Class Seven

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Class Seven

• Brought to you by
  
• Michael S. Orentlich CFP, CLU, ChFC

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Health Insurance

• Health insurance is the most common form of
  employee benefit.
• Health insurance covers more than 75 million
  employees nationwide.
• Unique
• It can be completely deductible by the employer
  and completely tax free to the employee.( Not
  taxable to the employee on either when benefits
  are paid or when premiums are paid for)

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Health Insurance Continued...

• There are two main types of plans
• Postpaid plans (Traditional indemnity plans)
• These plans are the type that pays providers for
  services rendered or reimburses employees for
  payments to providers.
• These plans can vary widely and can be customized
  to the employer.
• Basic Plans A basic plan primarily provides
  health care services that deal with
  hospitalization. (usually covers inpatient
  hospital charges, nursing care, supplies, in
  hospital visits by physicians, and surgical fees)
• Major Medical Plans A Major Medical Plan covers
  medical services usually excluded from the basic
  plan such as X- rays, prescriptions, and lab
  tests,
• Comprehensive Plans The comprehensive plans
  usually covers the basic and major medical plans
  in one.

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Health Insurance Continued...

• It is important to have a working knowledge of
  the components of a health plan such as
• Deductibles A Deductible is an amount of initial
  expense that is specified in the plan and that
  the participant is responsible for.
• Usually range from 100- 5,000.
• Usually computed annually.
• Some plans have carryover provisions.
• Most are cumulative for all causes but beware.
• Some plans have a family deductible.

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Health Insurance Continued...

• Coinsurance Under a coinsurance provision, the
  plan participant is responsible for a specific
  percentage of the costs after the deductible has
  been met.
• A typical coinsurance clause might state that
  after the deductible is met, the company will pay
  80 of the charges and the participant will pay
  20.
• Examples

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Health Insurance Continued...

• Stop Loss Limits A stop loss limit is the dollar
  amount when the insured does not have to pay
  anymore coinsurance and the company is
  responsible for the rest.
• A typical stop loss provision might state that
  the insured is responsible for 20 of the charges
  after the deductible has been met until the
  participant has paid out 1,000 after the
  deductible.

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Examples

• John Pastore, who missed another class last week,
  experienced an accident and the total cost was
  7,000. Johns plan has a 500 deductible and a
  90/10 coinsurance clause up to 10,000 of total
  expenses. What is his total out of pocket costs?
• Bill Begin, who thinks all the web site notes
  have not been updated since 1985, had hospital
  stay with total charges reaching 20,000.
  Assuming Bill had a 100 deductible and an 80/20
  coinsurance up to 5,000 of total expenses, what
  is Bills exposure?

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Health Insurance Continued...

• Maximum Coverage Limits
• The yearly or lifetime limits that an insurance
  company will cover you for.
• Extremely important to have high
  limits.(5,000,000)
• Be careful of the terms usual , customary, and
  reasonable!
• Employers fund post paid health insurance in one
  of three ways
• Commercial Insurance Company Contracts ( John
  Hancock, Metlife)
• Blue Cross/Blue Shield
• Self Insurance

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COBRA

• The Consolidated Omnibus Budget Reconciliation
  Act of 1985.
• Many employers have to continue to cover past
  employees and their dependents for a period of
  time after termination of employment due to COBRA
  or other state laws that require employers to
  offer health insurance after employment if
  certain circumstances are met.
• The federal law applies to employers that had 20
  or more employees on a typically business day in
  the preceding year.

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COBRA Continued...

• An employer under COBRA must provide the option
  to continue an employees health insurance for an
  employee and/or dependents for 36 months after
  the following qualifying events
• Death of the employee.
• Divorce or legal separation of the covered
  employee. ( Coverage continues for the former
  spouse and dependents)
• Employees entitlement to Medicare benefits
• A bankruptcy proceeding under the U.S. code where
  the employee retired from the employer.
• A child ceasing to be a dependent for plan
  purposes.

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COBRA Continued...

• Health coverage must be allowed to continue for
  18 months due to a reduction of hours except for
  gross misconduct.
• Health coverage must be allowed to continue for
  29 months due to a disability.
• Coverage can be terminated prior to the time
  limits just listed if
• The employer terminates the health plan for all
  employees.
• The employee fails to pay their share of the
  premium.
• The employee becomes covered under another plan.
• The employer can charge no more than 102 of the
  premium.
• Employees and beneficiaries must be notified of
  their right to continue coverage.

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Taxes!

• Under section 162(1), a self employed individual
  or more than 2 shareholder of a S corporation is
  entitled to a tax deduction equal to the
  following percentages for premiums paid
• 2001- 60
• 2002-70
• After 2002-100

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Health Maintenance Organizations

• A HMO is an organization of physicians or other
  health care providers that provide a broad and
  nearly complete range of services on a prepaid
  basis.
• Typically have co-pays for various services.
• Normally have to stay in network.
• Need a primary care physician.
• Referrals usually needed to see a specialist.
• Doctors are either direct employees of the HMO or
  independent contractors that have agreed to be in
  network.

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Sick Pay Plans

• A sick pay plan is a plan that continues
  employees salary or wages during periods of
  illness or other disabilities for a limited time.
• Sick pay benefits usually refer to uninsured
  continuation of wages or salary.(typically 100)
• Usually begins on the first day of illness or
  disability.
• Commonly available to only full time employees.
• Duration of benefits are sometimes tied into
  length of service.
• Some allow carryover provisions.

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Short Term Disability Plan

• A short term disability plan fills the gap
  between sick pay plans and the employers long
  term disability plan.
• Usually up to six month in duration.
• Usually insured.
• An employer can deduct payments made to an
  employee under sick pay plan and the employer can
  deduct premiums paid on behalf of an employee for
  short term disability plans.
• Benefits paid to an employee under a sick pay
  plan are taxed as wages or salary.
• Employer premium payments under a short term
  disability insured plan are non taxable to the
  employer.
• At the point of receiving disability payments,
  the benefit paid to the employee is taxable in
  direct proportion to the employers contribution.

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Long Term Disability

• Long term disability insurance is a program to
  provide disability income to employees who are
  disabled beyond their elimination period.
• The duration of the benefit can be for a limited
  number of years,(5,10,) to age 65 or for a
  lifetime.
• Definition of disability is important!
• Social Security definition.
• Qualified for definition(common for employer
  plans)
• Any occupation.
• Regular occupation/own occupation.
• Your occupation.

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LTD

• The social security definition of disability is
  defined as a condition under which an individual
  is unable to engage in any substantial gainful
  activity by reason of any medically determinable
  physical or mental impairment which can be
  expected to result in death or which has lasted
  or can be expected to last for a continuos period
  of 12 months.
• Most restrictive.
• The tax ramifications of a long term disability
  plan are the same as a short term disability
  plan.
• Insurance companies issue disability monthly
  benefits between 50-70 of pre-disability income.
• Most group plans integrate with social security.

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Group -Term Life Insurance

• A group term life insurance plan provides
  insurance for a group of employees under a group
  contract held by the employer.
• If the plan qualifies under code 79, the cost of
  the first 50,000 of insurance is tax- free to
  the employees.
• Code 79 prescribes rules to prevent
  discrimination in favor of key employees.
• The plan must
• Benefit at least 70 of all employees
• Benefit a group of which at least 85 are not key
  employees.
• Benefit a nondiscriminatory classification of
  employees as determined by the IRS
• Must not discriminate in favor of key employees
• All benefits available to key employees must be
  available to other plan participants
• Life insurance coverage equal to the same
  percentage of compensation for all participants
  will not violate the nondiscrimination rules

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Tax implications.

• The cost of any coverage that the employer pays
  for above the 50,000 limit is taxable to the
  employee on a monthly basis.
• The death benefit from the insurance is income
  tax free to the beneficiaries.
• Premiums paid by the employer for group-term life
  insurance of employees are deductible business
  expenses.
• The employer and the employee must pay employment
  taxes on the extra compensation that is included
  in income.
• Self-employed persons and more than 2
  shareholders of S corporation can be included as
  an insured under the group plan but the cost of
  even the first 50,000 is not excluded from
  taxable income
• Dependent coverage can be provided in a group
  term plan and treated favorably for tax purposes
  if the coverage is a de minimus fringe
• Dependent coverage is regarded as a de minimus
  fringe if the face amount of the employer
  provided group -term life insurance payable on
  the death of a spouse or a dependent of an
  employee does not exceed 2,000

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Death Benefit Only Plans

• A death benefit only plan, or DBO plan is a plan
  which an employer defers employee compensation
  and pays it to the employees designated
  beneficiary at the employers death.
• Advantages
• If the covered employee is not a controlling (
  more than 50) shareholder, properly designed
  death benefit only plan can be kept out of the
  deceased employees estate for federal estate tax
  purposes.
• The plans death benefit can provide valuable
  liquidity.
• The benefit is not taxable to the employee during
  lifetime.
• The death benefit can provide immediate and
  continuing cash to the beneficiary.
• The plan can be financed by the employer through
  the purchase of life insurance.
• Disadvantages
• The entire benefit is income taxable to the
  beneficiary.
• Avoiding estate tax requires very careful
  planning, ask Richard Tardiff for details.
• The employer/Corporations tax deduction is
  deferred until the benefit is paid and the
  beneficiary includes the payments received in
  income.

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Long-Term Care Insurance

• Long-Term Care involves a wide variety of
  services for people with a prolonged physical
  illness, disability or cognitive disorders.
  Long-term care is not one service, but many
  different.
• A typically long-term care insurance policy will
  begin paying for services after the elimination
  period is with met and the insured needs
  assistance with 2 out of 6 activities of daily
  living or is cognitively impaired.

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Long-Term Care Insurance Continued..

• The activities of daily living ( ADLs) are
  eating, dressing, bathing, transferring,
  continence, and toileting.
• Long-term care services are usually provided
• At home
• In assisted living facilities
• Adult day-care centers
• nursing homes
• Long-term care policies pay for skilled care,
  intermediate care, and custodial care.
• Policies range from two years to lifetime in
  duration.

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How are benefits paid?

• In two ways!
• Expense incurred method
• Once you have been determined to be eligible for
  benefits, the insurance company will either pay
  you or your provider up to the amount of the
  claim. The maximum limits apply.
• Indemnity method
• Once you have been determined to be eligible for
  benefits, the insurance company will pay
  benefits directly to you in the amount specified
  in the policy, without regard to the specific
  services rendered.
• The maximums can be on a daily, weekly, monthly,
  or annual basis.
• Most plans take a bucket of money approach.
• Example 200/day5years
• Inflation protection is very important!
• Simple versus compounded versus optional

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Long-term care
continued.

• There are basically four ways to pay for
  long-term care expenses
• Cash
• Medicaid
• Medicare
• Insurance policy
• Nursing homes can cost between 80,000-120,000
  per year in this area.
• Medicaid requires the spending down of assets.
• Be aware of look back periods for assets given
  away to qualify for Medicaid .(3yr,5yr)
• Medicare pays only up to 100 days in a skilled
  nursing facility per benefit period.
• Medicare does not pay for custodial care if that
  is the only care you need,
• Medicare also limits the amount of home care it
  provides to
• Part time or intermittent skilled care
• Part time or intermittent home care for physical
  therapy, speech-language therapy, and
  occupational therapy.
• Medical social services
• Medical supplies

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Components of long-term care policies.

• Elimination period
• Daily benefit
• Percentage home health care
• Benefit period
• Inflation protection

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Employer provided long-term care insurance

• Employer sponsored long-term care is treated
  similar to health insurance as an employee
  benefit for tax purposes.
• Tax deductible if paid by the employer
• Non-taxable to employee for premiums paid for on
  their behalf.
• Up to 240 per day of indemnity benefits paid
  from a long-term care policy excluded from income
  of the insured in 2005.
• The employees share of the premium paid can not
  be paid from a cafeteria plan or flexible
  spending account.
• Premiums paid by the employees for either group
  or individual LTC that do exceed the following
  limits are available for an itemized deduction
  under code 213 subject to the floor of 7.5,

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2005 Dollar Limits

• Not more than 40 270
• 40-50 510
• 51-60 1,020
• 61-70 2,720
• Over 70 3,400

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LTC

• A self-employed person may deduct premiums for
  long-term care insurance. The deductible premiums
  are first limited to those eligible for section
  213 and afterwards, subject to the following
  limitations
• 200160
• 200270
• 2003100
• 2004 and beyond100