For several years, financial advisors have known the Affordable Care Act’s rules and regulations were coming. As of 2014, most of the provisions are in full force, including the new rules for health care—who qualifies for it, what plans must cover, how premiums are determined, etc.

Yet the law affects more than your client’s health insurance. It also affects how clients save and invest money each year, their year-to-year cash-flow strategy and, of course, their income taxes. As a financial advisor, if you are not up to speed on how the act is affecting your clients, then it will probably cost them financially. You may not be filling a need they have, and we all know what happens when clients find another advisor who can.
So what should you be doing to improve your planning skills for the Affordable Care Act? Here are three strategic tips.

Not A Health Insurance Expert? No Problem, But Find One
Many financial advisors don’t have the registered health underwriter (RHU) designation, nor have they probably taken educational courses on health insurance. I, for one, fall into that category. However, it’s important to understand how your clients are covered for health insurance, what they are paying and whether it’s competitive for their situation. After all, health insurance premiums can be one of the largest monthly expenditures for clients (and it’s increasing). Financial advisors should not overlook a major expense category!

If your clients have access to group insurance, they are probably fine to stay put. Those with individual health insurance might have experienced a 20% or higher premium increase when they renewed their policy for 2014 given the new rules and regulations for health insurance coverage. I certainly received calls late last year from clients (unhappy clients, I might add) lamenting their premium increases.

If you don’t know what your clients’ health insurance strategy is, ask them, but first make sure you can refer them to a health insurance expert who can assist them, assuming this is not your area of expertise. To find a specialist, ask other professionals you know in the life or long-term-care insurance industry for a referral. Who do they know? Who have their clients used? Or ask your business owner clients who they use to provide their company’s insurance needs. You can end up widening your circle of influence and finding new referral opportunities yourself. And you want your clients to be calling you first when they need help in any financial area.

Map Out Five Years Of Cash Flow
The primary area of the Affordable Care Act that financial advisors are impacted by is the new 3.8% surtax on dividends, interest, capital gains, etc. Clients who continually find themselves in high tax brackets will be paying this surtax year over year on their taxable portfolio. However, those clients who might fall under the $250,000 adjusted gross income (AGI) threshold (for married couples) or $200,000 AGI threshold (for singles), should map out several years of cash flow. This can help them determine, for example, when it’s a good tax year to take extra capital gains. (We like using five years for many client cash-flow projections.)

Let’s say you have an executive client who is retiring in two years and has a large concentrated company stock position he or she needs to diversify. Perhaps selling company stock the year after retirement is best to limit or avoid the 3.8% surtax, as the client’s presumably higher salary and bonus income has ended. Or maybe not. Perhaps the clients need to exercise a large block of stock options or they have deferred compensation starting to pay out after retirement.

 

If you aren’t mapping this out, you won’t be able to have a fruitful conversation with your client or the client’s CPA about the tax cost of taking large capital gains—or when you should take them. Or consider your business owner clients who may be selling their companies soon.

Recognizing capital gains on their investments the year before their sale could be optimal. Yet if a business transaction is structured as a multiyear installment sale, this could mean your clients will find themselves in the top tax bracket (and subject to the 3.8% surtax) for a number of years. You and your clients need to plan for their tax bill accordingly. After all, the more our clients pay in taxes, the less of their portfolio they keep.

Diversify Clients’ Savings Buckets
When news of the 3.8% surtax first hit the media, it seemed advertisements for tax-deferred annuities were everywhere, encouraging clients to save their money each year in a vehicle that is not subject to the 3.8% surtax. Cramming every dollar into such a vehicle could feel good while clients are building wealth, but it could hurt them when it comes time for them to live off their portfolio.

Recall that the 3.8% surtax thresholds are based on AGI, so when clients start withdrawing money from their tax-deferred accounts during retirement, that recognized income could raise their AGI above the applicable thresholds. This will cause them to be subject to the 3.8% tax on certain portfolio income. Clients don’t want to be paying more in taxes during retirement when their resources are limited!

Diversifying clients’ savings buckets is wise to help them save taxes today, but give the clients (and yourself) more flexibility when they retire to figure out where their retirement income will come from and how much of their retirement portfolio income will be subject to income taxes and the 3.8% surtax. During their working years, their savings strategies should include maximizing the funding of their pretax 401(k) plans. They should also take advantage of pretax non-qualified deferred compensation savings, do annual Roth IRA conversions, fund tax-free health savings accounts, build a taxable portfolio and consider annuities or cash value life insurance products. Then, in retirement, your clients will have buckets subject to different tax consequences—ordinary income buckets, capital gains buckets and tax-free buckets—to draw from. Different tax buckets maximize flexibility each year to help you determine which accounts to take withdrawals from, and they can help retirees keep their year-to-year tax bill manageable.

The Affordable Care Act impacts many areas of a client’s comprehensive wealth management plan. Take action to understand the impact for each of your clients, and then update their insurance, investment and cash-flow strategies if appropriate. This will serve you and your clients well, and expand your capabilities and resources as their trusted advisor. 

Lisa Brown, CFP, CIMA, is a wealth advisor and partner at Brightworth (brightworth.com), an Atlanta-based, nationally recognized independent, fee-only private wealth counsel firm that serves high-net-worth families and individuals.