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Maximize Your Health Benefits

For millions of Americans, group health insurance offers affordable quality health care. To get the most from this valuable benefit, you need to understand what you have, how lifestyle changes can affect your coverage, and what to do if your coverage doesn’t meet your expectations.

Understand What You Have
Get your plan’s summary plan description (SPD) from your plan administrator. It gives a detailed summary of your plan–how it works, the benefits it provides, and how those benefits may be obtained or lost. Look for information on:

• Physician choice
• Accessibility of doctor’s offices
• Deductibles
• Co-payment requirements
• Maximum out-of-pocket expenses
• Lifetime benefits
• Incentives for using the plan’s network of providers
• Exclusions
• Waiting periods
• Prescription benefits
• Maternity benefits
• Dental and vision benefits
• Preventive care programs
• Member rights, including the right to appeal
• Quality reports and ratings from member-satisfaction surveys

Ask Questions in the Beginning
Don’t wait for a serious illness or injury to learn what to expect from your group health plan. Now is the time to find out. Take the time to learn the answers to the following questions:

• Do you need prior approval to visit a specialist?
• How does the plan define emergency care?
• How do you get care if you are outside the area?
• What hospitals are in the plan’s network?
• Is there a time limit on hospital stays?
• Who decides when you will be discharged?
• Will the plan pay for follow-up care, such as nursing home care or home health care?
• If you have a serious medical problem, will the plan provide someone to oversee care and make sure your needs are met?
• Are second opinions required for surgery? If so, who pays?
• How do you get ambulance service?
• Is there an advice hot line to help decide how to handle a problem that may not require a doctor’s visit?

Be proactive
Don’t be afraid to ask your doctor questions, and insist on clear answers. If you’re concerned that you won’t be able to understand or follow a doctor’s instructions, bring someone with you or take notes. Take responsibility for your own care. Consider:

• Lifestyle choices and changes you can make to lower your risks or prevent illness (e.g., losing weight)
• The risks and benefits of any tests or treatments
• How you would go about obtaining care after hours

What Happens When You Lose Coverage?
The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) allows you to purchase health coverage under your employer’s plan if you lose your job, change jobs, get divorced, or upon the occurrence of other qualifying events. Coverage that you obtain under COBRA can last from 18 to 36 months, depending on your situation.

COBRA applies to most employers with 20 or more workers and requires your plan to notify you of your rights. Most plans require you to make an election for coverage under COBRA within 60 days of the plan notifying you. Follow up with your plan administrator if you don’t get a notice, and make sure that you reply within the allowed time.

When you buy the insurance under COBRA, you must pay the full premium amount, plus administrative costs of up to 2 percent. If you were accustomed to sharing health insurance premiums with your employer, you may be in for a shocking expense.

However, if you or any family member have pre-existing conditions, you may not have any other choice, at least until you get into a new group plan. You must remember to pay your premiums on time, or you will lose your coverage. The medical coverage under COBRA must be identical to the coverage you had before. However, employers may drop benefits such as dental care and vision care.

As Your Lifestyle Changes, So Will your Insurance Needs
Review your group health insurance benefits and options when you:

• Get married
• Get divorced
• Have a new child
• Have a child who is no longer dependent on you
• Suffer the loss of your spouse

The information provided by your employer should tell you how you can change benefits or switch plans if needed.

What Can You do if a Claim is Denied?
Your plan administrator has a limited time after you file a claim to tell you if you will receive the benefits. If that is not enough time, you must be notified within a specified time why more time is needed and the date you can expect a decision. Many states regulate claims processing and denial notification to members, so be sure to find out your insurance company’s time frames for processing claims, issuing denials, and resolving appeals.

If your claim is denied, you must be notified in writing and given specific reasons why it was denied. If you have no answer in the allotted time, the claim is considered a denial, and you can use the plan’s rules for appealing the denial. If you disagree with any claims decision or pre-authorization denial, you can request an appeal.

It’s important to understand how your plan handles complaints. Check your health benefits package and your SPD to determine who is responsible for handling problems with benefit claims. Keep records and copies of all correspondence.

What if You are Unhappy with Your Health Care?
If you are in a managed care plan, you can change your primary care doctor if you are unhappy with the relationship. If the plan itself does not satisfy you, you may be able to switch plans. If you are dissatisfied with the managed care plan but prefer to remain in the plan because you want to remain with your physician, file a complaint. You have the right to a fair and timely process for resolving your complaint. If you are still unhappy, speak to your employee benefits manager to help you match your needs with the available plans.

Stay Informed

• Ask for a copy of the member handbook, sometimes called the evidence of insurance or evidence of coverage, to review coverage policies.
• Check to see if your plan has a right-to-privacy policy. Make sure that the plan requires your consent to release any medical information about you to outside agencies not involved with your direct health care or the administration of your health policy, especially your employer.
• Does your plan have a magazine or newsletter? Such a publication can give information on how the plan works and on rules that affect your care.
• Ask how you will be notified of changes in the plan’s medical providers or covered services and prescriptions.
• Talk to your plan administrator to learn more about your policy.

At the end of the day, it comes down to one simple fact…The more information you have, the easier it will be for you to make quality health-care decisions.

Self-Employment: The Good, Bad, and the Ugly

You’ve grown tired of commuting to a job where you sit in a cubicle and do someone else’s bidding. You fiercely believe you’ve got a better service, a better mousetrap. You have the knack for being in the right place at the right time, and so you’re thinking of self-employment. But how do you determine if this is a pipe dream or an idea worth pursuing?

Can You Handle It?
Whether you’re running your own business or working as an independent contractor, you’ll soon realize that working for yourself isn’t just another job, it’s a way of life.

Are you someone who likes a nine-to-five routine and collecting a regular paycheck? When you’re self-employed, you must be willing to make sacrifices for the sake of the job. You’re going to work long hours, which means that in the beginning you won’t have as much time as you used to for leisure activities. And if the cash flow slows to a trickle, you’re going to be the last one to get paid.

Can you get along well with all types of people? Entrepreneurship is all about managing relationships–with your clients, customers, suppliers, perhaps even with employees, certainly with your family, and probably with your banker, lawyer, and accountant, too. If you’re the type who wants to be alone to do the few things that you’re good at, then you should do that–for someone else.

The word entrepreneur is from the French entreprendre, which literally means “to undertake”. And you will find yourself undertaking a great deal more responsibility when you are the lifeline of the organization.

Are you a disciplined self-starter? There may be days when you’ll have to make yourself sit at your desk instead of going for a long lunch, or (especially if you have a home-based business) place those business calls instead of reading the newspaper.

Finally, do you enjoy wearing many hats? Depending on your line of work, you may be involved in handling marketing and sales duties, financial planning and accounting responsibilities, marketing, administrative and personnel management chores–or all of the above.

Your Dream Come True
Think about how great it will feel to get paid to do what you’d love to do anyway. If you’re working for yourself, chances are you’ll be doing work that you enjoy. You’ll get to pick who you’ll work for or with, and in most cases you’ll work with your customers or clients directly–no go-betweens muddying the waters. As a result, you may have days when it hardly feels as if you’re working at all. Such harmony between your working life and the rest of your life is what attracted you to self-employment in the first place.

Being your own boss means that you’ll be in control of all of the decisions affecting your working life. You’ll decide on your business plan, your quality assurance procedures, your pricing and marketing strategies–everything. You’ll have job security; you can’t be fired for doing things your way. As you perform a variety of tasks related to your work, you’ll learn new skills and broaden your abilities.

You’ll even have the flexibility to decide your own hours of operation, working conditions, and business location. If you’re working out of your home, your start-up costs may be reduced. You’ll also experience lower operating costs; after all, you’ll be paying for the rent and utilities anyway. If the location of your work isn’t important (perhaps you’re a freelance writer or a consultant), you can live wherever you want. At any rate, if you work at home, you’ll greatly reduce your daily commuting time and expense.

If all goes well and you’re making money, chances are you can make more than you did working for someone else. And since you’re working for yourself, you may not have to share the proceeds with anyone else. The fruits of your labor will be all yours, because you own the vineyard.

On the Other Hand . . .
When you’re self-employed, particularly if you’re starting your own business, you may have to take on a substantial financial risk. If you need to raise additional money to get started, you may need a cosigner or collateral (such as your home) for a loan. Depending on how much or little work you can line up, you may find that your cash flow varies from a flood to a trickle. You’ll need a cash backup so you can pay your bills while you’re waiting for business to come in or waiting to be paid for completed work. Since you’ll have to pay your own creditors first, this means that sometimes you may eat cereal instead of steak.

Remember that you’re not making any money if you’re not working. You don’t have any employer benefit package, which means that it’s going to be hard for you to go on vacation, take a day off, or even stay home sick without losing income. It also means that you’ll have to provide your own health insurance and retirement plan. Remember, too, that you can choose your clients or customers, but you can’t control their expectations or actions. If you don’t come through for them, or if you do something that offends them, you might not get paid for your work.

Because you’re working for yourself, you’re going to have to take care of everything yourself, from calculating your taxes to watering the office plants. You’ll probably need some new skills, such as bookkeeping and filing quarterly taxes. You can learn to do these things yourself–many software programs are designed just for this market–or you can hire others (e.g., an accountant) to take care of them for you. If you’re not careful, however, you may find that you’re spending more time on the business of being in business for yourself than you are on the work that attracted you to self-employment in the first place.

The Bottom Line
If you can work long and hard, tolerate risk and stress, cope well with potential disaster and failure, and work well alone and with others, then perhaps self-employment is right for you. If not, then perhaps you should hold on to your gig in the cubicle.

Are College Scholarships Taxable?

The short answer is: It depends. If a scholarship is used to pay for tuition, fees, books, or required equipment, then it’s not taxed. But if it’s used to cover other expenses like room and board, travel, or optional equipment, or if it’s awarded as payment for teaching or research, then it’s taxable.

But keep this in mind: Scholarships used to cover tuition, fees, or books (making them nontaxable) may impact your ability to claim the Hope or Lifetime Learning credit. That’s because these tax credits are based on the amount of tuition and fees you pay, and any tuition and fees paid with a tax-free scholarship can’t be counted when calculating your credit.

This rule has the most impact on your ability to claim the Lifetime Learning credit, worth up to $2,000. Because this credit is calculated as 20% of up to $10,000 in tuition and fees, a hefty scholarship applied to these expenses may leave you with less than $10,000 in eligible tuition and fees to count toward the credit. By contrast, the maximum $1,650 Hope credit is based on up to $2,200 in tuition and fees, so even with a scholarship, you might not use up all your tuition and fee expense eligibility.

However, if the scholarship is taxable (for example, in cases where its terms specify that it can’t be applied to tuition and related expenses), then the entire amount of tuition and fees can be counted when calculating the Hope or Lifetime Learning credits.

Tax Planning for the Self Employed

Self-employment. The opportunity to be your own boss. To come and go as you please. Oh and we can’t forget…the opportunity to establish a lifelong bond with your accountant. If you’re self-employed, you’ll need to pay your own FICA taxes and take charge of your own retirement plan, among other things. Here are some planning tips.

Understand Self-Employment Tax and How It’s Calculated
As a starting point, make sure that you understand (and comply with) your federal tax responsibilities. The federal government uses self-employment tax to fund Social Security and Medicare benefits. You must pay this tax if you have more than a minimal amount of self-employment income. If you file a Schedule C as a sole proprietor, independent contractor, or statutory nonemployee, the net profit listed on your Schedule C (or Schedule C-EZ) is self-employment income and must be included on Schedule SE, which is filed with your federal Form 1040. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed.

Make Your Estimated Tax Payments on Time to Avoid Penalties
Employees generally have income tax, Social Security tax, and Medicare tax withheld from their paychecks. But if you’re self-employed, it’s likely that no one is withholding federal and state taxes from your income. As a result, you’ll need to make quarterly estimated tax payments on your own to cover your federal income tax and self-employment tax liability. You’ll probably have to make state estimated tax payments, as well. If you don’t make estimated tax payments, you may be subject to penalties, interest, and a big tax bill at the end of the year. Oh, and if you do have employees, you’ll have additional periodic tax responsibilities. You’ll have to pay federal employment taxes and report certain information.

Employ Family Members to Save Taxes
Hiring a family member to work for your business can create tax savings for you; in effect, you shift business income to your relative. Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you. Be aware, though, that the IRS can question compensation paid to a family member if the amount doesn’t seem reasonable, considering the services actually performed. Also, when hiring a family member who’s a minor, be sure that your business complies with child labor laws.

As a business owner, you’re responsible for paying FICA (Social Security and Medicare) taxes on wages paid to your employees. The payment of these taxes will be a deductible business expense for tax purposes. However, if your business is a sole proprietorship and you hire your child who is under age 18, the wages that you pay your child won’t be subject to FICA taxes.

As is the case with wages paid to all employees, wages paid to family members are subject to withholding of federal income and employment taxes, as well as certain taxes in some states.

Establish an Employer-Sponsored Retirement Plan for Tax (and Non-Tax) Reasons
Because you’re self-employed, you’ll need to take care of your own retirement needs. You can do this by establishing an employer-sponsored retirement plan, which can provide you with a number of tax and nontax benefits. With such a plan, your business may be allowed an immediate federal income tax deduction for funding the plan. You can also generally place pretax dollars into a retirement account to grow tax deferred until withdrawal. You may want to use one of the following types of retirement plans:

• Keogh plan
• Simplified employee pension (SEP)
• SIMPLE IRA
• SIMPLE 401(k)
• Individual (or “solo”) 401(k)

The type of retirement plan that your business should establish depends on your specific circumstances. Explore all of your options and consider the complexity of each plan. And bear in mind that if your business has employees, you may have to provide coverage for them as well. For more information about your retirement plan options, consult a qualified tax professional.

Take Advantage of Business Deductions to Lower Taxable Income
Because deductions lower your taxable income, you should make sure that your business is taking advantage of any business deductions to which it is entitled. You may be able to deduct a variety of business expenses, including rent or home office expenses, and the costs of office equipment, furniture, supplies, and utilities. To be deductible, business expenses must be both ordinary (common and accepted in your trade or business) and necessary (appropriate and helpful for your trade or business). If your expenses are incurred partly for business purposes and partly for personal purposes, you can deduct only the business-related portion.

If you’re concerned about lowering your taxable income this year, consider the following possibilities:

• Deduct the business expenses associated with your motor vehicle, using either the standard mileage allowance or your actual business-related vehicle expenses to calculate your deduction
• Buy supplies for your business late this year that you would normally order early next year
• Purchase depreciable business equipment, furnishings, and vehicles this year
• Deduct the appropriate portion of business meals, travel, and entertainment expenses
• Write off any bad business debts

Self-employed taxpayers who use the cash method of accounting have the most flexibility to maneuver at year-end. See a tax specialist for more information.

Deduct Health-Care Related Expenses
If you qualify, you may be able to benefit from the self-employed health insurance deduction, which would enable you to deduct up to 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents. This deduction is taken on the front of your federal Form 1040 (i.e., “above-the-line”) when computing your adjusted gross income, so it’s available whether you itemize or not. The portion of your health insurance premiums that is not deductible there can be added to your total medical expenses itemized in Schedule A.

Contributions you make to a health savings account (HSA) are also deductible “above-the-line.” An HSA is a tax-exempt trust or custodial account you can establish in conjunction with a high-deductible health plan to set aside tax-free funds for health-care expenses.

"Kiddie Tax" Rules: The College Years

Special rules can apply when your child has unearned income. These “kiddie tax” rules may tax a portion of your child’s unearned income at your (presumably higher) marginal tax rate. Legislation signed into law in May expands the potential reach of the kiddie tax rules to college-aged children, prompting many parents to rethink gifting strategies.

Kiddie Tax Basics
Generally, the kiddie tax rules apply when a child has unearned income exceeding $1,700 (2007 figure). What’s unearned income? It’s income other than wages, salary, professional fees, or any other compensation for services. Interest and investment earnings are considered unearned income, as is taxable gain that results from the sale of an asset.

Prior to the Small Business and Work Opportunity Tax Act of 2007, the kiddie tax rules applied to children under the age of 18. Beginning in 2008, however, the new legislation expands the kiddie tax rules to apply to children who are under age 19, and to full-time students under age 24. There’s an exception carved out for any child who earns more than one-half of his or her own support.

Why the Change?
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the tax rate on long-term capital gains and qualifying dividends. Specifically, the act established a 15% tax rate for individuals in the higher tax brackets and a 5% rate for individuals in the bottom two tax brackets. Even more significant is that, beginning in 2008, the tax rate on long-term capital gains and qualifying dividends drops to zero for individuals in the lowest two tax brackets (this zero tax rate remains effective for tax years through 2010).

The zero tax rate applicable to individuals in the lower tax brackets presented a real planning opportunity: transfer appreciated investment assets to your child attending college. Since your child would likely be in the lower two tax brackets, he or she could then sell the assets in the year he or she turned 18, and use the resulting proceeds–tax free–to pay college expenses.

Impact of the New Legislation
By expanding the kiddie tax rules to include full-time students under age 24, the Small Business and Work Opportunity Tax Act of 2007 eliminates or greatly limits this planning opportunity for most families. Starting next year, if your child is a full-time student (who does not earn more than one-half of his or her own support), the kiddie tax rules will kick in if your child sells an investment asset before the year in which he or she reaches age 24. The resulting income–at least the portion that exceeds $1,700 with an adjustment for inflation–will be taxed at your (presumably higher) tax rate, eliminating most or all of any potential tax savings.

A Final Word
The new rules aren’t effective until 2008 for most people. So, if you’ve already transferred investments to a child, or intend to do so, you have a limited window to operate under the old rules. If you have questions, be sure to discuss your situation with a tax professional before the end of the year.

Putting Working Capital to Work

Do you own your own business? If so, then you know how important it is to keep some cash available to pay bills. But assuring adequate cash flow doesn’t mean your assets can’t do more for you. For example, if you have an infusion of cash that you don’t expect to spend immediately, you don’t have to let it sit idle. It may make sense to explore alternatives for putting at least some of that money to work. Managing your working capital wisely can help improve your business’s overall performance.

Determine Your Time Frame
Before you think about increasing returns on any excess cash, you need to make sure you’ve adequately forecasted upcoming needs. What looks like excess now could be needed if your cash flow projection is faulty or an emergency arises.

Is your cash flow relatively steady? Does it change dramatically from season to season? Vary from month to month, or year to year? All of these factors will influence whether and how you should put working capital to work.

For money that’s likely to be used at any moment, your major objective is to preserve both capital and liquidity. For money that isn’t needed immediately–for example, money you plan to use eventually to grow the business or pay off existing debts–you may have additional flexibility to try to increase the return on that money until it’s needed.

For Money You’ll Use Soon
A high-yield savings account, especially one linked to your checking account, is a relatively straightforward option, and one you may already be using. You may be able to combine your checking and savings balances to meet any minimum balance requirements and avoid monthly fees. A savings account’s yield will depend in part on how actively a bank is courting deposits, so it can pay to comparison-shop. Also, check on how many transactions are allowed each month.

If you’re a sole proprietor or run a nonprofit organization, you may be able to find an interest-bearing checking account. Otherwise, a sweep account combines a checking account with an investment account that pays interest. With a sweep account, you set a target balance for the checking account. Once transactions have been posted each day, the account automatically sweeps any cash above that target amount into the income-producing account–often a money market account or mutual fund, though you may also be able to choose from a range of investments. Investments are automatically liquidated as necessary and the proceeds moved into the checking account to cover outstanding payments and maintain the target balance, which in some cases may be as low as zero.

A sweep account also may be linked to a line of credit, enabling you to set a zero target balance for one or more checking accounts and borrow to cover checks. Deposits are then automatically used to pay down the line of credit and minimize interest charges.

If You Have a Longer Time Horizon
If you’re confident you won’t need the money for at least several months–for example, if you’re raising capital for a future expansion or equipment purchase–you could explore buying a certificate of deposit (CD) with a term that matches your time frame. You get a guaranteed interest rate, FDIC insurance up to $100,000, and return of your principal when you need it. Or put some money into a short-term CD and the rest into a longer-term investment with a higher yield. If an emergency requires use of the money, you might forfeit interest on only part of the assets.

You also could explore short-term Treasury bills, which can be bought in $1,000 multiples and whose terms range from a few days to six months. T-bills are bought at a discount to their face value; when they mature, you receive the difference between the purchase price and the face value as interest. Treasury notes are available in 2-, 5-, and 10-year denominations. CDs and T-bills can be rolled over if they mature before you need the cash.

A short-term bond fund might offer a higher yield; however, it will not be FDIC-insured. Also, share prices of the fund may go down as a result of interest rate increases, and you could lose principal. Companies in a high tax bracket or with frequent large cash balances might consider tax-exempt bonds or even a custom-tailored money management solution.

If you’re a sole proprietor, you have more freedom to invest the money as you might in a personal account–for example, by having an investment account with a specific goal, such as retirement or purchasing office space.

Calculating the College Payoff

If your child is approaching college age, you may be wondering if an Ivy League education is really worth the steep price of admission. Will a diploma from an elite college guarantee your offspring a bright and prosperous future…or just a pile of debt?

Higher Dollars and Cents
The cost of tuition, fees, and room and board at Harvard University for the 2007/08 year is $45,620. (Source: Harvard Crimson, March 22, 2007) If your child entered the freshman class this September, that would translate into a total cost of $196,628 for four years (assuming a rather tame 5% annual rate of college inflation). And this doesn’t include money for books, transportation, and personal expenses!

By comparison, the cost for the 2007/08 year at the University of North Carolina at Chapel Hill, a school widely regarded as a top-notch public college, is $28,684 for out-of-state students and $13,036 for in-state students. (Source: UNC Financial Aid Office) This equals a four-year cost of $123,632 for the out-of-state student and $56,187 for the in-state student (again, assuming a 5% rate of inflation). That’s an out-of-pocket savings of $72,996 and $140,441, respectively, compared to the cost of Harvard.

The Debt Factor
The Ivies often note that, while their schools might be expensive, most students rarely pay the full sticker price. But even as Ivy League colleges dole out millions of dollars in need-based aid each year from their huge endowments, non-Ivy private schools and public colleges distribute more merit aid, which is aid awarded on the basis of good grades or some special talent. Up-to-date college guidebooks can tell you how generous each college is in helping its students meet annual costs, and the breakdown of student loans vs. grants.

Still, you won’t actually know what your child will receive in the way of “free” grant and scholarship money until he or she actually applies to a particular college. So you won’t know for sure how much you or your child might need to borrow. But if your child does require student loans, here’s an idea of what he or she will owe each month:

Note: Results are based on a standard 10-year repayment term and a fixed interest rate of 6.8%–the current rate on all new federal Stafford loans.

As you weigh the cost factor, keep in mind that a high amount of debt might impact your child’s future major life decisions on job opportunities, living arrangements, graduate school, getting married, and/or starting a family.

What About the Intangibles?
Putting aside cost, there are benefits to an Ivy education that can’t be measured in nickels and dimes–the prestige of the name on your child’s resume, strong mentoring that can lead to coveted jobs and graduate school spots after graduation, the opportunity to build friendships with future leaders, and an alumni network that can open doors throughout life.

But critics of the “Ivy-at-any-cost” group point to excessive competition at the Ivies. They claim that students are more likely to get individualized attention at other colleges, and note that as time goes on, achievement in the workplace will matter more than the name on your child’s resume. Indeed, Warren Buffett, CEO of Berkshire Hathaway and graduate of the University of Nebraska-Lincoln, once stated: “I don’t care where someone went to school, and that never caused me to hire anyone or buy a business.” What counts most, some CEOs say, is a person’s ability to seize opportunities. (Source: Wall Street Journal, Any College Will Do, September 18, 2006)

The Bottom Line
To decide if an Ivy League education is worth it, weigh the cost with the potential long-term economic and life experience benefits. But keep in mind that highly motivated students who are independent thinkers and hard workers will likely do well in life no matter where they attend college. The important thing is to make sure that the match between your child and the college is a good one.

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