Divorce Pitfalls and the Affordable Health Care Act (Obamacare)

Effective Jan. 1, 2014, most individuals must have health insurance, provided either through the government exchange, an employer, privately purchased insurance, or Medicare or Medicaid. In order to purchase a marketplace health insurance plan outside the open enrollment period, there must be a qualifying life event. Divorce, like marriage or the birth of a child, is considered a qualifying life event. Attorneys need to be able to assess the impact of the Affordable Care Act on divorcing or post-divorce clients to advocate effectively for their clients.

Alimony Payments

In the initial determination of alimony, the need for alimony and the ability to pay it is potentially affected by the cost of health insurance, which affects both the alimony payor and the recipient. In New Jersey, for example, one of the factors courts consider in fixing the amount of alimony to be paid is the needs of the supported spouse, N.J.S.A. ' 2A:34-23 (b) (2009). If the supported spouse's insurance coverage becomes less expensive under the Act, then spousal support may also decrease. Since the cost of insurance is reduced, arguably, the amount of alimony the recipient requires is reduced.

The determination of the cost of medical insurance coverage is further complicated by the available government subsidies for individuals. An Affordable Health Care Act participant may be eligible for financial assistance to cover a portion of the costs of health care, which could greatly reduce that spouse's premiums. The credits are available to individuals who do not receive what is considered affordable, comprehensive coverage through their jobs and whose household income level is less than 400% of the federal poverty level. Additionally, if an individual's income changes during the year; his or her subsidy may change or be revoked. COBRA is still available for the maximum time under a plan; however, COBRA will likely be more expensive for the spouse who will have to pay the entire cost of the premium, including the piece that the employer paid in the past. Many states, including New Jersey, are expanding Medicaid programs under the Affordable Care Act, raising the eligibility threshold. The supported spouse, though previously ineligible, may now become eligible for health insurance through Medicaid.

Eligibility for Medicaid creates another opportunity for the paying spouses to argue for lower alimony payments because the supported spouse may be covered by the higher threshold. This raises another issue of who should be required to pay: the government or the paying spouse. In light of the general public policy that the government should not shoulder costs where an individual has the ability or the resources to provide for their needs, it is unclear the extent to which a court may require a supporting spouse to provide for health care costs where government subsidies are the only means by which a supported spouse can pay for health insurance.

The exchanges in the marketplace are meant to make shopping for insurance policies easier and include more transparent price information. However, in light of the many different variables effecting an individual's cost for medical insurance under the Act, the actual costs are still hard to ascertain, and thus, it may be hard to calculate the impact on alimony, equitable distribution, and even child support. Accordingly, language should be considered in Agreements that leave open this issue for future review. But the question remains: How specific do attorneys have to be in addressing health insurance costs?'

Addressing Medical Insurance Issues

In addressing the medical insurance issues, the following considerations should be addressed when determining whether a spouse should purchase medical coverage under the Act:

1. Divorcing couples and courts will have to decide what tier to purchase. There are five tiers of coverage provided by the Act: bronze, silver, gold, platinum and catastrophic (catastrophic plans have very high deductibles and essentially provide protection from worst-case scenarios, like a serious accident or extended illness). All offer the same set of essential benefits, but the out-of-pocket costs differ, with bronze plans having the lowest monthly premiums and higher out-of-pocket costs and vice versa for the platinum plans. The percentage of care that plans will cover average: 1) 60% Bronze; 2) 70% Silver; 3) 80% Gold; 4) 90% Platinum.

2. The effect of the subsidies in the law on the individual's obligation to pay for his/her insurance is complicated by the fact that spousal support is taxable income for recipients and tax-deductible for payers.

3. Another subsidy that will need to be factored into calculations is the government tax credit toward insurance coverage. In negotiations, an ex-spouse payer may argue for lower support payments where a spouse does not have workplace-based insurance, and is thus eligible for subsidies. The dependent spouse's eligibility for a subsidy would decrease his or her need for spousal support provided by the former spouse where the government may fill the financial gap in the dependent spouse's ability to pay for insurance. It is unclear whether alimony will be required to take the place of the government subsidy for the dependent spouse.

Divorce Agreements should reflect the fact that there is a non-quantifiable financial obligation for medical insurance coverage associated with every divorce case. This may require language such as the following:

It is understood that the medical insurance industry is undergoing change and the ramifications are unknown, including the availability and cost of COBRA coverage. Before either party relies on COBRA coverage they need to speak with a medical insurance expert. The parties agree to the extent possible they will work together to be sure they each have coverage and that the children's coverage is in their best interests. Each party has been advised to speak to medical insurance experts to obtain advice as to issues relating to coverage. The parties have been advised that counsel to the extent utilized do not provide advice as to issues relating to medical insurance coverage.

The cost of the medical insurance and an itemization of the out-of-pocket requirements should be spelled out in the agreement as well, so they are clearly enunciated in the event they are modified. Attorneys need to be sure that they are not leaving their clients vulnerable for future costs they cannot afford. Medical insurance in general and the costs of uncovered medical care must be sufficiently negotiated in cases. Practitioners need to add it to the computations when the amount of alimony is determined.

The Act also will affect equitable distribution of closely held corporations because the cost of medical insurance coverage may affect the value of a business. Increased costs in medical coverage for employees could reduce the value of a business. The Act provides that all employers, regardless of size, are now prohibited from dollar caps on lifetime benefits, imposing unreasonable dollar caps on annual benefits, rescissions of coverage, waiting periods of more than 90 days, elimination of pre-existing condition exclusions, and requiring coverage of a specified set of preventative services.

Overall, the Act increases the total number of people covered by employer-sponsored insurance. The Small Business Health Options Program (SHOP) Marketplace creates the exchange for small businesses to provide qualified health plans to their employees. Businesses with fewer than 25 full-time employees making less than $50,000 per year may qualify to obtain healthcare tax credits. To qualify for the small business healthcare tax credit, employers must pay at least 50% of their full-time employees' premium costs. Starting in 2014, the tax credit is worth up to 50% of employers' contributions toward employees' premium costs, up to 35% for tax-exempt employers, as per the Health Insurance Marketplace.

The Effect on Business Valuation

The extent to which employer-spending may change per person insured as per the Act is unclear. The potential business costs associated with the costs of insurance, or the extent to which any increase in an employer's health insurance costs will be offset by decreases in wages or other benefits, is not known. However, all these factors may affect the value of a business that is being evaluated for purposes of equitable distribution. It may also affect the salary paid to an owner or owners if the costs of medical insurance actually wind up being significantly more or less. Some companies may not have had the obligation to pay medical insurance coverage and now have that obligation.

The greatest impact will be on businesses with at least 50 full-time employees. The Act requires such business to provide insurance for the employees, creating an overall increase in spending. This cost will be particularly high for companies that currently do not provide any sort of medical insurance for its employees and are thus enrolling into an insurance program for the first time.

The cost of medical insurance coverage may need to be addressed by a forensic accountant conducting a valuation of a business to determine the impact. One question is, what was the company paying before and what is it paying now? If the company is paying more, it will be an additional line item expense that will have to be factored in the divorce, or if the coverage results in a savings for the business, then the value of the business may go up.

Post-Divorce

For post-divorce cases, what happens if the dependent spouse accepted an alimony award based on what the cost of insurance premiums were at the time, or what s/he thought the cost would be, and his/her costs actually increase because s/he is not entitled to benefits under the Act? Or even worse, what happens if his or her existing coverage is cancelled and s/he requires certain medical treatments that were covered privately but are not available under the Act? How many practitioners separately address medical insurance costs? Litigants receive an amount of support that is not broken down in components that address all possible medical expenses or scenarios.

Accordingly, at the time of the divorce, the payment for medical insurance coverage is unpredictable as is whether such payment will significantly change over time. In New Jersey, Lepis v. Lepis, 83 N.J. 139 (1980), allows for a modification based upon a change in circumstances. The problem then becomes whether such a change in payment qualifies as a change in circumstances to constitute a basis for a modification to alimony. To apply for modification, there would have to be a showing that medical insurance has drastically increased and this was not considered as part of the alimony determination as was determined to be at a lower amount. Additionally, the change in cost must not have been foreseeable. All these issues must be addressed in an application, assuming that the Agreement did not provide for a waiver of any future modification based upon changed circumstances.

Therefore, as court applications are heard, judges will need to consider, where there is no waiver of a change in circumstances as a basis to seek a modification of the support obligations (a Lepis waiver) in an Agreement, whether the increased or decreased costs of medical care are sufficient to trigger a review of an existing alimony obligation. Clearly, there needs to be recitation in an Agreement of the cost of medical insurance coverage so that there can be a modification later if the costs change post-judgment. It may be hard to establish what the anticipated medical costs were at the time of the divorce, that they were specifically contemplated and that they have now changed. What if coverage is no longer available privately and the coverage under the Act is not as “rich” in terms of benefits or treatment as the previous coverage? What about deductible or uncovered care? If a former spouse becomes ill should s/he be entitled to seek to have his/her spouse pay for out of network care or uncovered treatments? Practitioners may want to focus on some of these issues and have language added to Agreements or incorporated into Court Orders specifically addressing the costs of medical insurance coverage for these various scenarios and the conditions that may warrant modification of an alimony award to cover previously, not negotiated medical expenses.

Alternatively, under some circumstances, for example, a Divorce from Bed and Board in New Jersey, may allow for parties to be divorced except that they may continue to be on each other's medical insurance coverage. Since medical insurance coverage is changing, great care needs to be utilized in obtaining a Divorce from Bed and Board instead of a Final Judgment of Divorce. Under the Act, the Divorce from Bed and Board may not be accepted by various medical plans despite the parties' reliance on the coverage.

An Agreement without a divorce may allow for continued medical insurance coverage so long as there is no issue with the fact that the parties will be living in different locations. The parties can always obtain a Final Judgment of Divorce in the future. If the parties remain married, and rely on an Agreement and not a Judgment of Divorce, issues regarding what happens in the event of the death of a party need to be fully addressed. It would presumptively be the intention of the parties to waive any rights to inherit from the other. Such waivers need to be spelled out fully in an Agreement. The right of election disappears if the parties are living separate and apart whether or not they are divorced pursuant to the statute.

Conclusion

At this point, the cost of medical insurance, the implementation of the Affordable Health Care Act, and what it means to litigants going through a divorce need to be addressed, to the extent that they can. Matrimonial attorneys would be well advised to refer their clients to an insurance expert to calculate the cost of medical insurance coverage so that a correct number is utilized and that Agreements are drafted to take into account the greatest number of contingencies and possibilities.

Lynn Strober, a member of this newsletter's Board of Editors, chairs the family law department at Mandelbaum Salsburg P.C. The author would like to thank Christie
Pazdzierski, a law clerk at the firm, for her help in the preparation of this article.

The purpose of this article is to alert attorneys to the potential impact of the Affordable Health Care Act, colloquially known as “Obamacare” (the Act), 42 U.S.C.A. ' 18001 et seq. (2010), on litigants and on the handling of divorce cases by matrimonial practitioners. At this juncture, there is no way to know for certain how the implementation of the Act will affect us. However, practitioners need to protect their clients' needs as best as possible and consider a litany of different factors and take into account some potential unknowns.

Medical Insurance

Now, more than ever, attorneys handling matrimonial matters must consider the cost of medical insurance coverage; particularly post-divorce. Preliminarily, the matrimonial practitioner and/or the litigant must consult with an insurance professional for many reasons, including:

1. To explain the Act. The Act is complex and difficult to understand. An explanation of the nuts and bolts of the Act is necessary to ensure compliance with the law and improve the ability of the practitioner and litigant to pursue their interests.
2. To assess costs. The costs for insurance vary and may be difficult to quantify. The consultation may help determine the extent to which costs may potentially increase with the age of the recipient.
3. To determine to whom and to what extent the Act applies, including individuals and businesses and the various levels of coverage.
4. To answer whether the Act does or does not affect the utilization of Divorce from Bed and Board or COBRA coverage. (A Divorce from Bed and Board is a NJ divorce that is final, except that the parties cannot remarry. The arrangement often permits one party to remain on the other's medical insurance policy. It was created in the 1950s for those whose religious beliefs prohibited divorce. It is now used to continue medical insurance coverage. Attorneys in NJ should confirm that the insurance will continue; attorneys from other states should determine whether their jurisdictions have a similar vehicle.)

The good news is that there are several benefits of the Act: there are no limitations on coverage for pre-existing conditions or gender; various preventative services are available; no medical examination is required to qualify for coverage, and no one can be turned away.

Effective Jan. 1, 2014, most individuals must have health insurance, provided either through the government exchange, an employer, privately purchased insurance, or Medicare or Medicaid. In order to purchase a marketplace health insurance plan outside the open enrollment period, there must be a qualifying life event. Divorce, like marriage or the birth of a child, is considered a qualifying life event. Attorneys need to be able to assess the impact of the Affordable Care Act on divorcing or post-divorce clients to advocate effectively for their clients.

Alimony Payments

In the initial determination of alimony, the need for alimony and the ability to pay it is potentially affected by the cost of health insurance, which affects both the alimony payor and the recipient. In New Jersey, for example, one of the factors courts consider in fixing the amount of alimony to be paid is the needs of the supported spouse, N.J.S.A. ' 2A:34-23 (b) (2009). If the supported spouse's insurance coverage becomes less expensive under the Act, then spousal support may also decrease. Since the cost of insurance is reduced, arguably, the amount of alimony the recipient requires is reduced.

The determination of the cost of medical insurance coverage is further complicated by the available government subsidies for individuals. An Affordable Health Care Act participant may be eligible for financial assistance to cover a portion of the costs of health care, which could greatly reduce that spouse's premiums. The credits are available to individuals who do not receive what is considered affordable, comprehensive coverage through their jobs and whose household income level is less than 400% of the federal poverty level. Additionally, if an individual's income changes during the year; his or her subsidy may change or be revoked. COBRA is still available for the maximum time under a plan; however, COBRA will likely be more expensive for the spouse who will have to pay the entire cost of the premium, including the piece that the employer paid in the past. Many states, including New Jersey, are expanding Medicaid programs under the Affordable Care Act, raising the eligibility threshold. The supported spouse, though previously ineligible, may now become eligible for health insurance through Medicaid.

Eligibility for Medicaid creates another opportunity for the paying spouses to argue for lower alimony payments because the supported spouse may be covered by the higher threshold. This raises another issue of who should be required to pay: the government or the paying spouse. In light of the general public policy that the government should not shoulder costs where an individual has the ability or the resources to provide for their needs, it is unclear the extent to which a court may require a supporting spouse to provide for health care costs where government subsidies are the only means by which a supported spouse can pay for health insurance.

The exchanges in the marketplace are meant to make shopping for insurance policies easier and include more transparent price information. However, in light of the many different variables effecting an individual's cost for medical insurance under the Act, the actual costs are still hard to ascertain, and thus, it may be hard to calculate the impact on alimony, equitable distribution, and even child support. Accordingly, language should be considered in Agreements that leave open this issue for future review. But the question remains: How specific do attorneys have to be in addressing health insurance costs?'

Addressing Medical Insurance Issues

In addressing the medical insurance issues, the following considerations should be addressed when determining whether a spouse should purchase medical coverage under the Act:

1. Divorcing couples and courts will have to decide what tier to purchase. There are five tiers of coverage provided by the Act: bronze, silver, gold, platinum and catastrophic (catastrophic plans have very high deductibles and essentially provide protection from worst-case scenarios, like a serious accident or extended illness). All offer the same set of essential benefits, but the out-of-pocket costs differ, with bronze plans having the lowest monthly premiums and higher out-of-pocket costs and vice versa for the platinum plans. The percentage of care that plans will cover average: 1) 60% Bronze; 2) 70% Silver; 3) 80% Gold; 4) 90% Platinum.

2. The effect of the subsidies in the law on the individual's obligation to pay for his/her insurance is complicated by the fact that spousal support is taxable income for recipients and tax-deductible for payers.

3. Another subsidy that will need to be factored into calculations is the government tax credit toward insurance coverage. In negotiations, an ex-spouse payer may argue for lower support payments where a spouse does not have workplace-based insurance, and is thus eligible for subsidies. The dependent spouse's eligibility for a subsidy would decrease his or her need for spousal support provided by the former spouse where the government may fill the financial gap in the dependent spouse's ability to pay for insurance. It is unclear whether alimony will be required to take the place of the government subsidy for the dependent spouse.

Divorce Agreements should reflect the fact that there is a non-quantifiable financial obligation for medical insurance coverage associated with every divorce case. This may require language such as the following:

It is understood that the medical insurance industry is undergoing change and the ramifications are unknown, including the availability and cost of COBRA coverage. Before either party relies on COBRA coverage they need to speak with a medical insurance expert. The parties agree to the extent possible they will work together to be sure they each have coverage and that the children's coverage is in their best interests. Each party has been advised to speak to medical insurance experts to obtain advice as to issues relating to coverage. The parties have been advised that counsel to the extent utilized do not provide advice as to issues relating to medical insurance coverage.

The cost of the medical insurance and an itemization of the out-of-pocket requirements should be spelled out in the agreement as well, so they are clearly enunciated in the event they are modified. Attorneys need to be sure that they are not leaving their clients vulnerable for future costs they cannot afford. Medical insurance in general and the costs of uncovered medical care must be sufficiently negotiated in cases. Practitioners need to add it to the computations when the amount of alimony is determined.

The Act also will affect equitable distribution of closely held corporations because the cost of medical insurance coverage may affect the value of a business. Increased costs in medical coverage for employees could reduce the value of a business. The Act provides that all employers, regardless of size, are now prohibited from dollar caps on lifetime benefits, imposing unreasonable dollar caps on annual benefits, rescissions of coverage, waiting periods of more than 90 days, elimination of pre-existing condition exclusions, and requiring coverage of a specified set of preventative services.

Overall, the Act increases the total number of people covered by employer-sponsored insurance. The Small Business Health Options Program (SHOP) Marketplace creates the exchange for small businesses to provide qualified health plans to their employees. Businesses with fewer than 25 full-time employees making less than $50,000 per year may qualify to obtain healthcare tax credits. To qualify for the small business healthcare tax credit, employers must pay at least 50% of their full-time employees' premium costs. Starting in 2014, the tax credit is worth up to 50% of employers' contributions toward employees' premium costs, up to 35% for tax-exempt employers, as per the Health Insurance Marketplace.

The Effect on Business Valuation

The extent to which employer-spending may change per person insured as per the Act is unclear. The potential business costs associated with the costs of insurance, or the extent to which any increase in an employer's health insurance costs will be offset by decreases in wages or other benefits, is not known. However, all these factors may affect the value of a business that is being evaluated for purposes of equitable distribution. It may also affect the salary paid to an owner or owners if the costs of medical insurance actually wind up being significantly more or less. Some companies may not have had the obligation to pay medical insurance coverage and now have that obligation.

The greatest impact will be on businesses with at least 50 full-time employees. The Act requires such business to provide insurance for the employees, creating an overall increase in spending. This cost will be particularly high for companies that currently do not provide any sort of medical insurance for its employees and are thus enrolling into an insurance program for the first time.

The cost of medical insurance coverage may need to be addressed by a forensic accountant conducting a valuation of a business to determine the impact. One question is, what was the company paying before and what is it paying now? If the company is paying more, it will be an additional line item expense that will have to be factored in the divorce, or if the coverage results in a savings for the business, then the value of the business may go up.

Post-Divorce

For post-divorce cases, what happens if the dependent spouse accepted an alimony award based on what the cost of insurance premiums were at the time, or what s/he thought the cost would be, and his/her costs actually increase because s/he is not entitled to benefits under the Act? Or even worse, what happens if his or her existing coverage is cancelled and s/he requires certain medical treatments that were covered privately but are not available under the Act? How many practitioners separately address medical insurance costs? Litigants receive an amount of support that is not broken down in components that address all possible medical expenses or scenarios.

Accordingly, at the time of the divorce, the payment for medical insurance coverage is unpredictable as is whether such payment will significantly change over time. In New Jersey, Lepis v. Lepis , 83 N.J. 139 (1980), allows for a modification based upon a change in circumstances. The problem then becomes whether such a change in payment qualifies as a change in circumstances to constitute a basis for a modification to alimony. To apply for modification, there would have to be a showing that medical insurance has drastically increased and this was not considered as part of the alimony determination as was determined to be at a lower amount. Additionally, the change in cost must not have been foreseeable. All these issues must be addressed in an application, assuming that the Agreement did not provide for a waiver of any future modification based upon changed circumstances.

Therefore, as court applications are heard, judges will need to consider, where there is no waiver of a change in circumstances as a basis to seek a modification of the support obligations (a Lepis waiver) in an Agreement, whether the increased or decreased costs of medical care are sufficient to trigger a review of an existing alimony obligation. Clearly, there needs to be recitation in an Agreement of the cost of medical insurance coverage so that there can be a modification later if the costs change post-judgment. It may be hard to establish what the anticipated medical costs were at the time of the divorce, that they were specifically contemplated and that they have now changed. What if coverage is no longer available privately and the coverage under the Act is not as “rich” in terms of benefits or treatment as the previous coverage? What about deductible or uncovered care? If a former spouse becomes ill should s/he be entitled to seek to have his/her spouse pay for out of network care or uncovered treatments? Practitioners may want to focus on some of these issues and have language added to Agreements or incorporated into Court Orders specifically addressing the costs of medical insurance coverage for these various scenarios and the conditions that may warrant modification of an alimony award to cover previously, not negotiated medical expenses.

Alternatively, under some circumstances, for example, a Divorce from Bed and Board in New Jersey, may allow for parties to be divorced except that they may continue to be on each other's medical insurance coverage. Since medical insurance coverage is changing, great care needs to be utilized in obtaining a Divorce from Bed and Board instead of a Final Judgment of Divorce. Under the Act, the Divorce from Bed and Board may not be accepted by various medical plans despite the parties' reliance on the coverage.

An Agreement without a divorce may allow for continued medical insurance coverage so long as there is no issue with the fact that the parties will be living in different locations. The parties can always obtain a Final Judgment of Divorce in the future. If the parties remain married, and rely on an Agreement and not a Judgment of Divorce, issues regarding what happens in the event of the death of a party need to be fully addressed. It would presumptively be the intention of the parties to waive any rights to inherit from the other. Such waivers need to be spelled out fully in an Agreement. The right of election disappears if the parties are living separate and apart whether or not they are divorced pursuant to the statute.

Conclusion

At this point, the cost of medical insurance, the implementation of the Affordable Health Care Act, and what it means to litigants going through a divorce need to be addressed, to the extent that they can. Matrimonial attorneys would be well advised to refer their clients to an insurance expert to calculate the cost of medical insurance coverage so that a correct number is utilized and that Agreements are drafted to take into account the greatest number of contingencies and possibilities.

Lynn Strober, a member of this newsletter's Board of Editors, chairs the family law department at Mandelbaum Salsburg P.C. The author would like to thank Christie
Pazdzierski, a law clerk at the firm, for her help in the preparation of this article.