Health Insurance Plans

What are the differences between the various kinds of health insurance plans?

There are essentially three different kinds of plans: fee-for-service arrangements, Health Maintenance Organizations (HMOs), and Preferred Provider Organizations (PPOs). Each type of plan has its own unique features.

Fee-For-Service or traditional health insurance plans offer the broadest choices of providers of health services. In general, you pay for your healthcare up front, and then submit a claim for reimbursement. You pay a monthly premium, an annual deductible, and generally coinsure yourself up to an annual limit. Most plans have a cap on annual out-of-pocket expenses.

There are two types of coverage available - basic, which pays toward hospital room and care costs, surgery, and some doctor visits; and major medical, which provides coverage only for expensive illnesses or injuries. Major medical is generally the cheaper type of policy to purchase.

HMOs are a prepaid health plan, and are generally the least expensive. They are also the least flexible in terms of providers of health services. You pay a monthly premium, and the HMO provides comprehensive care for you and your family. Included are doctor's visits, hospital stays, emergency care, surgery, and the like. The choice of providers is very limited, generally. You'll usually have a copayment fee (around $10 or $20) for each visit. The good news is that there is no claim to file as long as you use the services within the choices given.

PPOs are similar to HMOs in that they are somewhat prepaid, and there is a limited number of choices for healthcare. You'll also have copayment fees with your doctor office visits. This kind of plan is also similar to the Fee-For-Service plan in that you can choose providers outside the "network" of choices, for a higher cost of service, in terms of copayment and deductibles.

Tips On Tax Preparers

* Avoid preparers who claim they can get larger refunds than other preparers, or who guarantee results or base fees on a percentage of the amount of the refund.
* Never sign a blank return, even if the preparer asks you to.
* Before signing your return, review it to ensure the tax information and your name, address and Social Security numbers(s) are correct and that you understand the entries and are comfortable with the accuracy of the return.
* Check to see if the preparer has any questionable history with the Better Business Bureau, the state's board of accountancy for CPAs, the state's bar association for attorneys or the state's Attorney General's office.

529 Plan Oversight

One recent study by UNC-Wilmington accounting professors concluded that federal and state tax subsidies for 529 plan participants were accruing to the mutual fund distributors and brokers rather than benefiting the investor. Another recent article declared that 529 plans have become too complex: “What should be a consumer's paradise is, instead, a quagmire of investment funds, tax incentives and tangled rules and regulations, enough to confuse the most astute expert.”
What does this mean to you? Quite likely, it will eventually mean greater oversight by the Securities Exchange Commission (SEC). With this oversight, it is possible that the current tax incentives that 529 plans enjoy may be a thing of the past.
We’ll have to keep an eye on this situation and let you know how it turns out. With the “sunset” of 2010 only five years away (how did that happen?), it makes one wonder if the tax incentives will go away at that point.

Retirement Savings - Where to Start

Today, we have so many choices for our retirement funds, it can be difficult to choose which one to contribute to. If you are fortunate enough to have more than one retirement plan available to you, in what order do you contribute to them?

First of all, most folks have some sort of tax-deferred, qualified, retirement account available. They go by many names – 401(k), 403(b), 457, and deferred compensation. This kind of account is a good place to start when contributing retirement savings. For the purpose of clarity, when I refer to a 401(k) plan, I am referring to all of these kinds of plans. Understand, though, that this does not include traditional or Roth IRA accounts.

If your employer matches your contributions, you should definitely choose the 401(k) plan as the place to start with your contributions. For example, your employer may choose to match your contributions to the 401(k) at a rate of fifty cents per dollar for the first 6% that you contribute to the plan. What this means is that, if you make $50,000 per year and you contribute 6% ($3,000) to your 401(k) plan, after the employer match you’ll have a total of $4,500 contributed to your account by the end of the year. With the fifty cents per dollar match, you’re making a 50% return on your money, even before you invest it in the market! An additional bonus is that the contributions you make are pre-tax, so they’re actually costing you less in the long run.

For example, the $3,000 we used in the example above would actually only decrease your take-home pay by approximately $2,250 for the year if you were in the 25% income tax bracket ($3,000 x 25% = $750, $3,000 - $750 = $2,250). So, in other words, when you include the employer match, you are actually doubling your money when you contribute to this account at this level.

Next, you should begin contributing to a Roth IRA.

A Roth IRA is a retirement account that allows you to contribute, for 2004, up to $3,000 per person, plus a $500 catch-up provision for folks over the age of 50. This amount increases to $4,000 per person for 2005. You can open an account with a discount brokerage, a mutual fund company, or at your local bank. Some of the unique features about a Roth IRA include the following:

1. Once you’ve contributed funds to the account, qualified withdrawals of the contributions and the growth of the account will be tax free. That’s right, tax free. The qualifications aren’t that difficult to live with, either – you can begin withdrawals in the year you reach the age 59 ½.

2. Your contributions are available to you. You can withdraw the contributed amount (but not any growth of the account) at any time you wish, for any purpose.

3. The entire account may be withdrawn for other qualified purposes prior to retirement, as well. Among these qualified purposes are: purchase of a first home, education expenses, or health-care expenses.

You have until April 15, 2005 to make a contribution to a Roth IRA for 2004. Make sure your broker or custodian understands that this contribution is for the year 2004. Once you’ve maxed out your 2004 contribution, begin maxing out your 2005 contribution to the Roth IRA.

For example, for a couple that makes $50,000 and $30,000 between the two of them, if their employers match fifty cents on the dollar for the first 6%, the first step is to contribute that 6% to each of your plans, for a total contribution on your account of $4,800 (6% of $80,000). Then you each can contribute $4,000 to Roth IRAs, for a total of $12,800 being contributed for your household ($3,000 plus $1800 plus $4,000 plus $4,000 equals $12,800). Keep in mind that I have not included the employers’ matches of $1500 and $900 to your accounts. We’re only counting what you’ve contributed here.

Thirdly, you should make additional contributions to your employer’s 401(k) or other defined contribution plan, up to the limit allowed by your employer or by law. For 2005, the maximum amount that you can contribute to a 401(k) plan is $14,000, and there’s a catch-up provision amount of $4,000 for folks over the age of 50. This is a pretty high limit to “lock up” in retirement savings, so the following options may not be applicable to your situation, but I list them for the sake of education:

Traditional IRA – if you don’t have access to an employer-sponsored income deferral plan like a 401(k), you may want to reduce your tax burden a bit by contributing to a traditional IRA. The limits on contribution amounts are the same as described for Roth IRAs, so this can be a significant amount to set aside to reduce your taxes. Keep in mind, though, that you can only contribute the maximum amount in either a Roth IRA or a traditional IRA, or a combination of the two. In other words, the maximum contribution limit of $4,000 for 2005 is for ALL IRA contributions, whether traditional or Roth.

Non-qualified plans – many employers offer savings plans that go above and beyond the 401(k) limits. Each plan is different, so you’ll want to check the provisions to determine if the plan is appropriate for you.

Employee Stock Purchase (or Ownership) Plan – also known as ESPP or ESOP, these plans typically have a provision for controlled purchase of your employer’s stock at a discount. Assuming that you are not over-exposed to your employer’s stock (rule of thumb: no more than 5% in any single company), this may be a good place to contribute some retirement money. Keep a close eye on your exposure to this single company, as well as your company’s future prospects. Remember Enron?

College Savings Plans – after you’ve funded your retirement, consider placing some money in a 529 plan or Coverdell Education Savings Account for your child(ren)’s education. In many states, these contributions are tax-deductible.

Health Insurance

Funny that today's topic is Health Insurance. I'm currently unable to breathe through my nose and my head is pounding due to this cold I've picked up. Not cause enough for me to go to see a doctor, mind you, but topical to the point of Health Insurance nonetheless.

There are many different varieties of health insurance, but there are similar components to most types of policies. Generally there is a list of covered (as well as non-covered) illnesses and calamities. There will be a description of the deductible, and the co-pay. There will also be two other items - Annual Out-Of-Pocket Limit, and Lifetime Limit. Many policies also include a "Network" of member or accepted doctors and facilities.

This review of health insurance applies to both individual and group coverages.

There are essentially three different kinds of plans: fee-for-service arrangements, Health Maintenance Organizations (HMOs), and Preferred Provider Organizations (PPOs). Each type of plan has its own unique features.

Fee-For-Service or traditional health insurance plans offer the broadest choices of providers of health services. In general, you pay for your healthcare up front, and then submit a claim for reimbursement. You pay a monthly premium, an annual deductible, and generally coinsure yourself up to an annual limit. Most plans have a cap on annual out-of-pocket expenses.

There are two types of coverage available - basic, which pays toward hospital room and care costs, surgery, and some doctor visits; and major medical, which provides coverage only for expensive illnesses or injuries. Major medical is generally the cheaper type of policy to purchase.

HMOs are a prepaid health plan, and are generally the least expensive. They are also the least flexible in terms of providers of health services. You pay a monthly premium, and the HMO provides comprehensive care for you and your family. Included are doctor's visits, hospital stays, emergency care, surgery, and the like. The choice of providers is very limited, generally. You'll usually have a copayment fee (around $10 or $20) for each visit. The good news is that there is no claim to file as long as you use the services within the choices given.

PPOs are similar to HMOs in that they are somewhat prepaid, and there is a limited number of choices for healthcare. You'll also have copayment fees with your doctor office visits. This kind of plan is also similar to the Fee-For-Service plan in that you can choose providers outside the "network" of choices, for a higher cost of service, in terms of copayment and deductibles.

When comparing these types of plans, consider the kinds of events that you're likely to encounter: if you're single, with no dependants and relatively healthy, and you don't have a desire to choose your primary physician, you will choose the plan that best fits those needs. If on the other hand you are married with four kids, and have a long-standing relationship with a specific doctor, and you frequent the emergency room (who doesn't with little ones?), you may want a plan that is more flexible and comprehensive.

If you have several choices, make a checklist of the services you use in order to compare the choices. Cost shouldn't be the deciding factor - effective service, providing quality healthcare to your family is the most important. But do your best to keep the costs in check.

Next time, we'll be looking at Auto insurance.

'til then -

jb