Three-percent.
This is the Alpha that Vanguard attributes to financial advisors beyond investment performance since 2001, when they began tracking the “Vanguard Advisor’s Alpha" concept.
Even so, since that date, mounting pressures from both inside and outside the financial services industry have mounted. Still, the CFP Board and many experts in the field continue to press this point: financial advice transcends just investment advice.
What was true then, and true today, is that the best advisors who are successful, and do generate Alpha, focus on a holistic approach to financial planning. These advisors seek out value under any rock that will serve their clients.
Improved cash flow is one way to help a client. This article describes a new option to manage healthcare costs - a major pain point for many people - that you, individuals and employers can leverage to improve cash flow.
This rule is so new that “the paint is still wet.” We are in a moment in time akin to two weeks after 401(k) plans became law. At that time, no one knew what was to come, but this is a monumental moment for healthcare savings. Some estimates say 5+million people will immediately benefit, while others postulate 50% of all individuals on employer sponsored plans could move to the individual market.
Using our example (below) of The Brady Bunch, Mike and Carol would have an extra $1,758.42 per month in income if they knew about this new rule and leveraged it to their advantage.
This is the “beyond investment advice” value that you can bring to the table... this is real Alpha.
What do we mean by cashflow? At a macro level, healthcare spending accounts for nearly 20% of GDP in the United States. At the individual and business level, health insurance is one of the largest expenditures. On average, employers set aside 31-percent of an employee’s total compensation to pay for benefits. THEN, employees spend 10-percent of their families’ budget on health premiums and deductibles! (Based on median income in the U.S.)
Obviously, managing insurance costs is very beneficial for both cohorts. The details about leveraging this benefit depend on the market you serve, but will be explored later in this article.
On October 13, 2022, the IRS enacted a FINAL rule that closes what is known as “The Family Glitch.” To circle back, THIS piece of information is the Alpha you can provide by making your clients aware of this change.
What is the Family Glitch? - The Brady Bunch
The Family Glitch, while not exactly a household phrase, is vital to understanding how, and which, individuals can sign up for health insurance during open enrollment. Before we dive into the increased cashflow individuals will have, let’s explain how we got here. Marcy Buckner, the SVP of government affairs at the National Association of Health Underwriters explains this concept so simply and succinctly that we’ll let her tell you.
Prior to the final rule, the family glitch came about because, in this example, Mike, the husband, is employed by his Architecture firm.
The company offers Mike, the employee, employer-sponsored coverage, which meets the affordability calculation where it does not cost Mike more than 9.5% of his income to cover just himself. The employer then offers coverage to Carol and the kids, but the company doesn’t provide any additional contribution toward the plan for the family members of their employee.
If Carol and the kids try then to go to the individual health insurance exchange and get a tax credit, they won’t be able to because under The Family Glitch the affordability is based on the employer's offer of coverage to the employee, and in this scenario, Mike has an affordable offer of coverage as an employee on the employer plan. That “affordability” would then extend to say that Carol and the kids would then have an “affordable” offer of coverage, even though the employer is not contributing anything toward that coverage for Carol and the kids.
So, you can see how this would create situations where, because that employee has an affordable offer of coverage from the employer, it blocks spouses and dependents from going into the exchange and potentially getting a premium tax credit: depending on what the family income is. Giving Carol and the kids a choice could greatly benefit the Brady’s and other families where the employer’s contribution toward the spouse and dependents may not be very much, and may currently be very costly for the employee to put the spouses and dependents on the employer plan. This rule redefines who the IRS looks at when they’re determining an “affordable offer of coverage.”
So, again using the Brady Bunch example…instead of looking to Mike and seeing whether he has an affordable offer of coverage from his employer as the employee. It extends and looks at the spouses and dependents. If the employer contribution to the spouses and dependents means that it is more than 9.5% of the household’s income to cover Carol and the kids, they are no longer having an “affordable offer of coverage.” By shifting the definition, Carol and the kids could now decide not to take the employer-sponsored coverage, go to the exchange, and geta premium tax credit: based on their family income.
Source: Transcribed excerpt from the 10/28/22 NAHU Podcast, “Do You Have Questions About the Family Glitch Before Open Enrollment?”
The Family Glitch - Beyond Anecdotal
Using the household dynamics of Mike and Carol from above, and some detective work, you can see an actual account of the power of this change below. (Located below, you’ll find sources on the income assumed, and ages of the kids.) According to national averages, the cost to cover Mike, after an employers’ contribution, would be a monthly premium of $110.58. To cover Carol and the kids (Marsha, Marsha, Marsha!) is going to depend on whether or not the employer contributes to the dependents’ premium.
In the chart below, the first column shows the "National Average Employer Contributions" which, under the Affordable Care Act, ensure reasonably affordable health insurance for the employee, Mike. This "affordable" coverage does not have to apply to Mike's entire household, including Carol and the kids. So, when Mike goes to add his family to his plan, there is a significant cost increase. The second column assumes without employer contributions, and Mike would be paying even more out of pocket to cover his family. In either case, with the Family Glitch fixed, the premium to the family is DRASTICALLY better, if the Brady’s put Mike on the employer plan and seek coverage for Carol and the kids in the individual markets. (Figure 1)
FIGURE 1: Mike, Carol, and the Kids: Real Numbers
*see below for all assumptions and due diligence
Real Savings: Both for Employees and Employers
With the glitch being patched, Mike and Carol would have an extra $395.33 per month, at least, in cash flow assuming national averages.
Alternatively, let’s use the above example, where the employer offered Mike an affordable plan, but simply offered Carol and the kids coverage without any contribution. By knowing about, and leveraging this new IRS final rule, the family would have an extra $1,758.42 PER MONTH in take home income.
The reality is this- most households in the US are somewhere between column 1 and column 2 with the employer contributing SOMETHING. The difference between the two columns is HOW MUCH the employer is contributing.
This is where this rule is mutually beneficial to employers and employees.
For families, the immediate benefits are both CHOICE and COST.
For employers who have contributed to spouse and dependent premiums, the benefit is saving that money when spouses and dependents enroll outside of the employer plan.
Employers who haven’t contributed to spouse and dependent premiums could improve attraction and retention prospects by bringing this option to light. Informing staff of this cost saving can show the employer as a steward of the needs of their teams.
Where Do Financial Advisors Step In?
For financial advisors we have spoken to about this topic, the question we field the most is not about the opportunity to serve. There isa clear opportunity for employers and families alike to benefit from this rule change. The question we address frequently is about scope of expertise and domain specific knowledge.
Pointedly, “Wouldn’t the benefits broker bring this up?”
We continue to surprise people with the short answer- no. At least, not in the way the glitch fix is presented here. The information provided by the Society for HR Managers, and many benefits trade-groups, has focused on whether or not there was a meaningful change to the compliance requirements that employers face. Often we hear: “Since the IRS changed how they calculate affordable, does this mean we have to report differently?”
What isn’t being discussed is the actual impact this rule has on businesses and families. We believe there are three explanations as to why this might be the case:
Money, expertise, and markets.
Similar to financial planning, where assets in your purview are assessed a spread, employees and their dependents generate revenue for brokers on, effectively, a per head per month basis. Some compensation arrangements do vary, but in general terms, the more people covered by the plan, the more the broker is compensated.
Naturally, the next question is, “well, if they aren’t covered by the plan, can’t the broker help them with Medicaid, CHIP, or a health insurance exchange plan?”
This would keep the broker’s headcount in check and they would be a useful resource to the group.
The role of a group benefits broker verses that of an individual health insurance broker can be compared to the differing roles of financial advisors. For instance, financial advisors who focus on employer retirement plans leverage economies of scale and curate their expertise around plan design and compliance testing. On the other hand, personal financial planners are much more focused on individual relationships and the nuances of the tax code, behavioral finance, and goal planning.
The individual health insurance broker, must understand the health insurance markets (where people purchase individual or family insurance on their own, rather than through an employer- sometimes called the Marketplace), because they don’t have the negotiating power like large group brokers. Additionally, brokers that focus on families have to understand have to project a households future income (Modified Adjusted Gross Income). This mix of the market, income tax expertise, and vetting which providers and drugs are covered, makes an individual health broker distinct from employer benefits brokers. Group brokers may not have knowledge of those regional nuances.
Alternatively, outside of money, and/or expertise, group brokers may believe that there are limited market options in their area. The following chart shows that in the last several years more and more options have become available. Today, 97% of individuals who enrolled in 2021 having the ability to pick plans from two or more carriers. In the past the industry collectively worried about choices when considering moving group plan coverage to plans in the individual marketplace.
Clearly, there are a number of headwinds that stop group brokers from talking about individual market viability. This isn’t good, or bad, but is an opportunity for other stakeholders- like financial advisors- to advocate for families and businesses.
Resources and Tools
We’ve gone ahead and drafted two resources that you are welcome to use either to frame your talking points, or to share directly to those in your footprint.
For Employers – https://www.mysnaphealth.com/post/employer-plan-sponsors-new-irs-rule-gives-relief
For Employees - https://www.mysnaphealth.com/post/families-on-employer-health-insurance-new-irs-rule-gives-relief
If a family knows the spouse and/or dependents don’t have an affordable offer of coverage, feel free to use these tools:
- They can use mysnaphealth.com to compare coverage options. This system is accessible 24 hours a day and uses a proprietary algorithm to account for your doctors, prescriptions, and income to sift all plans available in your area and make three personalized recommendations based on your specific needs.
- If SnapHealth is not yet available in their area, families have other choices for who helps them with health insurance. If they want someone local, consider finding a specialist at NAHU.org or HAFAmerica.org.
- Additionally, our team works with businesses around the US and would be happy to help. There are also options such as Healthcare.gov and state-based exchanges, however, these representatives are not licensed, cannot provide guidance on income questions, cannot recommend what a person should do and, from our experience, are glorified order takers.
About the Author: Joshua Brooker is a Legislative Policy Analyst who specializes in the Individual Health Insurance Markets. He has been featured in the WSJ, Kaiser Health News, Insurance News Net, and authored 5.1 million Are Impacted by The Family Glitch: How Is the IRS Taking Steps to Fix It? Published in American Benefits Specialist for the National Association of Health Underwriters. He’s an advocate for a better US Health System by working with clients, the government, industry groups, and the press.
About SnapHealth: Joshua Brooker spent 10 years with his team helping individuals with the Affordable Care Act Individual Market. Due to their model of service, and a focus on helping families, his team hit an apex in the volume of families they could actively help. They built SnapHealth as a self-guided resource for individuals and families to independently receive guidance on their terms. In the future, SnapHealth will add tools to help consumers navigate the out-of-pocket costs connected to their medical needs, too.
Sources and Assumptions:
Mike’s Salary in 2005 dollars - https://money.cnn.com/pf/features/lists/tvdad_salaries/
Salary inflation adjusted to 2022 - https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=44064&year1=200501&year2=202209
Before assumptions use national average rates here - https://www.kff.org/interactive/premiums-and-worker-contributions-among-workers-covered-by-employer-sponsored-coverage/
After assumptions, carry self-only rate over, and use Mike’s 2022 adjusted wages to compare Carol and the kids.
Kids ages assumption - https://www.metv.com/stories/see-the-brady-bunch-kids-grow-up-in-photos-from-the-first-and-last-episode#:~:text=When%20we%20first%20meet%20The,the%20boys%20from%207%2D13.
After rate assumes Mike’s income in 2022 at $68,581.79. The individual market used was Texas: 78681 zip code. All six kids were eligible for $0 premium CHIP with an annual application fee of $35 (divided into monthly is where the $2.92 was derived). Carol is eligible for SEVERAL $0 premium silver plans with no monthly premiums, $0 deductibles, $5 family doctor copays, and no charge for generic drugs. You can review these plans at https://www.healthsherpa.com/
Employer and employee health insurance costs:
https://www.bls.gov/news.release/ecec.htm#:~:text=for%20the%20remaining-,31.0,-percent.%20(See%20table
https://www.commonwealthfund.org/press-release/2022/new-state-state-report-37-states-workers-health-insurance-premiums-and#:~:text=states%20now%20spend-,10%20percent,-or%20more%20of