Obamacare Program Update for Plan Year 2026 – Change is Coming!

 

Background

The Obamacare health care reform law, formally known as the Affordable Care Act (ACA), was created in 2010 by the federal government to extend health insurance coverage and reduce the financial burden of medical expenses for millions of uninsured adults. ACA plans were first issued effective January 1, 2014; and the enrollment process that started the prior October through the Health Insurance Marketplace was chaotic that first year, if it worked at all.

Obamacare expanded Medicaid services, created federal and state Marketplaces (currently about 20 states operate their own state-based enrollment platforms), prevented denial of medical coverage due to pre-existing conditions, and required plans to cover 10 Essential Health Benefits (EHBs) with a cap on maximum out-of-pocket expenses. Two types of federal subsidies were introduced based on projected household income and size: the Advance Premium Tax Credit (APTC), or monthly premium subsidy, and Cost Sharing Reductions (CSRs), which make plans more affordable by lowering the amount eligible enrollees must pay for deductibles and other out-of-pocket costs. CSRs apply only to applicants up to 250% of the Federal Poverty Level (FPL) enrolling into a Silver-level ACA plan.

Initially, the ACA faced legal challenges, and the program’s popularity was divided along political party lines. The ACA prevailed at the U.S. Supreme Court, which struck down the argument that the ACA was unconstitutional. However, Medicaid expansion was left up to the states.

Perhaps the most unpopular aspect of the ACA was a tax ‘penalty’ imposed on anyone without an exemption from the mandate to be covered by a health care plan (an ACA plan, commercial group health, Medicare, or other qualifying coverage). In late 2017, President Trump signed a tax bill zeroing out the tax penalty for coverage issued in 2018 and thereafter.

With the ACA tax penalty gone, Obamacare gained popularity across both political parties, despite some national insurers exiting (but later re-entering) sales of ACA plans. Democrats remained the main proponents, and then on March 11, 2021, Obamacare was given a major overhaul when President Biden signed the sweeping “American Rescue Plan Act” into law.

The American Rescue Plan created temporary enhanced subsidies that later were extended through the end of 2025 by the Inflation Reduction Act (signed by President Biden in 2022). Higher-income people over 400% FPL could receive a subsidy for the first time; plus, the subsidy amount was increased for lower-income people already eligible. Further, maximal subsidies were given to those who received unemployment benefits (for 2021), and the law forgave individuals from having to repay excess ACA premium subsidies at tax time (for 2020). Finally, subsidized COBRA coverage was made available for laid-off workers (from April to September of 2021), and the 14 states that had not yet expanded Medicaid were given new financial incentives to do so.

Higher income individuals and families went from being ineligible for any federal premium subsidy to potentially qualifying for substantially reduced premium (possibly half, or even less, of the total plan premium). The applicable threshold is if benchmark premiums exceed 8.5% of household income.

Under the American Rescue Plan, individuals and families under 400% FPL (already eligible for PTCs) gained access to higher subsidies. Notably, those with incomes between 100%-150% of the Federal Poverty Level could qualify for zero-premium coverage when electing a Silver-level benchmark plan (under prior law, they had to contribute premium up to approximately 2% of income).

ACA Provisions Set to Sunset on 12/31/2025

The enhanced premium subsidies detailed above are set to expire on 12/31/2025; and without an unforeseen extension, subsidized ACA coverage is about to become a lot more expensive. As noted, individuals and families projecting over 400% FPL will lose subsidy eligibility entirely.

A recent report published by the Center on Budget and Policy Priorities estimated that a family of four making $85,000 would pay an additional $313 in monthly premiums for coverage in 2026, as well as face a $900 increase in their cap on total out-of-pocket medical expenses.

For reference, the 2025 Federal Poverty Level guidelines (applicable for 2026 ACA plans) are shown below (figures are for the 48 contiguous states).

2025 FPL:

Family Size of 1: $15,650

Family Size of 2: $21,150

Family Size of 3: $26,650

Family Size of 4: $32,150

For example, a family of four projecting $140,000 total annual household income in 2026 is at the 435% FPL level, rendering them ineligible for any premium subsidy next year. Currently, if this family were enrolled in my home zip code, they would be eligible for a monthly premium subsidy of $554 ($6,648 for the full calendar year). So, absent any change in the current landscape, this family is facing an increase of more than $6,600 in total 2026 premiums – not including premium rate increases due to yearly inflation that are extremely likely to be implemented.

ACA Program “Pause” of Year-Round Enrollment SEP

In 2021, the U.S. Department of Health and Human Services (HHS) finalized a new special enrollment period (SEP) in states that use HealthCare.gov (optional for states that operate a state-based exchange), granting Year-Round enrollment in ACA plans for household income up to 150% FPL. That Year-Round enrollment provision was extended through 2025 under the 2022 Inflation Reduction Act and became permanent under a rule change HHS made in 2024.

Under this SEP, eligible applicants can enroll in an ACA plan through the Marketplace at any time during the year. Coverage takes effect on the first of the following month (this is true even in state-run exchanges as of 2025; prior to 2025, state-run exchanges could set mid-month enrollment deadlines for coverage to take effect the first of the following month).

In states that have expanded Medicaid, due to the very narrow range between 138% of the current year’s FPL (for Medicaid eligibility) and 150% of the prior year’s FPL, a small segment of the population is helped by this year-round enrollment SEP. In states not expanding Medicaid, more people are impacted (those qualifying for a federal subsidy and within 100%-150% FPL).

So, is this special Year-Round enrollment period truly permanent? No, of course not!

The Trump administration’s “Marketplace Integrity and Affordability” rule (effective August 25, 2025, for some provisions, and for other provisions, Plan Year 2026 or Plan Year 2027) has paused the Year-Round SEP for ACA enrollees at or below 150% FPL. HHS clarified the low-income SEP will once again be available, at the option of each exchange, for Plan Year 2027.

The rationale for this HHS rule is that the low-income SEP played a significant role in allowing fraudulent enrollments, and that it is potentially resulting in adverse selection, with people waiting until they need medical services to enroll in coverage.

Other ACA Program Changes

A host of other changes are approaching:

Deferred Action for Childhood Arrivals (DACA) recipients lose eligibility for coverage because of the Marketplace Integrity and Affordability rule. HHS estimates that 10,000 DACA recipients will lose Marketplace coverage, and 1,000 people will lose Basic Health Program (BHP) coverage. While DACA recipients became eligible for Marketplace coverage in November 2024, access to enroll in Marketplace plans was soon revoked in 19 states that sued to prevent DACA recipients from enrolling (DACA recipients in the rest of the country have continued to be eligible, but that will end in August 2025).

While the Marketplace currently requires income verification for some applications with income mismatches or missing IRS data, we should expect all Marketplace applicants to be required to provide proof of household income when attesting to household income that does not match information the exchange gets from its trusted data sources (such as the applicant's most recent year’s tax return).

The final rule also permanently removes the current automatic 60-day extension to the regular 90-day window that applicants are given to provide requested income documentation.

Like the low-income SEP rule change, the income verification change is temporary and applies only through the end of 2026.

Another change is directed towards ACA enrollees who take advantage of grace period provisions and, for example, look for ways to ‘skip’ a premium payment. Under the new rules, ACA plan enrollees who owe past-due premium to an insurer and apply for a new policy with that insurer must pay the past-due premium to effectuate the new policy (unless contrary to state laws and regulations). If the applicant does not remit the past-due premium, the insurer will be allowed to refuse to effectuate the new policy.

A technical change has been made, impacting maximum out-of-pocket limits. Starting in 2026, the new rule finalizes a methodology change for how maximum out-of-pocket limits are calculated, and the result is that the highest allowable out-of-pocket limit for a single individual will be $10,600 in 2026. Under the previous methodology, the Biden administration had finalized a 2026 maximum out-of-pocket limit of $10,150, but that has now been replaced.

The impact on ACA plan enrollees will be higher out-of-pocket costs and less generous premium subsidies. Since the IRS uses the same premium indexing methodology to determine the percentage of income that Marketplace enrollees pay in after-subsidy premiums, the new methodology will also have the effect of reducing premium subsidies (this is because it will increase the percentage of income that people pay in after-subsidy premiums).

A new administrative rule will impact enrollees in $0 (after-subsidy) premium plans who let their plans auto-renew in 2026. Auto-renewal of ACA plans is widely used, as evidenced by the enrollment period for 2025 coverage, in which more than half of the approximately 20 million people who renewed Marketplace coverage utilized auto-renewal. 

Under the new rules, if ACA enrollees with a 2025 $0 premium plan rely on auto-renewal for their 2026 coverage, they cannot be approved for $0 premium coverage until they reconfirm basic eligibility information in their Health Insurance Marketplace account. Until doing so, these enrollees will incur a minimum of $5 premium due each month.

Like some of the rules noted above, the auto-renewal change is temporary and applies only for the 2026 Plan Year (and it does not apply to state-run exchanges).

But wait, that’s not all! The budget bill enacted on July 4, 2025 (known as the One Big Beautiful Bill Act) calls for Marketplace auto-renewal to end altogether, starting with the 2028 Plan Year. Marketplace enrollees will have to verify their ongoing eligibility for coverage to ensure receipt of premium subsidies each year (Marketplaces will have the option to rely on automatic verification protocols for confirming information, when available from trusted data sources).

The final rule permanently removes “Bronze-to-Silver” auto-renewal, a protocol that Healthcare.gov adopted in 2024, allowing the Marketplace to switch a consumer from a Bronze plan to a Silver plan in some circumstances. Under this process, if an applicant is eligible for CSRs, enrolled in a Bronze plan, and a Silver plan is available in the same product category with the same provider network, and with equal or lesser after-subsidy premiums, the exchange can auto-renew the enrollee into the Silver plan (allowing the enrollee to take advantage of CSRs).

The final rule prohibits this protocol, starting with the 2026 Plan Year. Instead, the auto-renewal will keep the enrollee in their existing plan if it continues to be available. State-run exchanges can retain flexibility regarding their re-enrollment protocols, but only at the discretion of HHS.

Pre-enrollment SEP eligibility verification will be stricter for the 2026 Plan Year. In recent years, HealthCare.gov applicants enrolling under a SEP have only been required to provide proof of their SEP eligibility if the qualifying life event was the loss of other qualifying coverage. The final rule removes that limitation, allowing pre-enrollment verification for any qualifying life event.

The exchange will be required to conduct pre-enrollment SEP eligibility verification for at least 75% of new SEP enrollments. Originally, the proposed rule called for this to apply nationwide, but it was only finalized for states that use HealthCare.gov (state-run exchanges will continue to have the option to verify applicants’ SEP eligibility or not).

A shorter open enrollment period is on the way, but not until Plan Year 2027. HHS had initially proposed a shorter open enrollment period starting in the fall of 2025, but the final rule pushes this out until the fall of 2026. So, the open enrollment period for Plan Year 2026 is slated to begin on November 1, 2025, and continue through January 15, 2026, in most states. State-run exchanges will have the option to extend it even later than that, which several have historically done.

But starting in the fall of 2026, and for future years, open enrollment will be shorter:

In states that using healthcare.gov, it will run from November 1 to December 15.

State-run exchanges will have the option to extend open enrollment, but only within certain parameters:

• It must begin no later than November 1
• It can’t continue past December 31
• It can’t last longer than nine weeks.
• All policies selected during open enrollment will take effect January 1

The open enrollment period will continue to apply both “on-exchange” and “off-exchange” (ACA-compliant health insurance, without availability of federal subsidies, sold outside of the Marketplaces). 

Already this year, at least one large national insurer has decided to fold its hand and exit the Health Insurance Marketplaces for Plan Year 2026. CVS Health, owner of Aetna, recently announced that Aetna will withdraw all ACA individual and family plans at the end of 2025 (Aetna has cited persistent underperformance in its ACA exchange business, including substantial financial losses).

This isn’t Aetna’s first time pulling back from sales of ACA plans. After exiting in 2018 and coming back in 2022, the company is shifting gears once again. While it’s not possible to know for sure, it would seem Aetna is keenly interested in its profit margin, more so than serving the American public.

As an editorial comment, people who earn too much to receive federal subsidies have seen individual market health insurance premiums rise steeply, in some cases ten-fold, compared to a dozen years ago. That’s in addition to the continuing trend of higher deductibles, out-of-pocket caps, etc. Proponents of Obamacare tout the value of APTCs, CSRs, coverage of pre-existing conditions, children allowed on their parents’ plan until age 26, and other components of the program, which clearly have helped many people… but at what overall cost?  Administrative and regulatory burdens under Obamacare are enormous, and arguably those expenses would be much better directed toward actual medical care.

To conclude, I shall share a remark posted last month on a popular financial website by a commenter who is unknown to me, but apparently has more common sense than many of our government leaders: 

The Bronze Plan is complete rubbish. 60/40, high deductible, covers nothing really, unless you are hit by a bus. Let's put Congress on the Bronze Plan. They have a Mercedes Benz Plan right now. Time for them to feel the pain of the average citizen. That should cut some 'government waste.' 

Until next time,

 

Andrew Herman, President

AH Insurance Services, Inc.

 

 

 

 

 

 

Highlights of the 2023 Medicare Trustees Report

The 2023 Medicare Trustees Report spelled good news for the program’s short-term viability but should not delay Congress from seeking a long-term solution that protects the health care of older Americans, experts agreed.

As part of a webinar this month sponsored by the American Academy of Actuaries, the Centers for Medicare & Medicaid Services’ (CMS) Chief Actuary Paul Spitalnik reported on the program’s finances as detailed in the report.  Three other panelists shared insights on how Medicare’s Hospital Insurance trust fund might remain solvent beyond the currently projected exhaustion date, and more generally how to make the program more sustainable in the long-term.

For background, the Medicare Program consists of multiple parts:

Part A - Covers inpatient hospital and skilled nursing care, post-institutional home health care, and hospice care.

Part A has about 65 million enrollees and is funded primarily by Medicare payroll taxes (1.45% paid by employees and employers, each; 2.90% paid by self-employed; additional .90% paid by high-income earners; and no cap on annual taxable earnings as is the case with the Social Security payroll tax).  Calendar year 2022 expenditures were $342.7 billion.

Part B - Covers physician services, outpatient hospital, diagnostic testing, durable medical equipment, ambulance, some additional services such as general home health care, and physician-administered drugs.

Part B has about 60 million enrollees and is funded approximately 30% by monthly premiums paid by Medicare beneficiaries ($164.90 standard premium for 2023 plus additional premiums charged to high-income earners) and 70% by government contributions coming from general taxation.  A small portion of revenue stems from fees imposed on drug manufacturers.  Calendar year 2022 expenditures were $436.7 billion.

Part D - Covers prescription drugs.

Part D has slightly over 50 million enrollees and is funded by premiums paid by Medicare beneficiaries (average monthly premium is about $32, funding about 15% of total revenues), additional premiums charged to high-income earners, general federal revenues, and state transfers.  Calendar year 2022 expenditures were $125.7 billion.

Part C - Medicare Advantage program.

The Part C (Medicare Advantage) program is an option for Medicare beneficiaries that are enrolled in both Part A and Part B and live in the service area where the private plan of choice is offered.  These plans are provided on a calendar-year basis by plan sponsors contracted with Medicare.  Medicare Advantage plans, which typically include Part D coverage, now cover close to half of Medicare beneficiaries nationwide.

The Medicare program has grown dramatically in both enrollment and paid benefits over the past four decades.  In 1982, Medicare benefits totaled $46.6 billion, or 1.4% of the nation’s gross domestic product (GDP).  The 2023 report found that had grown to $911.2 billion overall, or 3.6% of GDP.

Key highlights of the 2023 Medicare Trustees report are as follows:

The Part A Hospital Insurance trust fund (a long term reserve that has been set aside to cover future costs) is projected to be depleted by the year 2031, three years later than forecast in last year's report.  This is great news for the program's short-term viability, yet the eventual financial shortfall will need to be addressed to avoid reduction in program benefits.

The Inflation Reduction Act of 2022, intended to tamp down inflation and reduce the federal budget deficit, will impact Medicare in several ways:

• Reduces government expenditures for physician and outpatient services covered under Part B

• Increases expenditures for Part D through 2030

• Decreases Part D expenditures beginning in 2031

In the long-term, experts expect the Inflation Reduction Act of 2022 will be beneficial to the financial health of the Medicare program.

While the COVID-19 pandemic caused higher costs for acute treatment, those costs have been more than offset by deaths of seriously ill Medicare beneficiaries as well as reduced spending for non-COVID care.

The growing number of members portends long-term challenges.  James Mathews, executive director of the Medicare Payment Advisory Commission (MedPAC), noted that the number of program beneficiaries is expected to increase from the current 65 million to 80 million in the next decade.  At the same time, the number of workers supporting those on Medicare is projected to decrease from 4 per enrollee to 2.5 per enrollee.

To control costs, MedPAC is advising cuts to post-acute care payments in 2024 as well as reducing Medicare Advantage plan payments in excess of payments made to Original Medicare.  MedPAC also continues to advocate for reductions in Part D plans’ reliance on cost-based reinsurance and improved incentives to manage benefits.  However, Mathews said a hike in hospital payment rates is necessary to cover rising hospital costs.

Marilyn Serafini, executive director of the Bipartisan Policy Center’s Health Program, said it is essential that Congress seek out a bipartisan solution that will keep Medicare fully functioning.  Her group is currently in the midst of crafting recommendations to improve the program in the long-term.

It is developing a set of principles to guide policymakers, including improving the enrollment process, simplifying and improving the traditional Medicare benefit, promoting price competition in both Original Medicare and Medicare Advantage, and re-evaluating the trust fund structure and accountability mechanisms.

It is extremely likely additional funds will be needed to support growing Medicare enrollment.  Bowen Garrett, senior health fellow at the Urban Institute, noted that Congress in the past has always acted when the program neared fund exhaustion—as is happening now.  That’s for good reason, as doing nothing “would be a significant stressor on providers.”

The Urban Institute has examined 12 different options to raise revenues, ranging from an across-the-board increase in payroll or income taxes, to taxing health care benefits, or targeting solutions that would only impact more wealthy Americans or businesses.

Regardless of the path taken, there was broad agreement for congressional action in the near future to save Medicare for future generations.  “Demographics are pretty clear,” CMS Chief Actuary Spitalnic said.  “It is a question of when it will be depleted.”

Until next time,

Andrew Herman, President

AH Insurance Services, Inc.

Federal Long-Term Care WISH Act Introduced in U.S. House of Representatives

Earlier this week, U.S. Representative Thomas Suozzi introduced the WISH Act (H.R. 4289) to create a public catastrophic Long-Term Care Insurance program funded by a new payroll tax.  The acronym stands for "Well-Being Insurance for Seniors to be at Home Act" (click here to read H.R. 4289).

The program is to be financed by a payroll tax of 0.3 percent for workers and 0.3 percent for employers; and it would pay out a monthly cash benefit of about $3,600 (indexed to inflation).  This amount is estimated to pay for about six hours of in-home care daily.  Family members would not be eligible to receive payment; and the individual entitled to the benefit must comply with State and Federal laws relating to minimum wage and withholding of payroll taxes and other employment-related taxes.

The following chart shows how 2021 payroll taxes would be increased by this new program:

Including the proposed Long-Term Care (LTC) Tax, W-2 employees would pay total payroll taxes of 7.95% with self-employed workers paying 15.9% (employee plus employer portion).

The WISH Act conditions benefit eligibility on reaching full Social Security retirement age, and having a severe cognitive impairment or needing assistance in at least two activities of daily living (ADLs).  Full benefits would be paid to those who contributed to the program for at least 10 years (people would be eligible for partial benefits once they paid into the system for six quarters).

The program proposes to pay benefits after an enrollee required a high level of care for a varying amount of time based on a beneficiary’s average indexed earnings.  Those with the lowest incomes could receive benefits after one year; a median income worker would be eligible after twenty months; and the highest income workers would begin to receive benefits after five years.

Funding for the WISH Act is not limited to the LTC Tax noted above.  In addition, there is appropriated to the Federal Long-Term Care Trust Fund out of moneys in the Treasury:  $12,000,000 for program establishment in each of Fiscal Years 2022-2024; and another $50,000,000 for educating the public.

An immediate question that comes to mind is whether it would be allowed to opt out of the federal program, for instance if a taxpayer already owns private Long-Term Care Insurance.  It should be noted that an opt out provision was included in a Washington State program passed into law earlier this year.

The new Washington State Long-Term Care program mandates public Long-Term Care benefits for Washington residents.  The Long-Term Care Act was created to reduce pressure on the Medicaid system and is paid for by 0.58% tax on employee wages.  Under current law, residents have one opportunity to opt out of this tax by having private Long-Term Care Insurance in place by November 1st, 2021.

The WISH Act's sponsor said he is hopeful the program also will have an effect on the private Long-Term Care Insurance market, increasing opportunities for insurance companies and their agents to offer Long-Term Care Insurance to supplement the federal program.  That just may be WISH-ful thinking.

Until next time,

Andrew Herman, President

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.

SECURE Act Impact on U.S. Retirement System

The Setting Every Community Up for Retirement Enhancement (SECURE) Act went into effect on January 1, 2020 and makes a notable impact on our nation's retirement system.  Three important changes are outlined below:

1) The new age for RMDs is now 72

Under the SECURE Act, the "begin date" to start taking RMDs from your pretax retirement plan accounts and IRAs is the year you turn 72 (the previous age was 70½).

2) Age limits for contributing to traditional IRAs are eliminated

For tax year 2020 and beyond, the law removes the age limit at which you can contribute to a traditional IRA.  Prior to this change, you could not make a traditional IRA contribution after age 70½ (although you can contribute to a Roth IRA if you meet the income limitations).  The new law allows anyone who is working and has earned income to contribute to a traditional IRA regardless of age.

3) Non-Spouse beneficiaries who inherit a retirement account must withdraw the entire balance within 10 years

Under prior rules, beneficiaries could elect a "stretch IRA" planning strategy which allowed non-spouse heirs inheriting a pretax retirement plan or IRA to stretch withdrawals over their life expectancy.  That meant younger heirs could potentially leave much of that money growing tax-deferred for decades.

Now, non-spouse heirs must empty inherited accounts within 10 years following the year of the owner's death.  Heirs who remain under the old rules include spouses; the disabled or chronically ill; minor children (not grandchildren) generally until the age of 18, and beneficiaries who are not more than 10 years younger than the deceased.  The prior rules apply if you inherited an account before 2020.

Until next time,

Andrew Herman

Questions and Answers about Health Care Forms 1095-A, 1095-B, and 1095-C

This Post re-prints information from the IRS website published on January 11, 2016.  Here is a Link to the Source Page:

https://www.irs.gov/Affordable-Care-Act/Questions-and-Answers-about-Health-Care-Information-Forms-for-Individuals

We suggest you consult with a Tax Accountant to be sure that your 2015 health insurance premiums -- in particular any federal health insurance premium subsidies received -- are reported and reconciled as required on your 2015 tax return.

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Q&A:

1. Will I receive any new health care tax forms in 2016 to help me complete my tax return?

Starting early in 2016, you may receive one or more forms providing information about the health care coverage that you had or were offered during the previous year.  Much like Form W-2 and Form 1099, which include information about the income you received, these new health care forms provide information that you may need when you file your individual income tax return.  Also like Forms W-2 and 1099, these new forms will be provided to the IRS by the entity that provides the form to you.

The new forms are:

·        Form 1095-A, Health Insurance Marketplace Statement.  The Health Insurance Marketplace (Marketplace) sends this form to individuals who enrolled in coverage there, with information about the coverage, who was covered, and when.

·        Form 1095-B, Health Coverage.  Health insurance providers (for example, health insurance companies) send this form to individuals they cover, with information about who was covered and when.

·        Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.  Certain employers send this form to certain employees, with information about what coverage the employer offered. Employers that offer health coverage referred to as “self-insured coverage” send this form to individuals they cover, with information about who was covered and when.

2. When will I receive these health care tax forms?

The deadline for the Marketplace to provide Form 1095-A is February 1, 2016.  The deadline for insurers, other coverage providers and certain employers to provide Forms 1095-B and 1095-C has been extended to March 31, 2016.  Individual taxpayers will generally not be affected by this extension and should file their returns as they normally would.
 

3. Must I wait to file until I receive these forms?

If you are expecting to receive a Form 1095-A, you should wait to file your 2015 income tax return until you receive that form.  However, it is not necessary to wait for Forms 1095-B or 1095-C in order to file.

Some taxpayers may not receive a Form 1095-B or Form 1095-C by the time they are ready to file their 2015 tax return.  While the information on these forms may assist in preparing a return, they are not required.  Individual taxpayers will generally not be affected by this extension and should file their returns as they normally would.

Like last year, taxpayers can prepare and file their returns using other information about their health insurance.  You should not attach any of these forms to your tax return.

4. What are the health care tax forms that I might receive and how do I use them?

Health Care Form	Sent To	Sent By	What to do with this form
Form 1095-A, Health Insurance Marketplace Statement	Individuals who enrolled in health coverage for themselves or their family members through the Marketplace	Marketplace	This form provides information about your Marketplace coverage. Use Form 1095-A to complete Form 8962 and reconcile advance payments of the premium tax credit or claim the premium tax credit on your tax return. Use Form 1095-A for information on whether you and your family members had coverage that satisfies the individual shared responsibility provision. ·       If Form 1095-A shows coverage for you and everyone in your family for the entire year, check the full-year coverage box on your tax return. ·       If there are months when you or your family members did not have coverage, determine if you qualify for an exemption or must make an individual shared responsibility payment. Do not attach Form 1095-A to your tax return – keep it with your tax records.
Form 1095-B, Health Coverage	Individuals who had health coverage for themselves or their family members that is not reported on Form 1095-A or Form 1095-C.	Health Coverage Providers – ·       Insurance companies outside the Marketplace ·       Government agencies such as Medicare or CHIP ·       Employers who provide certain kinds of health coverage (sometimes referred to as “self-insured coverage”) but are not required to send Form 1095-C (see below). ·       Other coverage providers	This form provides information about your health coverage. Use Form 1095-B for information on whether you and your family members had health coverage that satisfies the individual shared responsibility provision. ·       If Form 1095-B shows coverage for you and everyone in your family for the entire year, check the full-year coverage box on your tax return. ·       If there are months when you or your family members did not have coverage, determine if you qualify for an exemption or must make an individual shared responsibility payment. Do not attach Form 1095-B to your tax return - keep it with your tax records.
Form 1095-C, Employer-Provided Health Insurance Offer and Coverage	Certain employees of applicable large employers (See next column).	Applicable large employers– generally those with 50 or more full-time employees, including full-time equivalent employees	Form 1095-C provides information about the health coverage offered by your employer and, in some cases, about whether you enrolled in this coverage. Use Form 1095-C to help determine your eligibility for the premium tax credit. ·       If you enrolled in a health plan in the Marketplace, you may need the information in Part II of Form 1095-C to help determine your eligibility for the premium tax credit. ·       If you did not enroll in a health plan in the Marketplace, the information in Part II of your Form 1095-C is not relevant to you. Use Form 1095-C for information on whether you or any family members enrolled in certain kinds of coverage offered by your employer (sometimes referred to as “self-insured coverage”). ·       If Form 1095-C shows coverage for you and everyone in your family for the entire year, check the full-year coverage box on your tax return.  ·       If there are months when you or your family members did not have coverage, determine if you qualify for an exemption or must make an individual shared responsibility payment. Do not attach Form 1095-C to your tax return - keep it with your tax records.

5. How will I receive these forms?

The Marketplace, health coverage providers and applicable large employers will mail (or hand deliver) these forms to you or provide them electronically to you, if you have consented to electronic delivery.

6. My employer or health coverage provider has suggested that I opt to receive these forms electronically rather than on paper.  Are they allowed to ask me that? 

Yes. Employers and health coverage providers may ask for your consent to receive the forms electronically. This is entirely acceptable and may be more convenient for you. Electronic forms provide the same information that is provided in the paper forms.

7. Will I get at least one form?

Maybe.  If you were enrolled in health coverage for 2015, you should receive a Form 1095-A, 1095-B, or 1095-C.  In addition, if you were an employee of an employer that was an applicable large employer in 2015, you may receive a Form 1095-C.  If you don’t fall in either of these categories, you won’t receive a form.

8. Will I get more than one form?

Maybe.  You are likely to get more than one form if you had coverage from more than one coverage provider or if you worked for more than one employer that offered coverage. You are also likely to get more than one form if you changed coverage or employers during the year or if different members of your family received coverage from different coverage providers.

The following examples illustrate when you may get more than one Form 1095 and what to do with the information on those forms.

Example 1:  You are single with two dependent children.  At the beginning of 2015, you were unemployed, and you and your children were enrolled in coverage through the Marketplace.  You received the benefit of advance payments of the premium tax credit to help pay for your coverage.  In August of 2015, you started working 40 hours per week for an employer with 300 employees (an applicable large employer) that offered health insurance coverage to you and your children.  However, that offer of coverage was considered unaffordable to you for purposes of the premium tax credit, so you did not enroll in it and instead continued your Marketplace coverage with advance payments of the premium tax credit.  Early in 2016, you receive Form 1095-A (from the Marketplace) and Form 1095-C (from your employer).

When you complete Form 8962, Premium Tax Credit, you will use the information on Form 1095-A to reconcile advance payments of the premium tax credit and to verify that you had health coverage for the entire year.  You will use Form 1095-C to verify that your employer coverage was unaffordable for you.  You will not attach Form 1095-A or 1095-C to your return, but you should keep these forms with your tax records.

Example 2:  You are single with no dependents. At the beginning of 2015, you were employed by employer A, which has 20 employees (and therefore is not an applicable large employer).  You had coverage through A’s employer-sponsored plan, which is insurance that A purchases from health insurance issuer Q (i.e., not a “self-insured plan”).  In June of 2015, you changed jobs and started working 40 hours per week for employer B, which has 500 employees (and so is an applicable large employer).  You immediately began receiving coverage through that employer’s plan, which is insurance it purchases from insurance issuer R.  Early in 2016, both insurance companies will send you a Form 1095-B providing information about the coverage in which you were enrolled.  You also will receive a Form 1095-C from employer B, the applicable large employer, providing information about the health coverage B offered you.

You will use the information on Forms 1095-B to verify that you had health coverage for each month during the year and will check the full-year coverage box on your tax return.  You will not need to use Form 1095-C to help complete your return because the information about the offer of health coverage made by your employer relates to whether you are eligible for the premium tax credit and you cannot get a premium tax credit if you were not enrolled in a health plan in the Marketplace.  You will not attach Form 1095-B or Form 1095-C to your tax return, but you should keep both forms with your tax records.

9. Will I get a Form 1095-C from each of my employers?

Not necessarily.  You will only receive a Form 1095-C from your employer if that employer is an applicable large employer, meaning it had 50 or more full-time employees (including full-time equivalent employees) in the year before the year to which the form relates.  Most employers have fewer than 50 employees and therefore are not applicable large employers required to provide Form 1095-C to their full-time employees.

Even if your employer is an applicable large employer, you will only receive a Form 1095-C for that employer if you were a full-time employee for that employer for at least one month of the year or if you are enrolled in an applicable large employer’s self-insured health plan, even if you are a part-time employee. 

10. How are the forms similar?

·       They all provide information about your health coverage during the prior year.

·       They are all used to determine if you, your spouse and your dependents had health coverage for the entire year and if not, for which months you did have coverage.  (The Form 1095-C includes this information only if your employer is an applicable large employer and the coverage you enrolled in was a certain kind of coverage referred to as “self-insured coverage”).

·       None of these forms should be filed with your tax return; they should be kept for your records with your other tax documents.

11. How are the forms different?

·         The forms are provided by different entities.         

o    Form 1095-A, Health Insurance Marketplace Statement, is provided by the Marketplace to individuals who enrolled or who have enrolled a family member in health coverage through the Marketplace.

o    Form 1095-B, Health Coverage, is provided by insurance companies and other coverage providers.  However, if your coverage was insurance purchased through the Marketplace or was a type of coverage referred to as “self-insured coverage” that was provided by an applicable large employer, you will receive a different form.

o    Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, is issued by applicable large employers to their full-time employees and, in some cases, to other employees.

·      The forms are provided to different groups of people.

·       Form 1095-A - Only individuals who enroll in coverage through the Marketplace will get this form.

·       Form 1095-B – Individuals who have health coverage outside of the Marketplace will get this form (except for employees of applicable large employers that provide self-insured coverage, who will receive Form 1095-C instead).

·       Form 1095-C - Individuals who work full-time for applicable large employers will get this form.  Also, part-time employees also will get this form if they enroll in self-insured coverage provided by an applicable large employer.

·       The forms contain some different information.  Form 1095-A, Form 1095-B, and some Forms 1095-C show who in your family enrolled in health coverage and for what months. Form 1095-A also provides premium information and other information you will need to reconcile advance payments of premium tax credit and claim the premium tax credit on Form 8962.  And Form 1095-C shows coverage that your employer offered to you even if you chose not to take that coverage.

12. What do I need to do with these forms?

·      You will use the information on these forms to verify that you, your spouse and any dependents had coverage for each month during the year.

·       Like last year, if you and your family members had minimum essential coverage for every month of the year, you will check a box on your return to report that coverage.  If you or any family members did not have coverage for the entire year, a coverage exemption may apply for the months without coverage.  If you or any family members did not have coverage or an exemption, you may have to make an individual shared responsibility payment.

·       If you or anyone in your family receives a Form 1095-A from the Marketplace, you will use the information on the form to complete a Form 8962 to reconcile any advance payments of the premium tax credit or to claim the premium tax credit.
·       Do not file these forms with your tax return.  Keep them in your records with your other important tax documents.

13. What should I do if:

·         I have a question about the form I received,

·         I think I should have gotten a form but did not get it,

·         I need a replacement form, or

·         I believe the form I received has an error?

In any of these situations, you should contact the provider of the form (or the entity that you think should have provided you a form, if you think you should have gotten a form but did not get it):

·       For questions about the Form 1095-A, contact the Marketplace.

·       For questions about the Form 1095-B, contact the coverage provider (see line 18 of the Form 1095-B for a contact telephone number).

·       For questions about the Form 1095-C, contact your employer (see line 10 of Form 1095-C for a contact telephone number).

14. Can I file my tax return if I have not received any or all of these forms?

If you enrolled in coverage through the Marketplace you will need the information on Form 1095-A to complete Form 8962 to reconcile any advance payments of the premium tax credit or claim the premium tax credit, and to file a complete and accurate tax return.  If you need a copy of your Form 1095-A, you should go to HealthCare.gov or your state Marketplace website and log into your Marketplace account, or call your Marketplace call center.  Although information from the Form 1095-C – information about an offer of employer provided coverage -  can assist you in determining eligibility for the premium tax credit, it is not necessary to have Form 1095-C to file your return.  See Publication 974 for additional information on claiming the premium tax credit. 

You do not have to wait for either Form 1095-B or 1095-C from your coverage provider or employer to file your individual income tax return.  You can use other forms of documentation, in lieu of the Form 1095 information returns to prepare your tax return.  Other forms of documentation that would provide proof of your insurance coverage include:

·       insurance cards,

·       explanation of benefits

·       statements from your insurer,

·       W-2 or payroll statements reflecting health insurance deductions,

·       records of advance payments of the premium tax credit and

·       other statements indicating that you, or a member of your family, had health care coverage.

If you and your entire family were covered for the entire year, you may check the full-year coverage box on your return.  If you or your family members did not have coverage for one or more months of the calendar year, you may claim an exemption or make an individual shared responsibility payment.

You will not need to send the IRS proof of your health coverage.  However, you should keep any documentation with your other tax records.  This includes records of your family’s employer-provided coverage, premiums paid, and type of coverage.

15. Am I required to file a tax return if I receive one of these forms?

If you receive a Form 1095-A, Health Insurance Marketplace Statement, showing that advance payments of the premium tax credit were paid for coverage for you or your family member, you generally must file an individual income tax return and submit a Form 8962 to reconcile those advance payments, even if you would not otherwise be required to file a tax return.  You also must file an individual income tax return and submit a Form 8962 to claim the premium tax credit, even if no advance payments of the premium tax credit were made for your coverage.  For more information, see the instructions to Form 8962,

However, you are not required to file a tax return solely because you received a Form 1095-B or a Form 1095-C.  For example, if you are enrolled in Medicaid you will receive a Form 1095-B.  If you do not have a tax filing requirement, you do not have to file a tax return solely because you received the Form 1095-B reflecting your Medicaid coverage.

The health care law tax filing requirements are the same as last year. 

·       If you enrolled in coverage through the Marketplace, you must file a tax return and reconcile any advance payments of the premium tax credit that were paid on your behalf. 

·       If you have a filing requirement and everyone in your family had coverage for the entire year, you should check the full-year coverage box on your tax return. 

·       If you or any family members did not have coverage for the entire year, you should claim any applicable coverage exemption or make an individual shared responsibility payment.

16. Should I attach Form 1095-A, 1095-B or 1095-C to my tax return?

No.  Although you may use the information on the forms to help complete your tax return, these forms should not be attached to your return or sent to the IRS.  The issuers of the forms are required to send the information to the IRS separately. You should keep the forms for your records with your other important tax documents.

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Until next time,

Andrew Herman, President
AH Insurance Services, Inc.