Editor's Note: This article is part of a Financial Advisor series "How I Solved It." Advisors describe a problem client and what they did to help.
When traditional health insurance coverage excludes treatments that could save lives or reduce disability expenses down the road, it can rip holes through families’ hearts and wallets -- especially when the patients are young children. This advisor found than adding an executive medical reimbursement plan was a more cost-effective way for a client to try to help his son.
A few years ago, the client relayed his problem to Michael Beloff, CFP, a wealth advisor now affiliated with Stratos Wealth Management in Purchase, N.Y. (Beloff also has the ChSNC designation, which stands for Chartered Special Needs Consultant, offered by the American College of Financial Services.) The client, an attorney with a solo law practice, was spending $70,000 annually on an applied behavior analysis therapy program for his son with autism, a developmental disability. At the time, conventional health insurance didn’t reimburse applied behavior analysis therapy, although some states now mandate it.
The client couldn’t deduct any of the therapy costs, said Beloff, because his total medical expenses didn’t exceed 7.5 percent of his adjusted gross income -- the floor at that time. The client, whose AGI was about $1 million, would’ve had to spend more than $75,000 before being permitted to deduct medical expenses. Under the tax law changes, the AGI floor, 7.5 percent this year, returns to 10 percent in 2019.
Beloff found an executive medical reimbursement plan that would reimburse medical expenses not covered by the client’s health insurance. The client could purchase the policy as long as he had at least one additional employee (he did) and he could deduct the policy as a business expense because it covered his employee.
The client paid an $80,000 premium for the plan, which covered reimbursements of $70,000 for himself and $5,000 for his employee, said Beloff. By deducting the entire premium as a business expense, the client was able to net “over a $20,000 benefit based on tax savings, even after accounting for the increase of out-of-pocket costs from $70,000 to $80,000,” said Beloff. “The client was thrilled.”
Employers that adopt medical reimbursement plans must offer coverage to all employees, said Beloff, so bigger companies may find it necessary to provide each employee with a smaller benefit in order to make the plan affordable.
Medical reimbursement plans can work well alongside health savings accounts. HSA contribution limits for families in 2019 are $7,000 ($8,000 if HSA holders are 55 and older). If someone has cancer, “they’ll blow through that $7,000,” he said. The same may be true when using medical providers who don’t accept health insurance. In some communities, many speech therapists, occupational therapists and physical therapists serving children don’t because parents are willing to pay out of pocket, he said.
Beloff, who works with many special needs families and whose 20-year-old son has autism, also noted that children with disabilities often benefit from more hours of therapy than states mandate insurance companies cover. Children may be better able to achieve their potential and need less care as adults “if you throw a lot of therapy at them when they’re younger,” he said. “An ounce of prevention is worth a pound of cure.”