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- Written by: Jerry Love, CPA
A recent article by Christine Vestal, ACA Spurs State Shift in Long Term Care, caught my attention and confirmed something that I have observed many times over the past few years that ACA is a program larger than Social Security and Medicare combined. Christine writes:
“In New Hampshire, Medicaid pays for in-home care for nearly all of its developmentally disabled residents. For frail elders, the opposite is true. Most wind up in nursing homes.
“To remedy this imbalance, New Hampshire is taking advantage of Affordable Care Act funding for a program aimed at removing existing barriers to providing long-term care in people’s homes and communities.
“Known as the Balancing Incentive Payment Program, it is one of several ACA provisions designed to keep as many people as possible out of costly institutions.” (http://www.pewstates.org/projects/stateline/headlines/aca-spurs-state-shift-in-long-term-care-85899534029)
The first Baby Boomers are approaching age 70. As with many other issues, this is beginning to bring issues into focus related to long term care in America. Long term care (LTC) is generally defined as a person who needs assistance that a normal healthy person does not. It can be a vague concept.
Most insurance policies that provide coverage for long term care use the definitions based on activities of daily living (ADL) that a person is having difficulty with one or more of the following: bathing or showering, using the restroom, eating, getting in or out of bed or a chair, dressing, or moving across the room to sit in a chair. Other functions that may be considered could be light housework, preparing meals, going shopping for groceries, managing medications and paying bills.
As you may notice, the definition of who is in need of long-term care is focused on a person having difficulty performing tasks vs. identifying a symptom like a pain in the chest. The secondary definition that is frequently used is that the difficulty performing the tasks is long term in nature and not something that may be resolved with rehabilitative care such as physical therapy.
It is estimated that nearly ten million Americans are in need of some level of long-term care. Although the majority of these people are over 65, not all are. Some are in need of this care in their home, while others are better served in a nursing home. It is estimated that 80% or more of those in need of long-term care are not in a nursing home. Sometimes that distinction is based on whether they live alone or if the other person or persons in the home are capable of providing the care. The issue, in part, is a question of independence. Can the person live independently or conversely, how much assistance do they need?
As you might note, this is not care that will normally be paid by health insurance and is not covered by Medicare. In fact the health care system is not designed to provide these basic needs. Most of the health coverage available is designed to address and pay for acute care, the detection and treatment of an injury or illness that is more of a short-term problem.
A study by Genworth Financial, Inc. and National Eldercare Referral Systems, LLC in 2013 found the median cost of a private room in a nursing home is $83,950. The study also concluded that a home health aide would cost an average of $19 per hour. The study also identified the median cost of an assisted living facility would be $41,400. An assisted living facility would provide personal care and assistance with medical care for those who are not able to live alone but do not require constant care normally required by nursing home residents.
However the study found the median cost varies significantly in the different 437 regions of the country. For example, the median cost of a private room in a nursing home for the following states was:
Texas $61,230
Kansas $62,780
Georgia $67,525
Florida $91,250
California $97,820
New York $125,732
Current estimates suggest that the demand for long-term care among the elderly will more than double in the next thirty years. Alongside policy toward Social Security and Medicare, policy toward long-term care will increasingly shape quality of life for aging Americans. (Congressional Budget Office,"Projections of Expenditures for Long-Term Care Services for the Elderly " Washington: CBO, March 1999.)
A very large majority of the population who need long-term care are on Medicare, although as indicated Medicare does not pay for long-term care. Medicare finances long-term care only tangentially through its limited skilled nursing facility (SNF) and home health benefits. Despite recent growth in spending on these benefits, much of the SNF and home care paid for by Medicare remains short-term rehabilitative care, often related to a hospital stay or outpatient procedure. Medicare covers SNF care for up to 100 days following a hospital stay of at least three days. For homebound persons needing part-time skilled nursing care or physical or other therapy services, Medicare pays for home health care, including personal care services provided by home health aides. (http://www.medscape.com)
According to a poll commissioned by the National Academy of Social Insurance’s (NASI) Study Panel on Long-Term Care, nearly three quarters of baby boomers and seniors are concerned either a great deal or a fair amount about paying for long-term care. According to The Economic Status of the Elderly (NASI Medicare Brief No. 4), “More baby boomers are likely to be living alone in old age compared to their parents, for three reasons. First, more of the baby boomers have never married. Nearly 10% of the youngest baby boomers (born between 1956 and 1964) are forecast never to have married by ages 55 to 64, which is twice the rate of their parents. Second, more of those who did marry will become divorced or widowed by the time they reach ages 55 to 64—25% to 30% of them compared to 15% to 20% of prior cohorts. Finally, childlessness is on the rise. In 1989, 26% of couples aged 25 to 34 had no children, compared to only 12% of such couples in 1959. These trends will result in increase in the percent of older Americans living alone, from 21% of those age 63 to 72 today, to 24% of those 10 years younger, to 37% of the early baby boomers.” (http://www.nasi.org/book/export/html/169)
Although LTC is financed through a combination of public and private resources, the largest public source is the Medicaid program. Medicaid is the largest single payer of LTC services. Medicaid-eligible people who use long-term care services are among the most disabled and chronically ill of the total Medicaid population. Although they accounted for only 7% of the Medicaid population, these long-term care users consumed more than half (52%) of total Medicaid spending. Moreover, the number of people who need LTC services is expected to increase rapidly during the next several decades. People age 85 and older constitute the fastest growing population in the United States; their numbers are expected to increase from about 4 million in 2005 to almost 21 million by 2050, foreshadowing an ever-expanding need for LTC services. (http://www.ncsl.org/research/health/long-term-care-faq.aspx)
Another facet of the need for long term-care is the growing number of people who are diagnosed with dementia. Dementia is a general term for a decline in mental ability severe enough to interfere with daily life. Memory loss is an example, however Alzheimer's is the most common form of dementia. Dementia is not a specific disease. It's an overall term that describes a wide range of symptoms associated with a decline in memory or other thinking skills severe enough to reduce a person's ability to perform everyday activities. Alzheimer’s disease accounts for 60 to 80% of cases.
According to the Alzheimer’s Association, “Alzheimer’s disease is the sixth leading cause of death in the US. More specifically, one in three seniors dies with Alzheimer’s or another form of dementia. It is the only cause of death among the top 10 in America without a way to prevent it, cure it or even slow its progression. More than 5 million Americans are living with the disease. By 2025, the number of people age 65 and older with Alzheimer's disease is estimated to reach 7.1 million—a 40% increase from the 5 million age 65 and older currently affected. In 2013, Alzheimer’s will cost the nation $203 billion and this amount is expected to rise to $1.2 trillion by 2050.”
The duration and level of LTC will vary by person and often change over time. Here are some statistics: 1) someone turning 65 today has almost a 70% chance of needing some type of LTC services, 2) women will need care longer (3.7 years) than men (2.2 years), and 3) one-third of today’s 65 year olds may never need any LTC support but 20% will need it for longer than five years. (http://longtermcare.gov/the-basics/how-much-care-will-you-need/)
So the big question is how do you pay for the LTC? Basically, there are three ways you pay all the costs (private pay), you buy LTC insurance that may pay for some or all of it, or qualify for Medicaid.
Option 1: Private Pay: As discussed above, it can be very expensive and may extend for several years. Suffice it to say, that the cost of LTC can consume a significant amount of the lifetime savings a person has accumulated for retirement. Fidelity Benefits Consulting, which has been tracking retiree health care costs for more than a decade, estimates that a 65-year-old couple retiring this year will need $220,000 to cover future medical costs (deductibles and copayments, premiums for optional coverage for doctor visits and prescription drugs, out-of-pocket expenses for prescription drugs, and other expenses that Medicare doesn't cover, such as hearing aids and eyeglasses). That doesn't include the high cost of long-term care. (http://www.aarp.org/health/medicare-insurance/info-12-2012/health-care-costs.html)
In an article published by MoneyWatch, by Steve Vernon, July 19, 2010, Long-Term Care: What Are the Real Risks? (http://www.cbsnews.com/news/long-term-care-what-are-the-real-risks/), two-thirds of people age 65 and over will need long-term care in their lifetime. The article quotes a comprehensive paper written by researchers and academics entitled Long-Term Care Over an Uncertain Future: What Can Current Retirees Expect? (http://www.allhealth.org/briefingmaterials/Long-TermCareOveranUncertainFuture-WhatCanCurrentRetireesExpect-461.pdf) This report, released in 2005, estimates the full range of out-of-pocket expenditures that people might expect to spend over their lifetime. For instance, according to this study:
- 42% of people turning age 65 will have no private out-of-pocket costs for long-term care over their lifetime.
- 19% of those turning 65 will have out-of-pocket costs under $10,000 over their lifetime.
- 8% will have costs between $10,000 and $25,000.
- 14% will have costs from $25,000 to $100,000.
- 11%will have costs over their lifetime from $100,000 to $250,000.
- 5% will have costs of $250,000 or more.
The report cited above estimates that for people turning age 65 in 2005, 69% of this group will need some form of long-term care over their lifetime, for three years on average. Of this period, 1.9 years will be provided at home, with 1.1 years provided at any type of formal facility.
Option 2: Buy Long-Term Care Insurance: According to the American Association of Long-Term Care Insurance, (http://www.aaltci.org/long-term-care-insurance/learning-center/best-age-to-buy-long-term-care-insurance.php/) “for most people, the best age to apply for LTC insurance is in your mid-50s. You can lock in your good health; and today there are policies that allow you to buy some coverage now and add to it in future years. As we age, our health changes. And once you reach your 50s it almost never gets better (even if you diet and exercise). If you are 50, chances are that you leave your doctor's office with some new prescription in hand. That drug may help you live a long life. But it's those changes in our health that can make it harder or even impossible for you to qualify for long-term care insurance.”
Premiums for long-term care insurance are based on your age when you apply and your existing health condition. If you wait until you are older or already have a diagnosis that would indicate you are more-likely-than not going to need extended LTC, then your premium is going to be very high, if you can get a policy at all.
It would be impossible for me to estimate what a premium would be, but American Association of Long-Term Care Insurance has indicated the following on the above referenced web page: “Here is a real example. The following scenarios use real rates (2010). You are age 55. You want what we term a "standard" plan of coverage. That equals $172,600 in current benefits (based on a $150 daily benefit for a 3-year plan). Your cost is $1,084 per year because you qualify for the preferred health discount (spousal discount too). Long-term care insurance protection should grow to keep pace with rising costs. The one we are illustrating does. So, by age 65, the $172,600 benefit you bought at age 55 -- will have grown in benefit value to $276,000. Someone age 65 (today) would pay $3,275 for $276,000 in coverage because it's very unlikely they will still qualify for that good health discount. And that reflects today's rates. Chances are rates will rise. So, the 55 year old who waits for 10 years will pay even more.”
Option 3: Qualify for Medicaid: It is necessary to understand the general distinction between Medicare and Medicaid. Medicare is a federal benefit that an individual receives once you turn age of 65 years. Medicare generally pays for your doctor bills and health care costs. Medicaid is also a governmental benefit. The first type of Medicaid, known as Community Medicaid, has strict income and asset requirements and pays for health care needs. The second type of Medicaid, pays for nursing home costs once the requirements for Medicaid are met.
From: http://www.familiesusa.org/issues/medicaid/about-medicaid.html
Since 1965, Medicaid has been the backbone of this country's health care safety net. Jointly funded by the states and the federal government, Medicaid covers more than 58 million low-income Americans, including families, people with disabilities, and the elderly. Today, Medicaid provides coverage for almost 29 million children and pays for approximately half of all long-term care costs. The Affordable Care Act gives states the opportunity to expand their Medicaid programs to cover all individuals with incomes at or below 138% of poverty, an income of about $31,809 for a family of four in 2012. That will extend coverage to many low-income adults currently left out of the program and simplify eligibility determinations across the program.
Federal law requires states to cover certain categories of people in Medicaid. In general, there are six categories of so-called “mandatory” individuals: 1) children, 2) pregnant women, 3) very low-income parents, 4) the elderly, and individuals who are 5) blind or 6) disabled.
Eligibility levels for these groups of people varies by income:
- Children under age six with family incomes up to 133% of the federal poverty level ($25,390 for a family of three in 2012).
- Children ages 6-19 with family incomes up to 100% of poverty ($19.090 for a family of three in 2012).
- Pregnant women with family incomes up to 133% of poverty.
- Parents whose income meets the state’s AFDC (Aid to Families with Dependent Children - former welfare program) criteria in place as of July 1996.
- People who are elderly, blind, or who have disabilities and who receive Supplemental Security Income (SSI) may have incomes up to 74% of poverty ($8,266 for an individual in 2012).
- Certain people with severe disabilities who would qualify for SSI if they did not work.
Elderly individuals and people with disabilities whose Medicare premiums are paid by Medicaid through the “QMB,” ”SLMB,” and “QI” programs—generally speaking, these are individuals who have incomes below 150% of poverty.
The Affordable Care Act requires states to maintain the Medicaid eligibility levels, policies, and procedures that were in place in March 2010 (the date the Affordable Care Act was enacted) until the state has an operational exchange.
The Affordable Care Act of 2010, signed by President Obama on March 23, 2010, creates a national Medicaid minimum eligibility level of 133% of the federal poverty level ($29,700 for a family of four in 2011) for nearly all Americans under age 65. This Medicaid eligibility expansion goes into effect on January 1, 2014 but states can choose to expand coverage with Federal support any time before this date. See related Federal Policy Guidance at http://www.medicaid.gov/Federal-Policy-Guidance/Federal-Policy-Guidance.html and states that have expanded Medicaid prior to 2014.
The Affordable Care Act (ACA) goes a long way toward simplifying Medicaid eligibility. Medicaid is a means-tested insurance program designed to help cover the expenses of people living with low incomes or lacking a certain level of resources. Poverty alone, however, will not necessarily allow you to qualify for Medicaid. In order to qualify for Medicaid, though, you will first of all need documentation of U.S. citizenship, and some way of satisfying certain residency and immigration requirements.
Joy Johnson Wilson, Health Policy Director for the National Conference of State Legislatures, summarizes Medicaid and CHIP provisions in the new law and compares them to current law. In particular, on page 8 Wilson notes that the ACA “[r]equires states to use a net income standard (no asset or resource test, no income disregards) to determine [Medicaid] eligibility.” The new federal income eligibility threshold is 133% of the federal poverty level (effective 1/1/14).
Essentially, the Medicaid expansion under the ACA will broaden Medicaid eligibility for low-income, non-elderly adults without regard to assets. A major exception for that age group is those with incomes above the threshold but with high out-of-pocket medical costs. Such individuals will be required to spend their assets down to the existing asset limit, which varies by state and is typically a few thousand dollars. Existing rules, including the asset tests, will continue to apply for individuals obtaining Medicaid eligibility through another program (e.g. foster care children, or SSI/SSDI recipients) and the elderly.
The Affordable Care Act called for a federal minimum income standard of up to 133% of the federal poverty line for all states. This expansion of Medicaid would establish this minimum in all states for them to participate in the federal Medicaid program and qualify for federal matching funds and took effect on January 1, 2014.
So all states now have the same income threshold? No. The United States Supreme Court in its ruling in June, 2012 on the Affordable Care Act stated that the federal government could not mandate or require this expansion of Medicaid as a condition of participating in the program, but rather participation in the expansion had to be voluntary.
Did all states agree to the expansion? No. Twenty-five states and the District of Columbia have agreed to participate in the expansion. 14 states have declined to participate in the expansion. Eleven other states have not officially stated if they will participate in the expansion.
The 25 states (along with the District of Columbia) that are participating in the expansion are: Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey, New Hampshire, New Mexico, North Dakota, Ohio, Oregon, Rhode Island, Vermont and Washington.
The 14 states that are not participating in the expansion are: Alabama, Georgia, Idaho, Iowa, Louisiana, Maine, Mississippi, North Carolina, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas and Wisconsin.
The 11 states that have not officially declared their intentions are: Alaska, Indiana, Kansas, Kentucky, Nebraska, New York, Tennessee, Utah, Virginia, West Virginia and Wyoming.
Conclusion: As with many aspects of financial planning, there is not a “one size fits all” answer. Furthermore, the Affordable Care Act has added some new twists to an already complicated issue that is of great concern to our clients and most of us.
Jerry Love, CPA, is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at
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- Written by: Jerry Love, CPA
Earlier this summer, I wrote an article about the topic of when a person should start drawing their Social Security. I received several requests that I also write about what a spouse would receive from Social Security and the answer is, “it depends” based on a number of factors. In this article, I will walk you through some of these basic considerations addressing only the retirement benefits of the spouse. If a person dies with dependent children, that is a whole other topic; I only have a limited amount of information about that in this article.
In this article and in the materials written by the Social Security Administration (SSA), it can be confusing about who they are referring to as the spouse. So to help you know who is who, I am going to assume that John Doe is the spouse who made the most money and when this article is talking about the spouse or the worker with the larger earnings record, I will indicate it is John. Jane Doe is (or was, as the case may be) married to John Doe.
Basically the spouse (Jane) may draw the higher of the retirement benefit based on their own record or their spouse’s (John’s) record or even a spouse prior to John. Generally, drawing based on the spouse’s (John’s) record would yield them a retirement benefit equal to half of their spouse’s (John’s) retirement benefit. Any retirement benefits that Social Security pays to the spouse (Jane) does not decrease the retirement benefits of the other person (John). Furthermore, it may be that John may have more than one person whose retirement is based on his earnings and that does not diminish what any of them are entitled to, including John.
First fundamental principle, you (Jane) cannot receive retirement benefits based on your spouse (John) until your spouse files for retirement, if he is alive and you are still married. You may apply for and receive retirement benefits based on your own record starting as early as age 62.
Who Can Get Survivors Benefits Based on Your Work?
According to the Social Security Administration’s (SSA) site http://www.ssa.gov/pubs/EN-05-10084.pdf:
“Your widow or widower may be able to receive full benefits at full retirement age. The full retirement age for survivors is age 66 for people born in 1945-1956 and will gradually increase to age 67 for people born in 1962 or later. Reduced widow or widower benefits can be received as early as age 60. If your surviving spouse is disabled, benefits can begin as early as age 50.”
As to the broader topic of Benefits for other Family Members, in the Social Security Administration’s publication on Retirement Benefits, they tell us:
1. “Your widow or widower can receive benefits at any age if she or he takes care of your child who is receiving Social Security benefits and younger than age 16 or disabled.”
2. “Your unmarried children who are younger than age 18 (or up to age 19 if they are attending elementary or secondary school full time) also can receive benefits.”
3. “Your children can get benefits at any age if they were disabled before age 22 and remain disabled.”
4. “Under certain circumstances, benefits also can be paid to your stepchildren, grandchildren, step-grandchildren or adopted children.”
5. “Your dependent parents can receive benefits if they are age 62 or older. (For your parents to qualify as dependents, you would have had to provide at least one-half of their support.)”
For more information on widows, widowers and other survivors, visit www.socialsecurity.gov/survivorplan.
Now back to our basic question of what are a spouse’s benefits for SSA retirement. The SSA website tells us:
“A spouse (Jane) who has not worked or who has low earnings can be entitled toas much as one-half of the retired worker’s (John’s) full benefit. If you are eligible for both your own retirement benefits and for benefits as a spouse, we always pay your own benefits first. If your benefits as a spouse (Jane based on John’s earnings) are higher than your retirement benefits, you will get a combination of benefits equaling the higher spouse benefit.
“If you (Jane) have reached your full retirement age, and are eligible for a spouse’s (John’s) or ex-spouse’s benefit and your own retirement benefit, you may choose to receive only spouse’s benefits and continue accruing delayed retirement credits on your own Social Security record. You then may file for benefits later and receive a higher monthly benefit based on the effect of delayed retirement credits. If you are receiving a pension based on work where you did not pay Social Security taxes, your spouse’s benefit may be reduced.”
Can a spouse (Jane) begin to draw Social Security retirement benefits before they reach full retirement age?
Yes, but the amount of the benefit is reduced. The amount of the reduction depends on the combination of what their spouse’s (John’s) “full retirement age” is and the age they (Jane) wish to begin drawing. For example, if their spouse’s (John’s) full retirement age is 65 and the spouse elects to begin drawing retirement at age 62, they would get 37.5% of the worker’s unreduced benefit. Or if the spouse’s (John’s) full retirement age is 67, a spouse would get 32.5% of the worker’s (John’s) unreduced benefit at age 62.
What is the retirement benefits amount for the spouse (Jane) when their spouse (John) has a larger history of earning?
The following is taken from http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/175.
"A spouse (Jane) receives one-half of the retired worker's (John’s) full benefit unless the spouse (Jane) begins collecting benefits before full retirement age.
"If the spouse (Jane) begins collecting benefits before full retirement age, the amount of the spouse's benefit is reduced by a percentage based on the number of months before he/she reaches full retirement age.
For example, based on the full retirement age of 66 (for John), if a spouse (Jane) begins collecting benefits:
- At age 66, Jane would get 50% of John’s full retirement benefit;
- At age 65, the benefit amount that Jane would get is about 46 percent of the retired worker's full benefit;
- At age 64, Jane would get about 42%;
- At age 63, 37.5 percent; and
- At age 62, 35 percent.
"However, if a spouse (Jane) is taking care of a child who is either under age 16 or disabled and receives Social Security benefits, a spouse (Jane) will get full benefits, regardless of age.
"If you are eligible for both your own retirement benefit and for benefits as a spouse, we will always pay you benefits based on your record first. If your benefit as a spouse is higher than your retirement benefit, you will receive a combination of benefits equaling the higher spouse's benefits."
Can I (Jane) receive reduced retirement benefits at age 62 under my record then at full retirement age receive full spouce' benefits?
According to SSA’s website at http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/309/kw/spousal%20benefits.
"If you (Jane) choose to receive a reduced benefit before full retirement age on your own record, you are not entitled to the full spouse's (based on John’s earnings) benefit rate upon reaching full retirement age, and a reduced benefit rate is payable for as long as you remain entitled to spouse's benefits."
One concept that I find many people are unsure or unaware of is that they may be eligible to draw retirement benefits based on a former spouse. They may be entitled to retirement benefits based on the earnings record of a former spouse who is deceased or from whom they are divorced. First, I will explore the Survivors Benefits as discussed on the SSA website at: http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/395. In order to determine eligibility to draw based on a deceased spouse’s record, we have to know how long they were married.
"Generally, you (Jane) qualify for survivor’s benefits if you were married to your spouse (John) for at least nine months before the worker (John) died. If your spouse could not have been expected to live for nine months when you married, you do not qualify for benefits on your spouse's record.
"In some cases, however, you do not need to be married to your spouse for any specific length of time to get benefits.
"As you (John) plan for your family's protection if you die, you should consider the Social Security benefits that may be available if you are the survivor (Jane)--that is, the spouse or child--of a worker who dies. That person (John) must have worked long enough under Social Security to be eligible for retirement benefits.
"The number of credits needed to provide benefits for survivors depends on the worker's (John’s) age when he or she dies. The younger a person is, the fewer credits he or she must have for family members to receive survivor’s benefits. But no one needs more than 40 credits (10 years of work) to be eligible for any Social Security benefit.
"However, benefits can be paid to the worker's children and the surviving spouse who is caring for the children even if the worker doesn't have the required number of credits. They can get benefits if the worker has credit for one and one-half years of work (6 credits) in the three years just before his or her death."
Qualifying for Divorced Spouse Benefits
Am I entitled to any benefits for a divorced spouse?
This poses an interesting twist and the answer is yes, you may be entitled to benefits based on a divorced spouse. You can find the discussion of this on SSA’s web site at http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/299.
So we can keep the spouses straight in these discussions we introduce Sam, Jane’s ex-husband.
"A person (Jane) can receive benefits as a divorced spouse on a former spouse’s (Sam’s) Social Security record if he or she:
- Was married to the former spouse for at least 10 years;
- Is at least age 62 years old;
- Is unmarried; and
- Is not entitled to a higher Social Security benefit on his or her own record.
"The amount of benefits he or she gets has no effect on the amount of benefits you (Sam) or your current spouse (Sam’s next wife) can get. Also, if you (Sam) and your ex-spouse (Jane) have been divorced for at least two years and you and your ex-spouse are at least 62, he or she can get benefits even if you (Sam) are not retired.
"The former spouse (Jane) must be entitled to receive his or her own retirement or disability benefit. If the former spouse (Jane) is eligible for a benefit, but has not yet applied for it, the divorced spouse can still receive a benefit if he or she meets the eligibility requirements above and has been divorced from the former spouse for at least two years."
What if I Remarry?
Follow our example that Jane has remarried and is now married to John. Here is what the SSA’s rule is:
“Generally, we cannot pay benefits if the divorced spouse (Jane) remarries someone (John) other than the former spouse (Sam), unless the latter marriage ends (whether by death, divorce, or annulment), or the marriage is to a person entitled to certain types of Social Security auxiliary or survivor's benefits.
"A person can receive benefits as a surviving divorced spouse on the Social Security record of a former spouse who died fully insured, if he or she:
- Is at least age 60, or age 50 and disabled;
- Was married to the former spouse for at least 10 years; and
- Is not entitled to a higher Social Security benefit on his or her own record.
"If the surviving divorced spouse is age 60 or over applying for benefits remarried after age 60, or after age 50 and at the time of remarriage was entitled to disability benefits, we disregard the marriage. If a person is already entitled to benefits as an aged or disabled surviving divorced spouse and remarries, benefits continue regardless of the person's age at the time of remarriage.
"The benefits paid to a divorced spouse or a surviving divorced spouse will not affect the benefit amount paid to other family members who receive benefits on the same record.”
As you can see this portion of the question can become very complicated and may require a trip to the Social Security office to discuss the matter with them in person.
What Information Do You Need to Apply for Spouse's or Divorced Spouse's Benefits?
You can find this listing of what you need to have with you if you are planning to apply for retirement benefits based on a prior marriage. http://www.socialsecurity.gov/online/ssa-2.html
"Documents you may need to provide - We may ask you to provide documents to show that you are eligible, such as:
- Birth certificate or other proof of birth;
- Proof of U.S. citizenship or lawful alien status if you were not born in the United States
- U.S. military discharge paper(s) if you had military service before 1968;
- W-2 forms(s) and/or self-employment tax returns for last year.
- Final divorce decree, if applying as a divorced spouse; and
- Marriage certificate.
"Important - We accept photocopies of W-2 forms, self-employment tax returns or medical documents, but we must see the original of most other documents, such as your birth certificate. (We will return them to you.)
"Do not delay applying for benefits because you do not have all the documents. We will help you get them.
What if I am Eligible for Ex-Spouse Benefits Based on the Above Rules, but They are Deceased?
Again we go to the SSA’s website, http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/1811/kw/spousal%20benefits.
"You (Jane) can receive retirement benefits as a surviving divorced spouse (Sam) on the Social Security record of a deceased former spouse (Sam) who is fully insured. If you:
- Are at least age 60, or age 50 and disabled;
- Were married to the former spouse for at least 10 years;
- Are not entitled to a higher Social Security benefit on your own record; and
- Are unmarried, unless the following exception applies: You remarried after age 60; or after age 50 and at the time of re-marriage you were entitled to Social Security disability benefits.
If you believe this article and the prior article have covered everything you need to know or want to try figuring out what you are eligible to receive, the SSA has a Do It Yourself (DIY) tool at http://www.benefits.gov/ssa.
"If you are inclined to assess what you might be eligible to receive, SSA has a DIY tool called BEST (Benefit Eligibility Screening Tool). BEST helps you find out if you could get benefits that Social Security administers. Based on your answers to questions, this tool will list benefits for which you might be eligible and tell you more information about how to qualify and apply.
BEST is NOT an application for benefits and:
- does not know, or ask for, your name or Social Security number.
- does not access your personal Social Security records.
- will not give you an estimate of benefit amounts."
However, if you are approaching retirement age (you are within 3 months of age 62 or older) you can apply online at http://www.socialsecurity.gov/applyonline/.
Otherwise you may call the SSA national toll-free service at 1-800-772-1213 (TTY 1-800-325-0778) or visit your local Social Security office. An appointment is not required, but if you call ahead and schedule one, it may reduce the time you spend waiting to apply.
"You can help by being ready to provide any needed documents; and answer the questions listed below.
What we will ask you
- Your name, gender and Social Security number;
- Your name at birth (if different);
- Your date of birth and place of birth (State or foreign country);
- Whether a public or religious record was made of your birth before age 5;
- Your citizenship status;
- Whether you or anyone else has ever filed for Social Security benefits, Medicare or Supplemental Security Income on your behalf (if so, we will also ask for information on whose Social Security record you applied);
- Whether you have used any other Social Security number;
- Whether you became unable to work because of illnesses, injuries or conditions at any time within the past 14 months. If "Yes," we will also ask the date you became unable to work;
- Whether you were ever in the active military service before 1968 and, if so, the dates of service and whether you have ever been eligible to receive a monthly benefit from a military or Federal civilian agency;
- Whether you or your spouse have ever worked for the railroad industry;
- Whether you have earned Social Security credits under another country's social security system;
- Whether you qualified for or expect to receive a pension or annuity based on your own employment with the Federal government of the United States or one of its States or local subdivisions;
- Whether you are currently married and, if so, your spouse's name, date of birth (or age) and Social Security number (if known).
- The names, dates of birth (or age) and Social Security numbers (if known) of any former spouses;
- The dates and places of each of your marriages and, for marriages that have ended, how and when they ended;
- The names of any unmarried children under 18, 18-19 and in secondary school or disabled before age 22;
- The name(s) of your employer(s) and/or information about your self-employment and the amount of your earnings for this year, last year and next year;
- Whether we may contact your employers for wage information;
- The month you want your benefits to begin; and
- If you are within 3 months of age 65, whether you want to enroll in Medical Insurance (Part B of Medicare).
"Depending on the information you provide, we may need to ask other questions."
Final Note
This has become part two of a discussion about applying for Social Security benefits. So if you are reading this article and have not already read the first one, I recommend that you obtain that one at www.cpamagazine.com and read it too. Its focus is more on the merits of starting your retirement payment at age 62, 66 or 70. Those elements are applicable to a person regardless of how their maximum benefit is determined.
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- Written by: Jerry Love, CPA
This is a question I am frequently asked by the Baby Boomer generation. After all, most of us have accepted there are stages in life and the logical progression is after we have been in the workforce for 40 something years, we should be able to retire. Well, the answer is the infamous “it depends.”
In the prior column, we explored the concept of when should you begin to draw your Social Security. So this article seems to be the logical extension of that one.
This question is really not very difficult to answer if you can tell me a few things: 1) how much will you be spending each year, 2) at what age will you retire, 3) how much do you have in savings, 4) what is your rate of return on your investments, and 5) how long will you live? OK, I would also need to know a few more things including how much you will be getting from Social Security and any pension or annuity type payments etc. Of course, we also need Big Brother to tell us exactly how much inflation will be by year, how much your investments will earn each year and whether there are any other variables such as family members coming to live with you or huge medical bills that are not covered by Medicare or your long term care policy.
These are all very important questions because according to Bank of America, http://learn.bankofamerica.com/articles/money-management/how-much-do-you-need-for-retirement.html, “many Americans have a retirement savings shortfall”. According to the Employee Benefit Research Institute (EBRI), about 64% of all workers have less than $50,000 saved for retirement.”
Further EBRI says, “almost 50% of workers ages 45 and older do not know how much they will need in retirement.” (http://www.deseretnews.com/article/865577034/How-much-money-you-need-to-retire-comfortably.html?pg=all)
So let’s begin to work through this maze.
Any planning for your retirement has to begin with our determining how much you are expecting to spend. Yes, this is basically me asking do you have a budget? The most frequent reply is “no”. So what I will generally do is encourage the client to do one of two things: either take the most current year or at least the prior three months and summarize by category what you have spent. From this historical summary, we can then identify what you would be expecting to spend in the first year of retirement.
Yes, we will make some modifications to this to adjust for items that may not be necessary during retirement which may include items you have been spending related to your work. There have been many articles written about how a person only needs 70% - 85% of their pre-retirement income. However, I have found it is better to assume that your spending will not be reduced during retirement and may in fact increase because you want to do some traveling or other items on your bucket list.
So first contrast that there is a difference in how much you are making prior to retirement and how much you are spending. If you are taking the rule of thumb literally, your current spending is probably in the range of 70% - 85% of your current income, if you consider that in most cases, 7.65% is going to pay your Social Security and you may be deferring 15% to your 401k or similar plan. If you throw in a few items such as commuting costs and anything else directly related to your employment, you might be on target to these rules of thumb. I choose instead to help clients think in terms of what they are spending. Some surveys indicate that as many as 15% to 20% of retirees see their spending go up during the early stages of retirement.
It is also important to understand that there are some increases to your budget during retirement, not the least of which may be medical expenses. From: http://business.time.com/2013/02/11/sizing-up-the-big-question-how-much-money-do-you-need-to-retire/#ixzz2WPgTrJyW, “EBRI estimates that a 65-year-old couple in 2019 that does not have any employer-provided health benefits will need $450,000 to have a 50% chance of funding healthcare expenses not covered by Medicare. Even with employer benefits, there is a 50% chance that out-of-pocket expenses will reach $268,000.”
In addition to the unknown of how much may be needed for medical expenses, it is also important to discuss if there are other major expenditures the client may have in mind during retirement.
Another important factor for us to anticipate is how long you will live. From http://business.time.com/2013/02/11/sizing-up-the-big-question-how-much-money-do-you-need-to-retire/#ixzz2WPg1OTqv, “The Society of Actuaries estimates that for a married 65-year-old couple, there is a 45% chance of one person reaching 90 and a 20% chance one will reach 95.”
Of course no one knows exactly how long we will live and for most clients, we are attempting to determine the life expectancy of two people not just one.
The actuarial tables are a good starting place. I generally ask the client to compare those life expectancies with their family history. There certainly seems to be support for the premise that the current population is living longer than prior generations due to improvements in our medical profession and that we are more educated about ways we can improve our health. Taking all of this into consideration, I find that it is generally a good idea to begin with a longer life expectancy than the tables. Most people would prefer to leave some assets as an inheritance to someone versus running out of money many years before their passing.
Of course, we also have to consider inflation during retirement. If a person retires at age 66, and lives another 20 to 25 years, they should be expecting that each year many things they consume will be increasing in price. Many financial planners will use a 3% assumption for inflation. Assuming you are 66 now and you believe your life expectancy will be only 15 years. If inflation is 3% per year, that means that the next year your expenses would be $51,500 which is $50,000 + ($50,000 x 3%) and the second year your expenses would be $53,045 which is $51,500 + ($51,500 x 3%) and so on up until your retirement 15 years from now when you will require $77,898 to buy the same things that you can buy today for $50,000.
To quote http://www.newretirement.com/Planning101/Inflation.aspx, “when living on a fixed income, inflation has a profound impact on your quality of life. Basically, inflation makes goods and services more expensive and decreases the value of your money. When you are working – your wages generally rise as the costs of goods and services increase. Your earnings ‘keep pace with inflation’, so normal inflation is not generally a big concern. However, when you are living off of savings – inflation literally robs you of income.”
Keep in mind that history shows that inflation runs about 3% a year, meaning the cost of living doubles roughly every 24 years. Some articles say that you should conservatively assume inflation will be 4% annually.
The next element in our calculation is how much will our investments earn during our retirement. This is especially important considering that many people have a perception that as they approach their retirement age, they should move closer to having 100% of their retirement assets in CDs, savings accounts or bonds. However, you should note that many of the retirement calculators assume an annual return of 8%, a lofty goal in today's investing environment.
Here is some data for comparison. According to an article written by Chris Taylor, March 28, 2012, http://www.reuters.com/article/2012/03/28/us-column-yourmoney-retirement-returns-idUSBRE82R0XH20120328, “a couple of basic building blocks: According to Irvine, California-based Index Fund Advisors, 86 years of data reveals the long-term return of the Standard & Poor's 500 index to be 9.78% annually, while long-term government bonds average 5.73%. That's a good place to start, and then you can start refining from there, depending on your particular asset allocation.”
He continues in his article to observe: “Even among financial professionals, there's a wide range of expected rates of return. For its sample pre-retirement balanced portfolios, Baltimore fund shop T. Rowe Price plugs in 7% annual returns, pre-retirement. Vanguard uses 6% for a long-term, balanced portfolio. In a recent research paper titled ‘How Much to Save for a Secure Retirement,’ Boston College's Center for Retirement Research analysts used a slim 4 percent. That might be overdoing it on the cautious side - but if being ultra-conservative prompts you to save even more, then that's not a bad outcome. Better to end up with too much than too little.”
Another critical element for us to understand is how much we are taking out of the retirement savings each year. This is called the “spend rate”. According to Vanguard, “basically, retirees who have a diversified portfolio of stocks and bonds can generally withdraw roughly 4% of their assets during the first year in retirement. In subsequent years, they should then adjust the dollar amount of withdrawals based on inflation. As an example, let's consider a $1 million retirement portfolio with an initial 4% withdrawal of $40,000. Assuming an inflation rate of 3%, during the second year the dollar amount of the annual withdrawal would increase by 3%, to $41,200.” (https://retirementplans.vanguard.com/VGApp/pe/pubnews/4PercentRule.jsf)
According to http://www.retirementwatch.com/CashSample4.cfm, “most studies conclude that the maximum safe rate is just over 4% of the portfolio's value.”
However it is important to note that one size does not fit all. According to http://www.advisorone.com/2012/03/26/milevsky-what-is-a-proper-spending-rate-in-retirement, “the greatest economic scholar of the first-half of the 20th century, Professor Irving Fisher, was born in 1867 and served as a professor of economics at Yale University during the years 1900 to 1935. Fisher’s Optimal Retirement Plan - If you haven’t heard of the infamous 4% rule of retirement income planning, it’s probably for the better. Most economists do not take kindly to this rule and the source of their discomfort can be traced directly to Irving Fisher’s ideas about lifecycle consumption smoothing. Fisher’s philosophy was that there was no universal spending or consumption rate and that everyone should pick a number that would best smooth their consumption. It does not have to be fixed or flat over time, and really depends on your personal preferences and especially your attitude towards risk.”
So about now, I imagine some are saying “my head is spinning, can you just tell me how much I need to have in my retirement account?”
From https://www.fidelity.com/viewpoints/personal-finance/8X-retirement-savings, “to simplify matters, we’ve created a rule of thumb: Save at least 8 times (X) your ending salary to help increase the odds that you won’t outlive your savings during 25 years in retirement. Fidelity suggests that you should have saved 1X your current salary by 35, then 3X by 45, and 5X by 55.”
From: http://business.time.com/2013/02/11/sizing-up-the-big-question-how-much-money-do-you-need-to-retire/#ixzz2WPfLeA2e, “the fund company T. Rowe Price advises a multiple of 12 times final pay. And another approach from Dallas Salisbury, president of the Employee Benefit Research Institute offers: You need 33 times what you expect to spend in your first year of retirement—after subtracting Social Security benefits.”
In conclusion, what I hope you will be able to take away from this article is that the answer to the initial question of “do we have enough money to retire?” is a complex matter that requires a skilled financial planner who will help you work through several inter-related assumptions as you make this evaluation.
Jerry Love, CPA, is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at
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- Written by: Jerry Love, CPA/PFS
This is a question that I am frequently asked by clients. Should they start as soon as they turn 62, when they are the full retirement age (now 66 for most individuals) or should they defer until they turn age 70? The answer is “it depends” on a number of factors. This article will walk you through the basic considerations.
For the purpose of this article, I will use the current maximum retirement benefit. According to the Social Security website:
“The maximum benefit depends on the age you retire. For example, if you retire at your full retirement age in 2013, your maximum benefit would be $2,533. But if you retire at age 62 in 2013, your maximum benefit would be $1,923. If you retire at age 70 in 2013, your maximum benefit would be $3,350.”
http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/5/~/maximum-retirement-benefit
Who is eligible for Social Security Retirement benefits? In the Social Security Administration’s publication on Retirement Benefits, they tell us:
“When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. The number of credits you need to get retirement benefits depends on when you were born. If you were born in 1929 or later, you need 40 credits (10 years of work). If you stop working before you have enough credits to qualify for benefits, the credits will remain on your Social Security record. If you return to work later on, you can add more credits so that you qualify. We cannot pay any retirement benefits until you have the required number of credits.
In 2013, you earn one credit for each $1,160 in earnings up to a maximum of four credits per year. (The amount of money needed to earn one credit usually goes up every year.)
Your benefit payment is based on how much you earned during your working career. Higher lifetime earnings result in higher benefits. If there were some years when you did not work or had low earnings, your benefit amount may be lower than if you had worked steadily.
Your benefit payment also is affected by the age at which you decide to retire. If you retire at age 62 (the earliest possible retirement age for Social Security) your benefit will be lower than if you wait until later to retire.
If you were born in 1944 or earlier, you are already eligible for your full Social Security benefit. If you were born from 1943 to 1960, the age at which full retirement benefits are payable increases gradually to age 67.”
Those born between 1943 and 1954 reach full retirement at age 66. If you were born between 1954 and 1960, you can look at the table published by the Social Security Administration.
How is my Retirement benefit calculated? The Social Security Administration’s publication titled A “Snapshot”, says:
“Generally, your Social Security benefit is a percentage of your average lifetime earnings. Low-income workers receive a higher percentage of their average lifetime earnings than those in the upper income brackets. A worker with average earnings can expect a retirement benefit that replaces about 40 percent of his or her average lifetime earnings.
Social Security never was intended to be your only source of income when you retire or become disabled or your family’s only income if you die. It is intended to supplement your savings, investments, pensions and insurance plans.”
Starting Social Security at age 62. Sixty-two is the earliest age that you can begin receiving the social security retirement benefit.
In the Social Security Administrations publication on Retirement Benefits, they tell us:
“Early retirement
You can get Social Security retirement benefits as early as age 62. However, you will receive a reduced benefit if you retire before your full retirement age. For example, if you retire at age 62, your benefit would be about 25 percent lower than what it would be if you waited until you reach full retirement age.
You may start receiving benefits as early as age 62. However, if you start your benefits early, your benefits are reduced. Your benefit is reduced about one-half of 1 percent for each month you start your Social Security before your full retirement age.”
Two fundamental questions come to mind when a client asks about beginning to draw their social security retirement prior to the required age for them to get the full benefit:
1. How long do you expect to live?
2. Are you planning to work prior to reaching your full retirement age?
How long do you expect to live? If for some unfortunate reason a person has a medical diagnosis that would lead them to conclude that they would not live to their full retirement age or may not live many years beyond their full retirement age, then it may be the best decision for them to begin drawing their Social Security even though they will have a reduction.
For illustration using the maximum payments above, let’s assume John wants to begin drawing his retirement at age 62 and does not expect to have any earned income prior to age 66 but believes that he may not live past age 70. For simplicity sake, the illustrations below will not consider any increases of Social Security.
1. Option #1: Begin drawing the $1,923 as soon as he turns 62. If you assume he will draw this amount for 8 years (96 months), he will receive $184,608 from Social Security.
2. Option #2: Begin drawing the $2,533 as soon as he turns 66. If you assume he will draw this amount for four years (48 months), he will receive $121,584 from Social Security.
3. Based on these assumptions alone (which includes the assumption that he will not have any surviving spouse or other qualifying dependent who will be entitled to continue his payment after his death), it would be clear that he would receive more total retirement benefits because he started at age 62.
4. Basically in this analysis we would be considering how much will the person draw prior to the full retirement age. In John’s case that is four years (48 months) for a total of $92,304. Then divide that amount by the expected difference between the reduced amount and the full retirement amount which in John’s case is $610 per month. The result would be that John would basically need to live beyond age 78 to have benefited from waiting to age 66.
Do you expect to have earned income between age 62 and 66? In the Social Security Administration’s publication on Understanding The Benefits, they tell us:
“If you work and get benefits, you can continue to work and still receive retirement benefits. Your earnings in (or after) the month you reach full retirement age will not reduce your Social Security benefits. In fact, working beyond full retirement age can increase your benefits. However, your benefits will be reduced if your earnings exceed certain limits for the months before you reach your full retirement age.
If you work but start receiving benefits before full retirement age, $1 in benefits will be deducted for each $2 in earnings you have above the annual limit. In 2013, the limit is $15,120.
In the year you reach your full retirement age, your benefits will be reduced $1 for every $3 you earn over a different annual limit ($40,080 in 2013) until the month you reach full retirement age.
Once you reach full retirement age, you can keep working, and your Social Security benefit will not be reduced, no matter how much you earn.”
So the second factor is much harder to clearly define in a formula. Basically for John’s illustration, if he were to have earned income in the first year of $61,272 ($15,120 + ($23,076 x 2)), he would effectively have his entire Social Security benefit nullified and would have to pay back the full amount he received in his first year. He could earn $15,120 and have no reduction in his retirement benefit. Then for each dollar earned above $15,120 he loses $1 of retirement for every $2 he earns, so when he has earned $46,152 ($23,076 x 2) he will have to pay back his full benefit.
As indicated above, in the year that John will turn his full retirement age of 66, he will have a higher threshold of earnings before losing his benefit.
Even though, there is a limitation to how much a person will be able to earn it is a facts and circumstances question that will require some thought and calculations to give the client a good answer. Obviously, if the person has been earning over the Social Security wage maximum ($113,700 in 2013), then the decision is really easy but for many middle to lower income clients it is not so clear.
Should I wait to age 70 to begin drawing Social Security? In the Social Security Administration’s publication on Retirement Benefits, they tell us:
“You may choose to keep working even beyond your full retirement age. If you do, you can increase your future Social Security benefits in two ways.
Each additional year you work adds another year of earnings to your Social Security record. Higher lifetime earnings may mean higher benefits when you retire.
Also, your benefit will increase automatically by a certain percentage from the time you reach your full retirement age until you start receiving your benefits or until you reach age 70. The percentage varies depending on your year of birth. For example, if you were born in 1943 or later, we will add 8 percent per year to your benefit for each year that you delay signing up for Social Security beyond your full retirement age.”
Once again, the biggest question is probably, how long do you expect to live?
Again, let’s do the math with John using the assumption that he will not have any surviving spouse or other qualifying dependent who will be entitled to continue his payment after his death. The Life and Worklife Expectancies by Hugh Richards, MS and Jon Abele, Esq. published by Lawyers & Judges Publishing Company, Inc., 1999 indicates the life expectancy for a man turning 66 is 15.4 years (age 81.4). So let’s assume that John dies on his 82nd birthday.
Similar to the approach above, we basically would be considering how much will the person draw prior to turning age 70. That is again four years (48 months) for a total of $121,584 ($2,533 x 48 months). Then divide that amount by the expected difference between the reduced amount and the full retirement amount which in John’s case is $817 ($3,350 - $2,533) per month. The result would be that John would basically need to live beyond age 81 (about 12.4 years) to have benefited from waiting to age 70.
Deciding when to retire. In the Social Security Administration’s publication on Retirement Benefits, they tell us:
“Choosing when to retire is an important but personal decision. Regardless of the age you choose to retire, it is a good idea to contact Social Security in advance to learn the available options and make an informed decision. In some cases, your choice of a retirement month could mean higher benefit payments for you and your family.
You should apply for benefits about three months before the date you want your benefits to start.”
This article is not intended to discuss the benefits for spouses but it should be noted in the Social Security Administration’s publication on Retirement Benefits, they tell us:
“A spouse who has not worked or who has low earnings can be entitled to as much as one-half of the retired worker’s full benefit. If you are eligible for both your own retirement benefits and for benefits as a spouse, we always pay your own benefits first. If your benefits as a spouse are higher than your retirement benefits, you will get a combination of benefits equaling the higher spouse benefit.
If you have reached your full retirement age, and are eligible for a spouse’s or ex-spouse’s benefit and your own retirement benefit, you may choose to receive only spouse’s benefits and continue accruing delayed retirement credits on your own Social Security record. You then may file for benefits later and receive a higher monthly benefit based on the effect of delayed retirement credits.”
As previously indicated this article has dealt primarily with the decision of whether to start drawing the retirement benefit at age 62, 66 or 70 taking into consideration just the individual without regard to the dynamics created when there is another person whose payment will be influenced by this decision. When you take on the engagement to discuss this decision with a client you need to have a clear understanding of how Social Security works and who, if anyone else, will be impacted by the decision.
Jerry Love, CPA, is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at
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- Written by: Jerry Love, CPA
The Affordable Health Care Act (AHCA) is being called the most historic overhaul of the U.S. health care system since Medicare and Medicaid. After its passage, many people believed the law would never go into effect because either the Supreme Court would overturn it or Congress would repeal it. Now that the general consensus has shifted to accepting it will become law, we are hearing about provisions contained in the Act. One that has gone unnoticed by many taxpayers is a credit for small business.
For the AHCA a small employer is defined as an employer with less than fifty full time employees (or more accurately stated less than fifty full time equivalent employees). Whitehouse.gov indicates, “The law specifically exempts all firms that have fewer than 50 employees - 96% of all firms in the United States or 5.8 million out of 6 million total firms – from any employer responsibility requirements. These 5.8 million firms employ nearly 34 million workers.” (http://www.whitehouse.gov/files/documents/health_reform_for_small_businesses.pdf)
However, AHCA states that small employers who pay for health insurance for their employees may be entitled to a tax credit for tax years beginning after Dec. 31, 2009. Of course, the cost of providing the health insurance is an ordinary and necessary business expense and a tax-free benefit for the employees. But thanks to a provision in the 2010 Health Care Act, as Amended by the 2010 Health Care Reconciliation Act, some small employers are entitled to a tax credit in addition to the tax deduction. According to sba.gov, “The credit is specifically targeted for those businesses with low and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.”
This is a much welcomed relief to small businesses that pay on average as much as 18% more for the coverage they provide their employees compared to similar policies offered by larger firms, (http://www.whitehouse.gov/sites/default/files/docs/the_aca_helps_small_businesses.pdf). Some industry observers indicate that insurance premiums are expected to increase 10% or more. However, sba.gov indicates in an article dated January 25, 2013 that, “The Affordable Care Act will help small businesses by lowering premium cost growth and increasing access to quality, affordable health insurance.” (http://www.sba.gov/community/blogs/top-three-things-small-businesses-should-know-about-affordable-care-act)
For purposes of this credit, health insurance coverage means benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital, medical service policy, medical service plan contract, or any health maintenance organization contract offered by a health insurance provider. A health insurance provider is either an insurance company or another entity licensed under state law to provide health insurance coverage.
Small employers with fewer than 25 full-time equivalent employees and average annual wages of less than $50,000 that purchase health insurance for employees are eligible for the credit. The maximum credit will be available to employers with 10 or fewer FTE employees and average annual wages of less than $25,000. To be eligible for a tax credit, the employer must contribute at least 50% of the total premium cost. For 2010 through 2013, eligible employers will receive a small business credit for up to 35 % of their contribution toward the employee’s health insurance premium. Small tax-exempt organizations meeting the above requirements are eligible for tax credits of up to 25% of their contribution. In 2014 and later, eligible employers who purchase coverage through the Small Business Health Options Program (SHOP) can receive a tax credit for two years of up to 50% of their contribution. The enhanced credit can be claimed for any two consecutive taxable years beginning in 2014 through the SHOP.
To be eligible for the credit the employer must have paid the premiums under a qualifying arrangement. According to the IRS instructions, “A qualifying arrangement is generally an arrangement that requires the employer to pay a uniform percentage (not less than 50%) of the premium cost for each enrolled employee's health insurance coverage. However, an arrangement that requires the employer to pay a uniform premium for each enrolled employee (composite billing) and offers different tiers of coverage (for example, self-only, self plus one, and family coverage) can be a qualifying arrangement even if it requires the employer to pay a uniform percentage that is less than 50% of the premium cost for employees not enrolled in self-only coverage.”
Certain employees are excluded for purposes of the credit including 2% shareholders, 5% owners, self-employed individuals, and certain individuals related to those individuals. It is presumed that you exclude these employees when determining if the employer has 25 or less FTE and when calculating the average annual wage. Furthermore, the rules require aggregation of controlled groups of corporations and affiliated service groups.
The determination of FTE for the credit is based on 2,080 hours per employee. Therefore, if the employer has part time employees it may be that they still qualify as having less than 25 FTE. Any hours worked by an employee in excess of 2,080 is excluded as you determine the FTEs. Further, you are allowed to exclude seasonal employees but would include part-time employees and any leased employees. The determination of the average wage is the average compensation of just the employees who make up the employees counted in the FTE calculation.
The credit changes for tax years after 2013. After 2013, the credit is only available for small employers that purchase health insurance coverage for its employees through a state exchange and is only available for a maximum coverage period of two consecutive tax years. However, the maximum two-year coverage period does not take into account any tax years beginning in years before 2014.
The credit is also available to small tax-exempt employers who are exempt under section 501(c). The credit available to them is generally 25% of the premium paid and is allowed based on payroll taxes paid. The tax-exempt entity would claim this credit by filing a Form 990-T.
For all other small employers, the credit is generally 35% of premiums paid, can be taken against both regular and alternative minimum tax, and is claimed as part of the general business credit on Form 3800. This credit is calculated on Form 8941. You must reduce your deduction for the cost of providing health insurance coverage to your employees by the amount of any credit for small employer health insurance premiums allowed with respect to the coverage.
According to whitehouse.gov, “These tax credits will benefit an estimated two million workers who get their insurance from an estimated 360,000 small employers who will receive the credit in 2011.” (http://www.whitehouse.gov/sites/default/files/docs/the_aca_helps_small_businesses.pdf)
Furthermore, whitehouse.gov emphasizes one of the goals of the AHCA is to increase the coverage by small employers. “Small businesses are the backbone of our economy, but high health care costs and declining coverage have hindered small business owners and their employees. Over the past decade, average annual family premiums for workers at small firms increased by 123%, from $5,700 in 1999 to $12,700 in 2009, while the percentage of small firms offering coverage fell from 65 to 59%.” (http://www.whitehouse.gov/sites/default/files/docs/the_aca_helps_small_businesses.pdf)
Jerry Love, CPA, is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at