Your Money: Questions Often Asked About Health Law

Those who managed to create accounts or peruse the plans offered in their state left with many questions about the Obama administration’s health care plan. Among them: What does all of this mean for my 26-year-old child, who is now too old to remain on my own policy? The premium subsidies are based on my income, but what if I have no idea what I may earn next year? How is “modified adjusted gross income” calculated anyway?

Last week, my column addressed the broad outlines of how the exchanges will work, from how the different tiers of coverage would be structured to what types of individuals would qualify for tax credits on their premiums.

Dozens of additional queries landed in my in-box this week. Here’s are some of the most frequently asked questions and an attempt at answering them:

Q. I haven’t seen any discussion about students. My son will be 26 next month, and thus can no longer be on my plan. He is a full-time student in another state and fully dependent on my financial support. Do you know where he fits into this system?

— Mark Alper, Berkeley, Ca.

A. Adult children lose coverage through a parent’s policy on their 26th birthday. But they can then immediately enroll on the exchange — even outside the open enrollment period, which ends on March 31. Individuals under age 30 may also qualify for a “catastrophic” plan, which carries a lower premium but a very high deductible (equivalent to the out-of-pocket maximum, or $6,350 for a single person, in 2014). Tax credits, however, cannot be applied to catastrophic plans.

Q. My difficulty and confusion is I don’t actually know what my annual income is or will be in the coming fiscal year. I am a freelance classical musician, meaning I have seasonal employment from as many as 20 employers in a year and I file tax returns in seven states and three countries.

— gibarian, San Francisco

A. The experts I spoke with said you needed to make your best educated guess when estimating your income. The exchange will verify it by checking your tax return from last year as well as your current income. (The federal government has contracts with firms that provide that information.) If your self-attested income varies by more than 10 percent when compared to those two sources, you will be asked to provide more documentation, according to a spokeswoman at the Department of Health and Human Services.

Q. I have very little annual personal income, but am fortunate to have other savings/resources that would allow me to pay for one of the better plans with higher premiums. (I have no access to any employer-sponsored plan). I am willing to enroll in one of these better plans on my state’s health exchange even if I don’t get any subsidy for it. (I seem to earn too little to qualify for a subsidy anyway.) Will I be allowed to do this, and do this without penalty or added taxes?

— KRyan, New York City

Q. I am currently unemployed but have a sizable trust fund. Do I qualify for discounts/tax credits when buying health insurance? Will I be required to show my federal tax return?

— Jory, Columbus, Ohio

A. You can certainly buy coverage on the exchanges when you don’t have coverage through an employer. Whether or not you pay full price or qualify for a premium tax credit depends on your modified adjusted gross income, which is based on your latest tax return (and yes, the exchanges will check your return).

If your household’s modified adjusted gross income is from 100 to 400 percent of the federal poverty level (that’s $11,490 to $45,960 a year if you’re filing as an individual and $23,550 to $94,200 for a family of four), you may be eligible for a premium tax credit, according to CCH, a tax and accounting service.

Several readers had questions about how the modified adjusted gross income is calculated. It’s basically your “adjusted gross income,” which can be found on line 37 of your 1040 tax return form. But it requires that you add back certain items like nontaxable Social Security income, tax-exempt interest and foreign-earned income, Mark Luscombe, a principal analyst at CCH, said.

The figure also includes income from items like dividends, interest, real estate and retirement account withdrawals. So even if you do not have much earned income, but have significant income from other sources, you obviously won’t qualify for financial assistance.

Premium tax credits and cost-sharing subsidies are generally based on your household income, which includes your spouse and any dependents for whom you file a personal exemption and who also earn enough money to file a return, he added.

Q. I get insurance through my employer. My same-sex husband has little to no income and will be using the exchange. Our state of residence (Virginia) is letting the federal government run the exchange. Our state does not recognize our marriage, but the Internal Revenue Service does. How will he determine income when using the exchange?

— S.G., Eastern U.S.

A. The I.R.S. said last month that all married same-sex couples would be treated as married for federal tax purposes, regardless of where they live. And starting in the 2013 tax year, all married couples will be required to file their returns together as either “married filing jointly” or “married filing separately.”

The insurance exchanges will also see you as married. In fact, if you’re a married couple buying insurance on the exchange — gay or straight — you’re required to file a joint federal return, the Treasury Department said. (Why? Imagine how many more people would qualify for subsidies if they used “married filing separately” status.)

Your Money: One Dip Into a 401(k) Often Leads to Another

After workers borrow money from their 401(k) retirement account, they may find that it becomes easier to come back for another loan — and perhaps even another. And yet another one after that.

Fidelity, which houses the 401(k) plans of more than 12 million workers, recently studied the behavior of these so-called serial borrowers. It found that this sort of repeat borrowing can put a serious dent in long-term savings, especially if the employees cannot continue to save as much while they pay the loan back.

And that’s what tends to happen with this group. “Once they broke the barrier, they went back and took more and more,” said Jeanne Thompson, vice president for market insights at Fidelity. “They find it’s probably easier than going to the bank to get a loan, so it becomes a bad habit.”

This type of borrowing can be a most attractive alternative to banks: the average interest rate for a 401(k) loan right now is about 4.25 percent (most plans add one percentage point to the prime rate, according to the Plan Sponsor Council of America’s 2011 report, though the formula does vary across plans). With the exception of a mortgage refinance, and perhaps a home equity line of credit, it is hard to beat that rate. Compared with credit cards and personal loans, which now average 15.31 percent and 11.41 percent, according to Bankrate.com, it seems prudent.

The government does not take a 10 percent penalty on the amount borrowed, as it does when a person cashes out of a 401(k) before retirement.

By and large, it looks like sensible people are using this vehicle. Repeat customers, Fidelity found, were typically in their 40s and 50s: people who have saved enough to actually take multiple loans and who also have a lot of competing needs: college tuition, perhaps, and aging parents to look after.

Ms. Thompson also suspects they’re using the money to pay off medical bills and credit card debt, though call center representatives reported that at least some people are using the money for luxury items like Jet Skis and vacations. A small fraction of borrowers even took out loans as little as $200. On average, someone who took three or more loans over the 12-year period earned $80,000.

But how sensible is it? Fidelity studied the patterns of 180,000 borrowers who were active participants in a 401(k) plan over the last 12 years. Among this group, the majority — two-thirds of employees — took more than one loan over that time period. But 25 percent of borrowers came back for a third or fourth loan, while 20 percent came back to their retirement account five times or more.

Even though borrowing appears to beget more borrowing, other experts cautioned that these workers may not be lacking self-control, but are simply using the loans to absorb some long-lasting financial shocks, like a spouse who lost a job. Over all, the number of 401(k) loans hasn’t significantly changed: about 10.6 percent of Fidelity plan participants took out new loans in the first three months of this year, which tracks close to the industry average. About 30 percent of all participants who took out two or more loans, or more than 1.7 million workers, still had more than one loan outstanding at the end of June.

“That a lot of people have more than one loan doesn’t mean that they are dysfunctional,” said David Laibson, an economics professor at Harvard who focuses on behavior. “It could mean a lot of things. It could mean that the household is in some financial distress. And for that household it might be a perfectly legitimate response.”

Fidelity didn’t survey the borrowers. It just observed their behavioral patterns. But it did find that the amounts that people borrowed decreased over time, particularly when they had taken at least three loans. “It’s almost a different mind-set versus the people who take just one,” Ms. Thompson posited.

Whatever the reason, it’s clear that serial borrowing can permanently impair your long-term savings. The money is no longer invested, so you may lose investment earnings. (When you borrow from a 401(k), the money is taken from your account, without penalty, and you pay yourself back with interest, typically through payroll deductions.)

Inventory - An Often Abused Asset

Tax reduction through inventory manipulation is not an uncommon practice. A company desiring to reduce income tax liability can achieve this result through inventory manipulation. Because this illegal tax-reducing technique does occur, the forensic accountant, business valuator, litigator, etc., must be aware of how it works.