Most Americans are financially unprepared to endure a health problem that renders them incapable of working. Strangely, surveys on the subject show they actually know they are unprepared. Evidently there is a denial habit at work here intertwined with concerns about the cost of long-term disability (LTD) insurance.

It’s important to keep in mind when approaching the topic that while the probability of becoming disabled is small, the potential loss is extremely large. Self-insurance is not a reasonable option, and yet, most people don’t act in their own interests, or, equally problematic, when they do, they overreact. A 2005 study published by the National Bureau of Economic Research reports that when the typical consumer does confront the potential implications of a disabling condition, he or she is often willing to pay a premium that far exceeds the actual risk. If you share these denial and overreaction habits, here are some helpful facts and options to consider.

The good news for CPAs is that a fairly easy fix can be found close at hand. Relatively inexpensive individual and group LTD policies are available to CPAs and firms that can go a long way toward relieving the financial burden of not being able to earn a living due to a disabling condition.

CPA firms are “preferred risks” for disability carriers, so the rates they pay are among the lowest for any occupation. Costs vary by the age of the insured or the insured population but generally range from one-half to 1.5 percent of covered payroll for replacing from 60 percent to two-thirds of an employee’s salary up to $10,000 a month. When figuring potential replacement income, keep in mind that the benefits of group LTD plans are coordinated with State Disability, Social Security Disability, and Workers Compensation, so that the benefits of the policy represent the difference between the social benefits and the net replacement level guaranteed by the policy.

If you’re a younger CPA, you might want to consider purchasing individual disability coverage that you can keep throughout your professional career. By securing a non-cancellable disability plan with a top-rated insurance carrier while still young, you can “insure your insurability.” Good individual policies contain cost-of-living increases and options to purchase future coverage without further evidence of insurability. Policies cost from one to four percent of gross earnings depending on plan features. Once the policy is issued, rates can’t change unless the policyholder exercises additional options/coverage. Since your professional life is mobile, why not make your essential benefits mobile as well?

If you’re a baby boomer, whether just turning 50 or older, there may be time to revamp your disability insurance plans. You can consider a new group plan or individual plan, or you might want to alter your current coverage to provide tax-free disability benefits by paying premiums with after-tax dollars.

Finally, if you’re managing benefit packages for your firm, some creative planning will allow you to provide a combination of group and individual plans that will maximize your employees’ benefits.

—Doug Hessel is Program Director, CalCPA ProtectPlus Ancillary Products at Hover Insurance Services. You can contact him at dhessel@hoverinsurance.com

A popular feature in comprehensive benefits packages, long-term disability insurance provides replacement salaries for employees who suffer from an extended illness or injury. While many employers carry an inexpensive group LTD plan as a matter of course, only some take advantage of an IRS ruling that would allow disabled employees to receive their disability income tax free. This failure can prove costly for employees and represents a lost opportunity for savings by employers as well.

Maximizing Benefits

The IRS ruling in question (Revenue Ruling 2004-55) clarifies the distinction between before-tax and after-tax benefits as it applies to disability income, and it provides a mechanism for distinguishing between them. Simply stated, if an employer pays 100 percent of an employee’s premium, the salary replacement benefits to the employee are taxable. Conversely, if the employer increases an employee’s pay to cover the cost of LTD and then deducts the premium from the employee’s check, the benefits are tax free.

Of course, this change means that the employer and employee incur some extra expenses—an increased salary will mean increased FICA, SDI, and so forth—but these are relatively small expenses. Consider the difference in benefits. An employee who is earning $60,000 a year and is covered by an employer-paid LTD plan offering a two-thirds salary replacement, will receive $3,350 a month if disabled. Assuming he or she has a 16 percent effective tax rate, that net replacement salary is reduced to $2,814. That’s a cost of more than $500 a month as opposed to the few dollars a month that employer and employee would have paid in compensation-based taxes.

Moreover, employers who are looking for savings should note that a less expensive after-tax LTD plan—providing only 60 percent salary replacement rather than the two-thirds given in the example above—would net the employee $3,000 per month, an improvement of almost $200 a month. In other words, by offering the LTD as an after-tax benefit, employers can provide employees with larger benefits with less coverage and pay smaller premiums (as much as 20 percent with some carriers). The cliché of a win-win situation has rarely been so applicable.

Avoiding the Three-Year Look-Back Rule

If your firm is paying LTD premiums in pre-tax dollars and is ready to change, be sure to take advantage of a mechanism provided in IRS Ruling 2004-55 that allows benefits to be tax free from day one.

Ordinarily, the IRS applies a three-year look-back rule that considers benefits taxable in the proportion that they were paid for by before-tax premiums over the last three years. However, the IRS has provided a method that allows employees to qualify for tax-free benefits immediately after the change is made to paying with after-tax dollars. The workaround requires specific amendments to the plan description and a modified enrollment form that allows employees to elect for after-tax payment of the LTD insurance. (See below for information on obtaining sample forms.)

Employees can decide on an individual basis whether they want to have their LTD paid for in pre- or after-tax dollars, so firms can implement the program for employees who want to take advantage of this opportunity without forcing others to make any change in the way they have traditionally received benefits.

Doug Hessel is Program Director, CalCPA ProtectPlus Ancillary Products at Hover Insurance Services. For further information and sample forms email dhessel@hoverinsurance.com

Health Care Reform Cadillac Tax

What You Need to Know Now About: The Cadillac Tax

Another component of the Patient Protection and Affordable Care Act (PPACA) commonly referred to as the Health Care Reform Act is a tax on benefit-rich or “gold-plated” insurance plans. This tax is often referred to as “The Cadillac Tax” and, although it is not scheduled to go into effect until 2018 and may see several revisions in design before then, some plan sponsors are beginning to develop strategies to address it.

1.  Why was “The Cadillac Tax” included in the Health Care Reform Act?

There are two primary reasons for the inclusion of The Cadillac Tax in the Health Care Reform Act. The first is to stem the rise of health care costs. One belief is that excessively benefit-rich plan designs encourages higher utilization, even overuse, of health care services by the plan participants and, as a result, have a greater influence in driving escalating health care costs.

The second reason is to generate revenue to help pay for covering the uninsured.   The Congressional Budget Office (CBO) estimates that The Cadillac Tax will generate $149B over a 10-year period.

2.  What plan sponsors and plan designs are subject to The Cadillac Tax?

Beginning in 2018, if a benefit-rich insurance plan has an annual value of more than $10,200 for an individual and $27,500 for a family, then the insurance plan is subject to a 40% excise tax. 

The 2018 annual value amounts of $10,200 and $27,500 include medical, prescription drugs, administrative fees and also include employee and employer contributions to flexible spending, health reimbursement or health savings accounts.  Stand-alone vision and dental plans are not included in the calculation. However, there has been some recent confusion on the topic as it appears that the cost for a self-funded dental plan must be added to the calculation whereas a fully-insured dental plan does not. More guidance from the IRS/DOL is needed.

3.  How is the 40% excise tax calculated and who pays it?

The 40% excise tax is calculated on the amount above the annual value amount. For example:

A.     2018 Annual Value Amount – Individual     $10,200

B.     Insurance Plan’s Actual 2018 Annual Value Amount – Individual     $11,200  

C.     Difference Insurance Plan’s Amount v. Allowed Amount (B – A)     $1,000 

D.     40% Excise Tax – “The Cadillac Tax” (C * 40%)     $400 

The excise tax is paid by the plan sponsor and is paid for each participant in excess of the 2018 allowed amount so, in this example, if the plan sponsor has 500 participants with Individual coverage in the insurance plan at an 40% excise tax of $400 each participant, then the plan sponsor would pay a Cadillac Tax of $200,000.

Of course, although the plan sponsor is responsible for paying The Cadillac Tax, many may pass on some, if not all, of the cost on to the plan participants in some form such as higher employee contributions. 

4.  Will the Annual Value Amounts for Individual and Family change after 2018?

Yes, it is anticipated that the Annual Value Amounts for subsequent years will be indexed and will increase. At the moment, the expectation is that the amounts will increase, annually, by the medical inflation rate. Usually, this rate averages between 3%-5%. 

It should also be noted that some plan sponsors might find in 2018 that they do not trigger the tax, however, because their insurance plan costs continue to rise faster on an annual basis than the medical inflation rate that in a subsequent year such as 2019, 2020, etc., they will trigger the tax.

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The following information is from the United States Department of Labor’s web site. Since this COBRA article (or booklet, as the article refers to it) from dol.gov has an abundance of information, we will break the article up into sections over the next several weeks. We hope that you find the information valuable.

An Employee’s Guide to Health Benefits Under COBRA -The Consolidated Omnibus Budget Reconciliation Act 

 Note: This publication contains information about the COBRA premium reduction provisions of the American Recovery and Reinvestment Act of 2009 (ARRA). This publication has not been updated for recent amendments made to ARRA. For updated information on ARRA and its amendments, please see the COBRA Premium Reduction Fact Sheet.

Introduction

Health insurance programs help workers and their families take care of their essential medical needs. These programs can be one of the most important benefits provided by an employer.

There was a time when employer-provided group health coverage was at risk if an employee was fired, changed jobs, or got divorced. That substantially changed in 1986 with the passage of the health benefit provisions in the Consolidated Omnibus Budget Reconciliation Act (COBRA). Now, many employees and their families who would lose group health coverage because of serious life events are able to continue their coverage under the employer’s group health plan, at least for limited periods of time.

This booklet explains your rights under COBRA to a temporary extension of employer-provided group health coverage, called COBRA continuation coverage.

This booklet is designed to:

• Provide a general explanation of your COBRA rights and responsibilities;
• Outline the COBRA rules that group health plans must follow;
• Highlight your rights to benefits while you are receiving COBRA continuation coverage.

What Is COBRA Continuation Coverage?

The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires most group health plans to provide a temporary continuation of group health coverage that otherwise might be terminated.

COBRA requires continuation coverage to be offered to covered employees, their spouses, their former spouses, and their dependent children when group health coverage would otherwise be lost due to certain specific events. Those events include the death of a covered employee, termination or reduction in the hours of a covered employee’s employment for reasons other than gross misconduct, divorce, or legal separation from a covered employee, a covered employee’s becoming entitled to Medicare, and a child’s loss of dependent status (and therefore coverage) under the plan.

Employers may require individuals who elect continuation coverage to pay the full cost of the coverage, plus a 2 percent administrative charge. The required payment for continuation coverage is often more expensive than the amount that active employees are required to pay for group health coverage, since the employer usually pays part of the cost of employees’ coverage and all of that cost can be charged to the individuals receiving continuation coverage. The COBRA payment is ordinarily less expensive, though, than individual health coverage. A temporary premium reduction may be available to help (see “Premium Reduction Following Involuntary Termination”). While COBRA continuation coverage must be offered, it lasts only for a limited period of time. This booklet will discuss all of these provisions in more detail.

COBRA generally applies to all group health plans maintained by private-sector employers (with at least 20 employees) or by state and local governments. The law does not apply, however, to plans sponsored by the Federal government or by churches and certain church-related organizations.

Under COBRA, a group health plan is any arrangement that an employer establishes or maintains to provide employees or their families with medical care, whether it is provided through insurance, by a health maintenance organization, out of the employer’s assets on a pay-as-you-go basis, or otherwise. “Medical care” for this purpose includes:

• Inpatient and outpatient hospital care;
• Physician care;
• Surgery and other major medical benefits;
• Prescription drugs;
• Dental and vision care.

Life insurance is not considered “medical care,” nor are disability benefits; and COBRA does not cover plans that provide only life insurance or disability benefits.

Group health plans covered by COBRA that are sponsored by private-sector employers generally are governed by ERISA. ERISA does not require employers to establish plans or to provide any particular type or level of benefits, but it does require plans to comply with ERISA’s rules. ERISA gives participants and beneficiaries rights that are enforceable in court.

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If you lose or have lost work during this period, you need to know about these provisions because they can save you money. Keep in mind, however, that if you voluntarily quit your job you don’t qualify. Moreover, individuals who were fired for negligence or misconduct don’t qualify either.

If you are an employer and let employees go during these 15 months, new rules under this law require action on your part. Among its many features, ARRA provides federal subsides that reduce premiums for nine months of COBRA or Cal-COBRA coverage.

During this nine-month period eligible individuals (and their qualified beneficiaries) are responsible for only 35 percent of their premiums. For COBRA recipients the remaining 65 percent must be paid by their former employer, while for Cal-COBRA recipients, the 65 percent portion must be paid by the insurer. Employer and insurer payments, however, are fully reimbursable through a tax credit.

Another provision of the new law allows COBRA recipients to switch their health coverage to a less expensive policy if that policy is available to all active employees of their former company.

Under the previous law, an eligible employee could only elect to continue coverage under the policy they had at the time they were terminated. To comply with ARRA, employers must amend their existing COBRA notice forms and distribute additional notices that include information about these benefits.

CalCPA member firms with ProtectPlus coverage should take note that Seabury & Smith has already sent letters to all those they believe are eligible under Cal-COBRA. Employers with 20 or more employees who fall under COBRA regulations are themselves responsible for notifying former employees who may be eligible.

If you have questions or concerns regarding these issues, please contact Seabury & Smith customer service at (800) 824-1154. Those with other health insurance coverage should make sure they are in compliance.

Other medical expenses, such as doctors’ fees are covered under Medicare Part B. And though optional, subscribing to Medicare Part B is universally recommended.

The small premium for this coverage is automatically deducted from your Social Security payment, or will be billed to you if you have opted to delay collecting benefits. In addition to Medicare Parts A and B, the Social Security system gives you the opportunity to subscribe to prescription drug coverage under Medicare Part D. The complicated nature of this coverage has by now been well documented, so you should be sure to budget adequate time to determine the policy that will serve you best.

At your retirement you also have the option of choosing among many Medigap supplemental insurance policies that are designed to cover co-payments, coinsurance, and deductibles at different levels. While Medigap plans are offered by private companies, they must meet specific federal and state requirements in terms of benefits.

They do, however, differ in price. Deciding which, if any, Medigap policy is appropriate for you, requires both research and thought. While examining your options, keep in mind that you can’t enroll in a Medigap policy if you don’t enroll in Part D, but you can enroll in Part D without having a Medigap plan.

Perhaps the biggest complication for those who are retiring at 65 arises when their spouse has been covered through their workplace group policy.

The extent of that problem, however, depends on the size of the company. When a solo practitioner retires, his or her spouse will have to find insurance in the private market. Or for those with health problems, there is the additional option of a HIPAA guaranteed-issue health policy with high deductibles.

The spouse of a CPA who worked in a firm of fewer than 20 employees qualifies for continued group health insurance coverage under CalCOBRA. The spouse of a CPA who worked in a firm with 20 or more employees can continue health coverage under COBRA. These continuation options must, of course, be paid fully out of pocket at a rate that is higher than the premium for an employee.