire. 3. Ignoring tax-favored retirement plans Probably the best way to accumulate funds for retirement is to take advantage of IRAs and employer retirement plans like 401(k)s, 403(b)s, and 457(b)s. The reason these plans are so important is that they combine the power of compounding with the benefit of tax deferred (and in some cases, tax free) growth. For most people, it makes sense to maximize contributions to these plans, whether it’s on a pre-tax or after-tax (Roth) basis. If your employer’s plan has matching contributions, make sure you contribute at least enough to get the full company match. It’s essentially free money. (Some plans may require that you work a certain number of years before you’re vested in (i.e., before you own) employer matching contributions. Check with your plan administrator.) 4. Investing too conservatively When you retire, you’ll have to rely on your accumulated assets for income. To ensure a consistent and reliable flow of income for the rest of your lifetime, you must provide some safety for your principal. It’s common for individuals approaching retirement to shift a portion of their investment portfolio to more secure income-producing investments, like bonds. Unfortunately, safety comes at the price of reduced growth potential and the risk of erosion of value due to inflation. Safety at the expense of growth can be a critical mistake for those trying to build an adequate retirement nest egg. On the other hand, if you invest too heavily in growth investments, your risk is heightened. A financial professional can help you strike a reasonable balance between safety and growth.
		Because retirement may be many years away, it’s easy to put off planning for it. The longer you wait, however, the harder it is to make up the difference later. That’s because the sooner you start saving, the more time your investments have to grow.

Copyright 2011 by Broadridge Investor Communication Solutions Inc.
All Rights Reserved.

Making the Most of Your 401(k) Plan

A 401(k) plan represents one of the most powerful retirement savings opportunities available today. If your employer offers a 401(k) plan and you’re not participating in it,  you should be.

Contribute as much as possible

The more you can save for retirement, the better your chances of enjoying a comfortable retirement. If you can, max out your contribution up to the legal limit ($17,500 in 2013, $23,000 if you’re age 50 or older). If you need to free up money to do that, try to cut certain expenses. (Note: some plans limit the amount you can contribute.)

Why invest your retirement dollars in a 401(k) plan instead of somewhere else? One reason is that your pretax contributions lower your taxable income for the year. This means you save money in taxes immediately when you contribute to the plan–a big advantage if you’re in a high tax bracket. For example, if you earn $100,000 a year and contribute $17,500 to a 401(k) plan, you’ll only pay federal income taxes on $82,500 instead of $100,000.

Another reason is the power of tax-deferred growth. Any investment earnings compound year after year and aren’t taxable as long as they remain in the plan. Over the long term, this gives you the opportunity to build an substantial sum in your employer’s plan. (Your pretax contributions and any earnings will be taxed when paid to you from the plan.)

Consider Roth contributions

Your 401(k) plan may also allow you to make after-tax Roth contributions. Unlike pre-tax contributions, Roth contributions don’t lower your current taxable income so there’s no immediate tax savings. But because you’ve already paid taxes on those contributions, they’re free from federal income taxes when paid from the plan. And if your distribution is "qualified" (that is, the distribution is made after you satisfy a five-year holding period, and after you reach age 59½, become disabled, or die) any earnings are also tax free.

If your distribution isn’t qualified, any earnings you receive are subject to income tax. A 10% early distribution penalty may also be imposed if you haven’t reached age 59½ (unless an exception applies).

Capture the full employer match

Many employers will match all or part of your contributions. If you can’t max out your 401(k) contributions, you should at least try to contribute as much as necessary to get the full employer match. Employer matching contributions are basically free money. By capturing the full benefit of your employer’s match, you’ll be surprised how much faster your balance grows. If you don’t take advantage of your employer’s generosity, you could be passing up a significant contribution towards your retirement.

Access funds if you must

Another beneficial feature that many 401(k) plans offer is the ability to borrow against your vested balance at a reasonable interest rate. You can use a plan loan to pay off high-interest debts or meet other large expenses, like the purchase of a car. You typically won’t be taxed or penalized on amounts you borrow as long as the loan is repaid within five years. Immediate repayment may be required, however, if you leave your employer–if you can’t repay the loan, you may be treated as having taken a taxable distribution from the plan.

And remember that when you take a loan from your 401(k) plan, the funds you borrow are generally removed from your plan account until you repay the loan, so you may miss out on the opportunity for additional tax-deferred investment earnings. So loans (and withdrawals if available) should be a last resort.

Evaluate your investment choices

Choose your investments carefully. The right investment mix could be one of your keys to a comfortable retirement. That’s because over the long term, varying rates of return can make a big difference in the size of your 401(k) plan account.

Copyright Forefield Broadridge Investor Communications 2013.