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Health Care Reform: What You Should Do to Prepare Now

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Now that the health care overhaul is law, when will you start to see a difference? Some changes kick in immediately, but the rest trickle out over the next few years, with a few provisions not taking hold until the end of the decade. While you're probably aware of some of the bill's major changes, we've sorted through the nitty gritty details to help you start planning. Here's a look at some of the key measures that you can — and should — prepare for in the coming months and beyond.

Expanded Coverage for Dependents

What the change is: Kids will now be able to stay on their parents’ health plans until their 26th birthday, unless they’re already covered by their own employer-provided plan (currently, many insurers drop coverage when children reach age 19 or graduate from college). Even if your children are married, they may still be eligible for insurance under your policy if they qualify as your dependents.

When it will take effect: September 23, 2010

What you can do to prepare: If an adult child age 25 or younger has been dropped from your plan, ask your insurer’s benefits manager or your firm’s HR department how to get him or her reinstated. And check to see if your premiums would rise. If so, compare the cost to that of policies sold on the individual market. In most cases, your employer plan will be the better deal and will offer better benefits. Also, if you already have dependent coverage for your spouse or other children, adding another one to your plan may even be free.

Reducing the Medicare ‘Doughnut Hole’

What the change is: Seniors who get their prescription drugs through Medicare Part D will get a $250 rebate if they fall into the costly coverage gap known as the “doughnut hole.” Currently, the gap begins after you’ve spent $2,830 on prescription drugs. You then have to pay the next $3,610 in prescription bills out-of-pocket until coverage kicks in again at $6,440.

When it will take effect: Immediately. Seniors who hit the doughnut hole in any calendar quarter this year will receive the rebate no later than the 15th of the third month following the end of that quarter. Next year, seniors will receive a 50 percent discount on brand name drugs when they reach the gap, and a 7 percent discount on generics. After that, additional discounts will be added each year until the doughnut hole is closed in 2020.

What you can do to prepare: If you’re in the doughnut hole, save all Medicare documentation and prescription bills to show you’re entitled to the rebate check. To further reduce the bite on your wallet, talk to your doctor about switching to cheaper generics and ask for free samples of your medications, suggests Joe Baker, president of the nonprofit Medicare Rights Center in New York City.

Cuts to Medicare Advantage Plans

What the change is: Government subsidies to these private for-profit plans that provide Medicare coverage — plus additional benefits — to 11 million seniors will be slashed by $136 billion.

When it will take effect: The changes will be phased in over the next three to seven years, depending on where you live. Reductions will be made more gradually in high-cost states like Florida and California, and more quickly in lower-cost ones such as Arizona.

What you can do to prepare: “Keep an eagle eye on your mailbox as the annual renewal period for your Medicare Advantage plan approaches,” says Joe Baker. Because prices and services could vary significantly from plan to plan as these changes take effect, you may have to make a new decision each year about whether to change plans, says Baker.

Limits on Flexible Spending Accounts (FSAs)

What the change is: Previously, there were no federal limits on how much consumers could contribute to these pre-tax savings programs to pay health-related costs, although many employers capped them, usually at $3,000 to $5,000. Now, contributions to FSAs will be limited to $2,500 per year, with increases indexed to the CPI. Also, reimbursements for non-prescription drugs will no longer be allowed.

When it will take effect: January 1, 2013

What you can do to prepare: See if your employer offers a premium conversion plan as an add-on to your FSA. These plans use pre-tax dollars to pay for your share of your health plan premiums if your employer deducts them from your pay, thus sheltering more of your income from Uncle Sam.

If you want to sock away more money for future medical costs, look into whether your employer offers a health savings account (HSA). Unlike FSAs, which have an annual “use it or lose it” requirement, an HSA lets you accumulate pre-tax savings for future medical costs that roll over from year to year — with no federal limit on how much you can ante up (there are annual limits on contributions, however, currently $3,050 for individuals and $6,150 for families). However, to be eligible for an HSA, your health plan must have deductibles of at least $1,100 for an individual or $2,200 for a family. “Health savings accounts are one of the last remaining tax shelters,” says Richard Wright, Jr., CPA, director of Freed, Maxick and Battaglia, a Buffalo, NY accounting firm.

New Tax on Investment Income

What the change is: If you make more than $200,000 a year (or $250,000 for joint filers), you’ll be socked with a new 3.8 percent Medicare contribution tax on investment income, including dividends, interest, royalties, and rent.

When it will take effect: January 1, 2013

What you can do to prepare: For tax-exempt income, municipal bonds may be worth considering. However, these low-yield investments won’t build your wealth, so look at growth stocks that don’t pay dividends, or funds that own them, as another way to escape the new tax, says Berkeley, California certified financial planner Julie Asti. Needless to say, tax strategies should not determine your investment moves — build your portfolio first, and then incorporate any tax moves that make sense.

Increased Payroll Tax on High Earners

What the change is: The Medicare payroll tax will increase from 1.45 percent to 2.35 percent for individuals making more than $200,000 a year (or $250,000 for joint filers).

When it will take effect: January 1, 2013

What you can do to prepare: If you’re a high earner, lessen the sting by taking advantage of employee benefits that are surtax-exempt such as an FSA, HSA, premium conversion plan, and dependent care flexible spending account. Unfortunately, the surtax will still be deducted from contributions to your 401(k) or pension plan.

New Marketplace for Health Insurance

What the change is: State-run online markets called exchanges will offer consumers and small businesses one-stop shopping for policies.

When it will take effect: 2014 (exact date has not been announced)

What you can do to prepare: In theory, comparing plans side-by-side on the exchanges should be simple, since benefits should be standardized. But you’ll still need to plan ahead, says Kathleen Stoll, director of health policy at Families USA, a Washington, DC nonprofit. “Most people are used to looking at one or two options offered by their employer, but suddenly you’ll have to weigh ten or even 20 choices in the exchanges, with varying premiums, deductibles, and co-pays,” says Stoll. “You need to become an educated consumer by doing your homework before it’s time to buy.”

Also on the Horizon

In addition to the above areas, there are a number of changes on the way that don’t necessarily require advance planning, but if they affect you, you should be aware that they’re on the way. These include:

  • Bigger adoption tax credit. Not only has the tax credit for child adoption expenses been increased by $1,000 (from $12,170 to $13,170), but it’s retroactive, applying to adoptions occurring after January 1, 2010. The credit is also refundable, so even if you don’t owe any taxes on your 2010 return, you will still get a check for $1,000 from Uncle Sam. The refundable credit also applies to 2011 adoptions.
  • Free preventive services. Starting in September, new private plans will have to pay for an annual checkup with no deductibles, and cover many preventive services with no co-pays. Beginning on January 1, 2011, Medicare will do the same.
  • No more lifetime or annual caps on coverage. Beginning in September, both individual and group plans will be banned from placing a dollar limit on how much they’ll pay for health care over the beneficiary’s lifetime. In 2014, annual caps will also be eliminated.
  • An end to exclusions for pre-existing conditions. Starting in September, plans can’t turn kids up to age 19 down for coverage due to health problems. In 2014, this prohibition will also apply to adults.
  • Ban on rescissions. Starting in September, your plan can’t drop you from coverage because you get sick.

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