Since as early as 1960, our national health expenditures have been steadily increasing. The American Medical Association found Americans paid nearly $3.5 trillion on healthcare in 2017, and expenses continue to rise, with estimated increases in healthcare expenses by the Bureau of Labor Statistics pegged at over 7% since 2016.

To address our country's rising healthcare expenses, the Medicare Modernization Act was signed into law by President George W. Bush in December, 2003.  This law created Health Savings Accounts (HSAs) to encourage individuals to enroll in High-Deductible Health Plans (HDHPs) in an effort to curb overall healthcare spending. In essence, HDHPs incentivize individuals to make healthcare decisions more carefully, with higher out-of-pocket requirements and lower premium expenses (which can often make up for the higher out-of-pocket requirements – especially for healthy individuals!).

Health Savings Accounts (HSAs) offer a further incentive for HDHP enrollment, as they provide a very attractive 'triple-tax' set of potential benefits. The three potential benefits are: 1) tax-deductible contributions, 2) tax-deferred growth, and 3) tax-free withdrawals for qualified medical expenses (although withdrawals made for non-qualified expenses are not tax-free and incur a 20% penalty if made before age 65). After age 65, though, non-qualified withdrawals have no penalty, so the account virtually becomes an “enhanced” IRA which can be used for any purpose but without the requirement of taking annual RMDs.

As with other tax-preferenced savings accounts, there are contribution limits for HSAs, which are based on the type of HDHP coverage an account owner has.  For family HDHPs, annual limits are $7,000 for 2019 ($7,100 for 2020), and for self-only HDHPs, limits are $3,500 for 2019 ($3,550 for 2020). Additionally, HSA owners age 55 and older are allowed to make an annual $1,000 catch-up contribution.

Financial advisors with clients who are married and have mixed health insurance coverage can help their clients understand their actual HSA contribution limits, as these limits depend on the type of plan each spouse has.  For spouses covered by separate self-only HDHP plans, each can contribute up to the maximum, self-only limit to their respective HSAs, but they can’t make up for any contribution shortfalls of the other spouse.

Sometimes, one spouse might have self-only HDHP coverage and the other an "employee-and-children" family HDHP (which does not offer coverage for the employee's spouse). This can be cost-effective for couples with children, as family HDHPs sometime provide for “employee and children” coverage that is less expensive than family plans that include both spouses. In this situation, the spouse with self-only coverage is limited to the self-only HSA contribution amount, and the spouse with family coverage can contribute up to the family limit.  But while the total between spouses cannot exceed the family limit, the spouse with the family plan can make up for any contribution shortfall of the spouse with self-only coverage.

In rare cases, both spouses may each opt for separate HSA-eligible family HDHPs through their employers (perhaps because of different in-network doctors offered by each plan). Again, the total contribution between spouses may not exceed the annual family limit, but in this situation, both spouses have the ability to compensate for any contribution shortfalls of the other, or to simply choose which spouse's HSA it makes sense to fund first.

Financial advisors who have married clients with HSAs, where at least one spouse is under age 65, can employ some strategies to maximize the value of their clients’ accounts.  For example, it may behoove the couple to maximize contributions to the older spouse’s account first in order to reduce the potential exposure to the 20% penalty for non-qualified withdrawals, since the penalty will not apply to the age 65+ older spouse. In addition, using HSA funds from the younger spouse’s account to pay for qualified medical expenses will also result in more funds in the older spouse’s account, available for penalty-free withdrawals for non-qualified expenses.

Ultimately, the key point is that the unique triple-tax benefits of HSAs make them attractive savings vehicles that can be used for expenses beyond medical care (but penalty-free for non-qualified expenses only after age 65). Financial advisors can help their clients with different HDHP coverage options get the most value out of their HSAs by guiding them through their specific contribution rules and choosing how to coordinate withdrawals for qualified and non-qualified expenses from each account in the most tax-efficient manner.

Read More...

Social Security spousal and survivor benefits were created to provide some level of Social Security benefits to households that relied primarily on a single worker, as a means to both financially support households with stay-at-home spouses, and to ensure that an earner’s widow was not left in poverty after the primary worker passed away. The caveat, however, is that in the early years of Social Security, some government workers had the opportunity to participate in jobs that did not pay into Social Security (so-called “non-covered” jobs), and instead directly received a private pension… with the end result that, in addition to their pensions, they also ended out receiving Social Security spousal and survivor benefits as though they were a stay-at-home spouse, when in reality they were simply a working spouse in a non-covered job.

To address this concern, Congress passed the Government Pension Offset (GPO) rule over 40 years ago to more fairly determine how Social Security benefits would be received by such non-covered government workers to ensure they were not effectively “double-dipping” into government pension benefits as workers and spousal and survivor benefits intended primarily for non-workers. Today, the GPO affects more than 695,000 Social Security beneficiaries.

The core of the GPO rule is that workers who receive pensions from government jobs that did not participate in Social Security will face a reduction of spousal and survivor benefits that they might otherwise be entitled to based on the work records of their spouses (who worked in covered jobs that did pay into Social Security).  Specifically, the GPO rule applies to individuals who meet three criteria: 1) worked at a federal, state or local government job where they did not pay Social Security taxes; 2) qualified for a pension from that job (that did not pay into Social Security); and 3) are eligible to receive spousal or survivor’s benefits from a spouse who did work in a job covered by Social Security.

For those who are affected, the GPO reduces spousal and survivor benefit amounts by 2/3 of the government pension benefit received from the non-covered employer. And if 2/3 of the retiree’s pension exceeded their spousal or survivor benefit altogether, the net result is that they will receive none of that Social Security benefit at all! Importantly, though, this rule applies only to the person who actually owns (i.e., originally earned) the non-covered pension. Which means that if a retiree inherits their spouse’s non-covered pension, their Social Security survivor benefits are not reduced because the pension was originally owned by and based on the work history of another.

In some cases, an individual may have pension benefits based on earnings from covered and non-covered employment (having switched jobs over the years between employers who both paid into the pension). In these situations, the GPO will reduce the individual’s benefits by 2/3 of the pension portion attributable only to non-covered employment. This non-covered pension portion is determined by multiplying the full amount of the pension benefit by the ratio of non-covered months of employment to the total months of employment contributing to the pension.

While the GPO is generally difficult to avoid, there are a couple of strategies that financial advisors can consider for their clients who may be impacted by the rule. The “Last-60-Months” exception says that the “GPO does not apply if an individual was covered by both the government retirement system and Social Security throughout his/her last 60 months of Federal, State, and local government service. The 60 months need not be consecutive.” Thus, if a worker leaves their current job under which they would have been subject to the GPO, finds new employment that is covered by Social Security and the government pension, and stays in that job (or another job that contributes to the government pension and that is covered by Social Security) for at least 60 months of service prior to retirement, the GPO rule would not affect their Social Security spousal or survivor benefit.

Alternatively, a government employee has the option of withdrawing from their pension altogether. For this strategy to avoid the GPO, the worker would need to withdraw all of their own contributions (with interest) from the plan, forfeiting any employer contributions (unlike most non-government pensions, many government pensions consist of both employee and employer contributions). This strategy should be considered carefully, as while the GPO impact on Social Security benefits would potentially be eliminated, so too would any pension benefits to which the individual was once entitled (and the loss of the pension itself may easily end out costing more than the otherwise foregone Social Security benefits would have been in the first place!).

Ultimately, the key point is that advisors should be aware of when and how the Government Pension Offset may affect their clients, and if their clients can use a strategy to mitigate the GPO’s impact on their benefits. While there are stirrings of legislative proposals to eliminate the GPO rule (along with the WEP), the population actually affected by these rules is relatively small (approximately 1% of all Social Security beneficiaries in 2018 were affected by the GPO). Thus, traction on any amendments to eliminate or modify these rules may be difficult, especially since there arguably are good policy reasons for it to exist (to avoid the implicit ‘double dipping’ of earning a non-covered pension as a worker and a spousal or survivor benefit nominally intended for non-working spouses). In the meantime, advisors can help their clients by understanding when the GPO needs to be factored into a client’s financial plan, especially given that the GPO can heavily (or fully) eliminate Social Security spousal or survivor benefits that they might have otherwise anticipated receiving!

Read More...