Health care law changes the way we look at personal financial security

February 1, 2016 marked a milestone in the field of tax and financial planning for middle income Americans. The way that we will look at our health care planning and financial liabilities begins to shift today and perhaps forever.

Yesterday the open enrollment season for the  Obamacare health insurance exchanges closed leaving about 1 in 8 Americans without health insurance coverage. Some of those could not find affordable coverage. “Affordable coverage” is legally defined as insurance that cost 8% or less of their household income yet many believe that coverage is not affordable at a much lower price level assessed by their own opinion. Insurance limits an individual’s uncovered medical bills to less than $15,000 for the year – a hefty but not catastrophic risk. Those without insurance face the possibility of unlimited liability of assets and future income. Until yesterday, the primary response to individuals facing dramatic  health care costs was simply to find better coverage. In some cases this meant spending up to 20% or more of household income on health care expenses but both the financial problems and the solutions were easily defined. The important point was that there was a solution available – a safety net – and the costs were known even if unpalatable. Today that is no longer the case.

Effective today, planning for health care liabilities  becomes the #1 factor in tax and financial planning for many middle income Americans. No longer is a definable solution immediately available to for up to 30 million Americans who may face catastrophic medical expenses. Millions more who lose coverage during this year for a wide range of reasons (employment changes, business failures, leaving parents’ policy, divorce, moving, etc.) will find no palatable options immediately available. The issues surrounding state and commercial collection activities for unpaid medical bills and the risk of levies on real property become more important.

Some issues to consider:

• There is no real world evidence supporting the belief that having health insurance significantly reduces the risk of medical bankruptcy for working class Americans who face catastrophic medical costs.
• Millions of Americans people who bought their own coverage outside the exchange do not have “minimal essential coverage” (even though they think they do).
• Millions of Americans who get coverage from their employer do not have “minimal essential coverage” (even though they may think they do).
• Millions of Americans without minimal essential coverage face catastrophic financial risks if they need medical treatment.
• States are increasingly likely to levy real estate to recover medical expense payments of people without minimum essential coverage. States like Idaho also levy personal property.
• Commercial collection efforts against individuals without minimal essential coverage are intensified. People without minimal essential coverage should not expect any leniency from the legal system.
• Employers who cannot prove that they provided notice of coverage options risk being held financially responsible for medical bills of employees without minimal essential coverage.
• Tens of thousands of small  businesses are subject to health care excise taxes (even though they do not realize it).
• Professional tax preparers who do not recognize excise tax liability of business clients may be subject to substantial underreporting penalties.
• The tax penalty (actually ” individual shared responsibility provision”) for not having minimal essential coverage jumps to an average of about $1,000 per applicable tax filer in 2016, significantly higher than last year.

Health care planning clearly moves to a seat in the front row in tax and financial planning. Planners and advisers will continue to struggle with a system that seems unwieldy and frustrating. Some portion of our clients will not be successful in finding acceptable solutions to their health care challenges. This will leading to an increase in anguish, financial struggle, legal battles and bankruptcies. Advisers need to accept that we can only do our best within the existing system and recognize that sometimes that will not be enough for our clients.

Author’s note: I published my first article about the role of health insurance in financial planning in a local Philadelphia area newspaper in 1987. Since then I’ve focused on keeping health care planning in a central role in the planning process to ensure the overall financial security of my small business and individual clients.