The decision of the Supreme Court on the constitutionality of the Patient Protection and Affordable Care Act is not going to make our conversations with our clients any simpler, even if it resolves some of the overall economic uncertainty that has made these conversations so difficult of late.
Americans now face a new levy, which is the antithesis of a consumption tax. Rather than charging citizens when they consume something considered bad for them (think New York City Mayor Michael Bloomberg and super-size sodas), the health care law has been constitutionally blessed to assess a tax on people who do not consume something considered good for them: namely health insurance.
For planners to the affluent or ultra rich or to those with existing employer-provided insurance, this new tax will not need a lot of analysis or explanation since it primarily hits those currently without coverage whose household incomes are below $90,000. Further, if the tax works the way it should, it will rarely be assessed.
But clients, like nature, abhor a vacuum, and while the anti-consumption tax is no big whoop, we still have a lot of explaining to do. The Supreme Court decision looks and feels monumental to most Americans, even if it just confirmed the status quo, and our clients will want to know its likely impact on their budgets, their retirement planning, and the economy.
Here are some of the topics planners can focus on:
Medical and Insurance Costs
One thing seems clear, they are a big component of our clients’ budgets, and are likely to increase. While the intent of the ACA was to make health care affordable, at most its impact will be to make these costs more affordable than they otherwise would have been in the absence of legislation, but certainly not less. We need to get our clients to accept and prepare for this new reality. Perhaps more competition and a bigger insured base will contain the increases of health care insurance premiums, but as a society we will still be consuming more and more health care.
We need to impress on our clients the true reason for insurance: namely to cover losses that they cannot afford, as opposed to simply paying for costs they want to avoid. Health savings accounts, tied to high deductible plans, are still a great way to self-insure those growing costs. What’s more they can be invested in providers of medical products and services, as a way to hedge those rising health care costs.
Single-pay long term care policies, with guarantees that no further premiums can be assessed, are also worth a second-look, though we all know in the real world that guarantees are never truly risk-free. But COLA riders on daily benefits do seem a definite must.
Planning for the Kids
We’ve all discovered in the past several years that so many of our affluent clients have poor kids that they are supporting in one way or another, to the detriment of their own retirement savings. Many have taken advantage of the health legislation’s provision that allows them to put their dependent adult kids under the age of 26 on their own policies. Now may be a good time for us urge our clients to set these kids ìfreeî and off the family payroll, since at least in the area of health care coverage, these adult children will be able to get and pay for insurance even without jobs.
Short-Term Planning Now
The most important implication of the Supreme Court decision for high-income clients is that the 0.9% add-on to the payroll tax, and the 3.8% surcharge on investment income is now certain to take effect in 2013. Many affected taxpayers have delayed dealing with the implications of these costs till the outcome of the presidential election, where a far larger possible cost hangs in the balance: namely the expiration of the Bush-era tax cuts. Planners should be getting their high-earning clients to think about the benefits of modified adjusted gross income planning now as a strategy to mitigate the certain health care law assessments, and as a possible preparation for the additional tax hikes to come. This could include shifting income into the current year, doing a Roth IRA conversion before year-end, or distributing income over several tax years through installment sales. Portfolio reviews are also in order, both to minimize the type of investment income that will be subject to the health care law surcharge, as well as to take preemptive action against a possible increase in capital gains and dividend rates that could kick in if the Bush tax cuts are not extended. We need to tell our clients that the time from now until November is the dress rehearsal to get ready for when the real curtain may drop in 2013. Because of the certainty of the health care law taxes, there is nothing to be lost in getting thus prepared.
The True Value of Long-Term Planning
One thing is for sure, our clients will need us by their sides for a long time to come, to help them prepare for and respond to what will be a huge seismic shift in the American economy as it responds to the legislation. It’s important that we reframe their expectations accordingly, to respond to this as well as other new realities of our economy. Messages like ìless house, more healthî or ìdon’t let the tax tail wag the financial dogî would not be amiss. Helping them to put investing in its place, as only one of the many tools that can improve their retirement outlook, is also important too.
What the health care law will mean in terms of the amount, quality and costs of the health care we as a nation will consume is still highly speculative. But this provides us a real opportunity once again to drive home a fundamental principle of our profession: that the value of financial planning is not in eliminating uncertainty – that simply cannot be done, nor is it even desirable. Instead, helping clients to be ready for and to manage uncertainty is what we are all about.
Eleanor Blayney is the CFP Board consumer advocate and president of Directions for Women.