Healthcare Planning - Pre and Post Retirement

Paying for health insurance has become a huge financial drag for American employers, so very few companies still offer retiree benefits. Be careful about relying on your employer's promise to provide health care benefits once you retire. Even those that pledge such care may find it hard to fulfill their promise when you hit retirement. More and more companies are reducing or rescinding health insurance benefits once promised to their retirees. Even public-sector employees are seeing reductions in benefits as states and local governments attempt to balance their budgets.

What is COBRA? When your employment terminates, you will have the option of continuing on your employer's health plan for at least 18 months, thanks to a federal law called the Consolidated Omnibus Budget Reconciliation Act (COBRA). It says that when you leave your job, your employer must allow you to keep your coverage for up to 18 months. Generally, this law applies to firms with at least 20 employees. If you do continue the company plan under COBRA, you are responsible for the entire premium (including what your employer paid when you were working). Moreover, the insurance company can tack on an extra 2% to cover administrative fees.

How much will health insurance cost me? Individual policies vary depending upon the type of coverage. Data shows that individual health insurance is, on average, more affordable than group coverage, however it may not feel that way since you will no longer have an employer subsidizing some of your premium costs. Since the passage of the Affordable Care Act, insurance companies can no longer discriminate against you because of a preexisting condition, but you will likely still pay more if you are older, and plan pricing varies widely from state to state. If you're buying insurance on your own, we recommend that you speak with an insurance broker. They offer insurance coverage from many different carriers and will help you find the best policy for you. You can also shop the federal health exchange created under the Affordable Care Act, or find your state exchange, by going to Healthcare.gov. Most states have various plan options available at different prices. What's more, the federal government offers subsidies to people with income below a certain level. Medicare does kick in at 65, but there are costs for that coverage as well. Many retirees choose to buy so-called Medigap policies that provide coverage above and beyond what is offered through Medicare, or Medicare Part D prescription drug coverage. Add it all up, and you need to get serious saving money today to help cover your health costs in retirement. Even when you are covered by Medicare and any other health insurance, you still are going to pay for some costs, including premiums, deductibles, co-pays and - most importantly for many retirees - prescription drugs.

What if I retire and have no health plan? It depends how old you are. If you're 65, then you’re eligible for Medicare. If you're not yet 65, you must find - and pay for - your own health insurance coverage until then. Don't ever let your health coverage lapse. If you suddenly have an accident and become ill, you could burn through your entire retirement savings in very little time.

How can I keep my health costs down in retirement? You can start saving now, earmarking money specifically for future health costs. Once you turn 65 you’ll be eligible for Medicare, and that will take care of much of your medical expenses, but probably not all. You will be required to pay a premium for some of your Medicare coverage, and you will probably want to purchase a private Medigap policy to cover all the costs that Medicare doesn't cover. Fidelity Investments estimates that a 65-year-old couple who retired in 2015 would need $245,000 of their own savings to handle 20 years of out-of-pocket retirement health costs.

What is the best way to save for health care? First, max-out any and all tax-deferred retirement savings plans for which you're eligible, such as 401(k)s or IRAs. Many retirement vehicles can be accessed for qualified medical expenses. Once you’ve contributed the maximum amount to your tax-deferred accounts, consider adding one of the following plans:

• Health Savings Account (HSA): a tax-advantaged medical savings account for individuals who are covered under a high-deductible health plan to save for medical expenses that the plan does not cover. Pre-tax contributions are made into an HSA account by the individual and are limited to a maximum amount each year. The contributions are invested over time and as long as withdrawals are used to pay for qualified medical expenses, the amount withdrawn will not be taxed.
  
  Qualified medical expenses include deductibles, dental services, vision care, prescription drugs, co-pays, psychiatric treatments, and other qualified medical expenses not covered by a health insurance plan. Insurance Premiums usually don’t count towards qualified medical expenses unless the premiums are for Medicare or other healthcare coverage if 65 years or more, for healthcare insurance while unemployed and receiving unemployment compensation, and for long-term care insurance.
  
  If distributions are made from an HSA for reasons other than paying for medical expenses, the amount withdrawn will be subject to both income tax and an additional 20% tax penalty. Individuals who are 65 years old or older will no longer be able to contribute to an HSA, but can withdraw any funds accumulated in the account for any expense without incurring the 20% penalty. However, income tax will still apply to any non-medical usage.
  
  The Health Savings Account (HSA) is often compared with the Flexible Savings Account (FSA). While both accounts can be used for medical expenses, there are some key differences that exist between them. For example, unused funds in the FSA during a given tax year are forfeited once the year ends. Also, while the elected contribution amount for the year can be changed by an employee with an HSA anytime during the year, the elected contribution amount for an FSA is fixed, and can only be changed at the beginning of the following tax year.
• Flexible Spending Accounts (FSAs):An account funded with pre-tax voluntary employee contributions. FSAs are established to pay for specific health care expenses that are not reimbursed by a group health plan such as eyeglasses, dental work, deductibles and co-payments. Your expenses and the expenses of your spouse, dependent children, and any other qualified tax dependent can be paid for using your flexible spending account.
  
  Employers may offer FSAs as part of a cafeteria plan and have complete flexibility to offer various combinations of benefits in designing their plan. Based on previous IRS regulations, contributions remaining at the end of the plan year were forfeited under the IRS "use it or lose it" rule.
  
  Even though the IRS has extended the allowable period to beyond the end of the plan year, the "use it or lose it" rule remains an integral component of any FSA. Employers must amend their plans to include the time extension beyond the end of the plan year now permitted by the IRS. The extension is not automatic. At the end of the extension period, unused funds are still forfeited.
  
  Some employers may even contribute to the FSA, but this is not an IRS requirement. So that requests for reimbursement can be paid, employers must receive verification of the medical claims. You do not have to be covered under the employer/sponsor's health care plan, or any other health care plan to participate in an FSA. Self-employed individuals are not eligible for an FSA.
• Medical Savings Accounts (MSAs):Medical Savings Accounts were established before HSAs and are also known as Archer MSAs. They were made available in 1996 to self-employed individuals and employees of smaller businesses. If you have an MSA, you may transfer your funds to your HSA. You may choose to keep both an MSA and an HSA.
  
  If you contribute to your MSA, your HSA maximum annual contribution limit will be reduced by the amount of contributions to your MSA each year. At age 65, you may spend your MSA or HSA monies on whatever you choose, penalty free, but you will have to pay tax on non-qualified distributions.
• Health Reimbursement Accounts or Health Reimbursement Arrangements (HRAs):Employer-owned accounts administered on a "pay-as-you-go" basis. Bookkeeping entries or accounts are established and maintained by employers on behalf of each covered employee for the purpose of paying for unreimbursed medical expenses. Often employers will allow you to roll over the money remaining in your HRA at the end of the year to your HRA for the next year. However, if you leave your employer, your account generally cannot be taken with you and you may not have future access to the remaining balance. With the Tax Relief and Health Care Act of 2006, employers may transfer HRA balances to open HSAs. Individuals may not execute a transfer on their own.