U.S. Supreme Court Upholds Affordable Care Act in 7-2 Ruling

Once again, the nation's highest court has upheld the Affordable Care Act (ACA) in a 7-2 ruling dismissing a challenge made to the ACA in the suit Texas v. United States.  That suit, which had the potential to invalidate the entire law, was turned away by today's majority ruling in California v. Texas.  This marks the third time the U.S. Supreme Court has ruled in favor of the ACA.

Today's ruling found that the plaintiffs did not have a legal right to bring the case before the Court.  The opinion held that plaintiffs in the challenge “failed to show a concrete, particularized injury fairly traceable to the defendants’ conduct in enforcing the specific statutory provision they attack as unconstitutional.”  The opinion did not speak to the underlying issue of the mandate’s constitutionality.

Justice Stephen Breyer delivered the court’s opinion, with Justices Samuel Alito and Neil Gorsuch dissenting.  Writing for the court, Justice Stephen Breyer said the states and people who filed the latest suit lacked legal standing to go to court.  Breyer said they could not show they were injured by the now-toothless mandate, as required under the Constitution.

The prior mandate, arguably the most controversial aspect of the ACA law, was a federally imposed tax penalty for not being enrolled in health insurance.  It was eliminated in 2019 by actions taken under the Trump Administration.  The penalty amount for not having health insurance in 2018 was $695 for adults and $347.50 for children, or 2% of yearly income, whichever amount is more.

Breyer noted, “To find standing here to attack an unenforceable statutory provision would allow a federal court to issue what would amount to an advisory opinion without the possibility of any judicial relief."

Justices Samuel Alito and Neil Gorsuch dissented, indicating they would have let the suit go forward and continue to support dismantling most of the ACA.

In his dissent, Alito wrote “No one can fail to be impressed by the lengths to which this court has been willing to go to defend the ACA against all threats."  Alito was in dissent in both previous ACA cases.

In a concurring opinion, Justice Clarence Thomas said he agreed with Alito’s analysis of the previous cases, but agreed with the majority that the latest challengers lacked the right to sue. “Although this court has erred twice before in cases involving the Affordable Care Act, it does not err today,” Thomas wrote.

Today’s ruling leaves the entire ACA intact.  The case is California v. Texas, 19-840.

Until next time,

Andrew Herman

Investing in Fixed Annuities for Safety, Accumulation, and Tax Advantages

While they are best known for providing guaranteed income during retirement, Fixed Annuities can be purposed for tax deferred accumulation.  They are designed to protect your principal from downside loss and can be funded from after-tax money or pre-tax accounts such as IRAs and 401Ks.  Additionally, distributions made for Qualified Long-Term Care expenses are entirely tax-free.

Are Annuity products a safe investment?

Not all Annuities are equal when it comes to protecting your principal from investment loss.

Variable Annuities are the least safe, as contract funds typically are invested directly into equities and other assets that can fluctuate widely in value.  Variable Annuities offer a potentially rewarding upside, but their suitability is limited to investors who can tolerate the risk of losing their invested principal.

Investors seeking growth and safety of principal have better options with Fixed Deferred Annuities.  Two popular products are Multi-Year Guaranteed Annuities (MYGAs) and Fixed Indexed Annuities (FIAs).

MYGAs offer a contractually guaranteed interest rate for a fixed period, such as three years or five years.  Interest earnings grow fully tax-deferred when no distributions are made (when money is withdrawn, gains are taxed first prior to return of principal).  “Surrender Charges”, or fees, generally apply for early termination; however, most MYGAs allow penalty-free withdrawals during the guarantee period.  Such withdrawals may be limited to certain thresholds such as: 10% of account value each year, accumulated interest earned, Required Minimum Distributions (RMDs on Qualified Annuities), or other terms as specified in the Annuity contract.

When choosing a MYGA product, it is important to review all contract guarantees and terms including how funds are disbursed if the Annuitant (person insured by the Annuity) dies before the end of the accumulation period.  Some MYGAs pay a death benefit equal to the full account value without any surrender penalty.

When the guarantee period ends, consumer-friendly tax laws allow accumulated funds to be rolled over without tax consequence into a new Annuity contract (this is known as a 1035 exchange).  The customer has other options as well, such as annuitizing the payout over a specified number of years (or for lifetime) or receiving a lump sum payment.  As noted above, distributions are taxed first on gains. In the case of a Qualified Annuity, or IRA-type account, the entire distribution is taxable since none of the contract funds had been taxed previously.

FIAs, like MYGAs, are Fixed Annuity contracts that accumulate interest on a tax-deferred basis; and they often are designed for a longer time horizon compared to MYGAs.  The main difference, though, is that FIA contracts base investment returns on the performance of a selected Index such as S&P 500.  Unlike direct investment in equity or bond markets, FIAs generally are protected against investment losses. In exchange, only a portion of Index growth is credited to the Annuity contract when the Index increases in value.  Index measurement for interest crediting purposes often is on a one-year point-to-point basis with an annual reset for the next year.

 

When purchasing an FIA, it is important to review all terms including contractual surrender charges, availability of penalty-free withdrawals, the portion of Index gain credited to the contract, guarantees regarding annuitization (payout) of funds in the future, and how the death benefit is calculated.

 

FIAs are especially attractive in times of a mature bull market, since history shows market corrections occur and the downward trend usually is short-lived.  For example, consider an investor with $100,000 who purchases an FIA contract participating in a stock Index, and with downside protection, rather than investing directly in the Index itself.  If the underlying Index were to drop 20% in the following year, the FIA contract value is still $100,000 and has not suffered any of the 20% market loss which could take years to recoup.

 

Investing in a MYGA vs. FIA Contract

 

Purchasing a MYGA contract makes the most sense when there is a shorter timeline for needing access to funds and/or the investor wants to know exactly how the investment will grow.  MYGAs can be compared to Bank Certificates of Deposit (CDs), which operate similarly in that an interest rate is guaranteed for a specified period.  Currently, MYGAs are available with much higher credited rates compared to Bank CDs; and, as noted earlier, Annuity contracts grow on a tax deferred basis unlike most investments including Bank CDs.

 

Purchasing an FIA contract is most suitable when the investor has a longer time horizon and would like some exposure to market upside but without risk of losing principal.  The long-run return on FIAs tends to be higher than investments in MYGAs; and there is no need to worry about a steep market loss during the contract period.

Annuity Tax Advantages

Annuities can be purchased with non-qualified or tax-qualified funds.  With Non-Qualified Annuities, the amount invested comes from after-tax money; and only investment gains are taxed when money is withdrawn.  With Qualified Annuities -- like traditional IRAs -- the entire amount of money withdrawn is subject to taxation as the investment was funded initially with pre-tax dollars.

Tax deferral inherent in both Non-Qualified and Qualified Annuity products helps to accelerate asset accumulation through “Triple-Compounding”, which includes earning interest on the principal, interest on the interest, and interest on what would have been paid to taxes.

Distributions from an Annuity during the accumulation phase are taxed on what is known as a last in, first out (LIFO) basis.  This means withdrawals from an Annuity are made on earnings (gains) first, and the owner is taxed at regular income rates on the payments until all earnings have been distributed.

It should be noted that for people under the age 59 ½, withdrawals from an Annuity may be assessed a 10% penalty applicable to the taxable portion of the withdrawal.

Annuity Tax Advantages for Qualified Long Term Care Expenses

Fixed Annuities also can be purposed to protect against the high cost of Long-Term Care services.  One well-known product is a “Hybrid” Annuity/Long-Term Care Insurance policy, which can be funded with a single premium that buys a base policy plus a continuation of benefits rider to pay Long-Term Care expenses for additional time if the base funds are exhausted.  Limited health underwriting applies, so applicants who are not in good health may not be eligible to purchase a Hybrid product.

With Hybrid Annuities, distributions for Long-Term Care services are not subjected to a surrender penalty and are income tax free.  This would not be the case if paying for these costs from IRA or 401(K) assets.

Non-Underwritten Fixed Indexed Annuities with a “Boost” benefit for Long-Term Care

Insurance carriers also have begun offering non-underwritten Fixed Indexed Annuities featuring a “Boost” to income payout amounts when the annuitant cannot perform Activities of Daily Living (ADLs) or has cognitive impairment.  Here is an example of one company’s product design:

• Wellness Withdrawals can be triggered if you or your spouse cannot perform at least two of six Activities of Daily Living.  These withdrawals serve to double your guaranteed monthly payout and are available for up to five 5 consecutive policy years.
• Investment performance with the Annuity can be tied to the Barclays Atlas global diversified index, as well as S&P 500 (funds can be allocated in any proportion between the two).
• Penalty-free withdrawals can be taken for any reason up to 5% of the account value each year beginning on the first policy anniversary.

Summary

All Fixed Annuities offer safety of principal, tax-deferred growth, and innovative product designs not available with most other investments.  With Fixed Indexed Annuities, investors can participate in the upside of equity markets while avoiding the risk of losing invested principal.