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It’s been about a month since the Inflation Reduction Act (IRA) passed. There have been plenty of articles and videos talking about the legislation – what it does, who it impacts, and when we’ll see the impacts. My team and I started receiving a lot of questions from the financial advisors we work with leading up to the passing of the IRA and have continued since. The IRA impacts everyone, but the healthcare portions of it mean substantial changes to the way advisors incorporate healthcare costs into their financial plans for clients who are retired, on Medicare, or are still working.
Here’s what financial advisors need to know about the IRA.
1. The IRA will impact your clients on Medicare
In more ways than one!
Effective in 2025, there will be a $2,000 cap on out-of-pocket costs for prescription drugs for Medicare recipients. This cost reduction not only saves clients money – and will make it easier to plan for Medicare drug costs than it is today – but it broadens their health plan options under Medicare now that there is a cap on out-of-pocket costs for prescriptions. Although not likely to be common among clients of financial advisors, in 2024, full extra help eligibility will extend to enrollees with income up to 150% of the poverty level, and assets up to $15,510 for an individual and $30,950 for a couple. Full extra help means beneficiaries won’t pay premiums for the part D benchmark plan and won’t have a part D deductible. Starting in 2024, the IRA will also prevent beneficiary premiums for part D coverage from increasing by more than 6% annually. However, this doesn’t mean that every plan’s premium increases will be capped at 6% per year. Because of this, it will be crucial that Medicare enrollee clients still compare their part D plans each year to ensure they choose the optimal plan for their health needs and financial goals.
For a full breakdown of how and when Medicare will be affected by the IRA, check out Kaiser’s timeline here.
2. The IRA affects pre-65 retirees
How? Through the extension of premium tax credits. Normally, you can't claim the credit unless your household income is between 100% and 400% of the federal poverty level for your family's size. But in March of last year, the government allowed people with income levels above the 400% threshold to claim the premium tax credit for those two years if they meet the other requirements. This temporary rule would have ended after 2022, but the IRA extends the temporary exception to the 400% cap through the 2025 tax year. This affects people who retire before 65 because they often choose a Marketplace (ACA) plan for their health insurance while they wait to become Medicare-eligible. The subsidies for Marketplace plans could reduce monthly premium costs to as little as $0. The extended timeline and changes made to these subsidies also mean that even someone who has an income of over $100,000 would still earn a subsidy of more than $2,000.
Let’s look at an example. Let’s say you have a client in Texas who is 54 with $100,000 in annual income from property and investments. They are retiring soon and will get a Marketplace plan. Let’s say they also have a 55-year-old spouse and a 23-year-old dependent, both of whom will also go on the Marketplace plan. Their estimated tax credit to use towards health insurance premiums would be $1,815; this would cover 72% of their monthly health insurance costs.
3. The IRA could affect clients who are actively employed
A potential outcome of the IRA could be increased costs for employer-provided health plans. One source stated, "Pharmaceutical companies are likely to raise costs to recoup what they deem to be a loss in revenue previously filled by the government and Medicare beneficiaries. Employers may be left with little protection as insurance carriers pass on the price hike to group health plans, driving premiums up." Because of this, we might see some smaller employers encourage their employees to obtain healthcare coverage through the ACA Marketplace, while larger employers will likely remain unphased due to their size. If any of your clients are small business owners, work for a company that doesn’t offer employer-sponsored health insurance, or are self-employed, it is a good idea for them to look into a Marketplace health plan.
Although it can be hard to keep up with new legislation, the great news is that most of the impacts from the IRA are positive for financial advisors and their clients. Most of your clients should see reduced healthcare costs and/or you can work with them to make healthcare choices that will reduce their costs.
Christine Simone is a co-founder of Caribou, a healthcare cost prediction and optimization solution for financial advisors. She often writes on the topics of healthcare and women in tech.
Resources:
https://www.youtube.com/watch?v=boTdhPFVRus
https://www.benefitnews.com/news/bidens-inflation-reduction-act-impact-on-health-insurance
Read more articles by Christine Simone
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
