Although not specifically part of the Patient Protection and Affordable Care Act, legislation passed by Congress allows families eligible for TRICARE to purchase coverage for “dependents” that are under 26 years old. Previously TRICARE coverage ended at age 21 or 23 if the dependent was a full-time student. Like TRICARE, TRICARE Young Adult (TYA) has two coverage options. Individuals can purchase TYA-Standard which features a deductible and co-pay arrangement similar to TRICARE-Standard or they can purchase TYA-Prime which functions like TRICARE-Prime.
To be eligible for TYA a dependent must be:
- Less than 26 years old
- Unmarried, and
- Not eligible for employer sponsored health insurance
TYA has the following monthly premium structure:
- TYA-Prime: $201 per month
- TYA-Standard: : $176 per month (starting 1 Jan, reduced from $186 per month)
But should you purchase TYA? Well, ultimately it will depend on your individual situation. But, there may be reasons to consider other options. First, TYA is not especially inexpensive. Consider this, a military retiree pays $260 per year for individual TRICARE-Prime coverage. That retiree could be 50+ years old (up until TRICARE For Life eligibility). A young healthy adult would pay significanly more per year. Also, depending on where the dependent lives, doctors that accept or are in the TRICARE network could be limited.
So, what other options should you consider? TYA may be your best option, but before I signed up for it, I would (and I will when my oldest son turns 23) check out a High Deductible Health Plan (HDHP) coupled with a Health Savings Account (HSA). Why?
- Premiums could be lower. Health insurance premiums are always subject to numerous variables, but it is possible to get a lower premium. I recently saw one advertisement for High Deductible polices starting at $45 per month.
- Your dependent can set up an HSA. An HSA has several benefits for a young adult
- Contributions to an HSA are tax deductible by the individual. The deductions can be made by the individual or anyone who is not the individual’s employer
- Contributions can carry-forward from one year to the next
- Earnings in the account accumulate tax-free
- Distributions are tax-free is used for qualified medical expenses
- HSAs are portable, so they stay with the individual
- Finally, and most importantly, distributions from an HSA after age 65 are subject to taxation but not any penalty (other distributions used for non-qualified distributions are subject to a 20% penalty). This is important because if an HSA is not needed for medical expenses it functions like a Traditional IRA. Let’s face it, most young adults that don’t have a job with health insurance coverage probably won’t have the extra money to pay for health insurance and fund an IRA. So, if the young adult is healthy, the HSA gives them a chance to “fund an IRA” with unused HSA contributions. And remember, an individual doesn’t need earned income to fund an HSA. For an IRA the individual generally needs to have earned income (or be the spouse of someone who does). Starting to save for retirement early in life is absolutely critical to significant retirement savings.
When you sign up for a HDHP you do accept risk. In most cases, you will pay at least the first $1,200 per year in medical costs (individual). But that risk can be mitigated if the HSA is fully funded.
To qualify for an HSA there are a couple of requirements
- First, the individual must have a High Deductible Health Plan
- The individual cannot be claimed as a dependent on anyone else’s return…if the military dependent still lives at home, think through whether to claim the young adult as a dependent or not
- The individual cannot have any other health insurance (including Medicare)
Assuming a young adult is in good health, the HDHP/HSA combination makes a lot of sense to me. Carefully think through your own decision as we all have different circumstances. But make sure you look at both TYA and HDHP/HSA when you and your young adult make you health insurance choices.
Curt Sheldon is a Fee-Only Financial Planner based in Northern Virginia. He can be contacted at (703)542-4000, (800)928-1820 or Curt@CLSheldon.com
IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication
The information contained in this blog is for general financial education and should not be construed as individual financial advice. Please consult your own financial, tax or legal advisor prior to applying any principles discussed here to your own financial situation.