Health Care for Early Retirement
Getting the right health insurance is critical when retiring before age 65. Medicare isn’t an option yet. This forces a young retiree to have to select from a number of complex health care options - in fact, there may be as many as 7 of them. Unfortunately, not understanding the programs available to you can lead to costly mistakes. We aim to solve the confusion for you here. In this blog series, we overview the benefits and costs associated with the 7 health insurance alternatives one must consider when retiring before 65.
To learn more, check out our health care for early retirement blog series below:
How Health Insurance Can Make or Break Your Decision on When to Retire
The Top Benefits and Drawbacks to Know About Healthcare Sharing Ministry Plans
Short Term Health Insurance Plans: A good option to bridge the gap before Medicare?
A Healthcare Choice Available to Every Pre-Medicare Retiree: Affordable Care Act (“ACA”) Coverage
Could a Health Savings Account (HSA) be THE best account to invest in?
How Health Insurance Can Make or Break Your Decision on When to Retire
If you are nearing retirement, it is likely that you are worried about the rising cost of health insurance. According to a survey conducted by, Dr. Renuka Tipirmeni of the University of Michigan (originally reported by Reuters), 45% of individuals in their 50s and 60s are not confident they can afford health care in retirement. This makes health care the single greatest worry to those at or nearing retirement.
To put this cost into perspective, Fidelity Investments’ annual Retiree Health Care Cost Estimate study projects a 65-year couple will, on average, spend $300,000 on health-related expenses throughout their retirement. Clearly not chump change, even for wealthy individuals.
THE CHALLENGES OF RETIRING EARLY
What if you want to retire early? It becomes even more of a challenge because you might be suffering from a serious gap in your health insurance coverage. The reality is that the average worker retires at the age of 62, which is 3 years before Americans are eligible to enroll in Medicare, when a retiree reaches age 65. If you are someone who falls into this camp, what options are there to help you bridge the gap from retirement at age 62, to Medicare at age 65?
As it turns out, there are up to 7 of them:
Employer’s Group Coverage
When evaluating which health care coverage option from above is best suited to meet your early retirement needs, determining what is right for you will depend. Therefore, it’s prudent to understand how the features, benefits, and costs align with your personal set of circumstances. With that in mind, our health care for early retirement blog series will be overviewing each of these strategies in greater detail.
For the sake of brevity, this article will highlight the key points of employer group coverage. However, we will also address health sharing ministries plans, COBRA, employer’s retiree group coverage, concierge direct primary care DPC plans, non-ACA short-term insurance plans, and ACA coverage with future articles. There are more in-depth planning techniques associated with each of these health care options that you won’t want to miss, so stay tuned to our blog!
EMPLOYER’S GROUP COVERAGE
Typically, when employment ends, that employee’s health insurance coverage ends. However, it’s important to consider if someone else in your household continues to work and he or she has group coverage. In this type of situation, the retiree may be able to obtain coverage from the plan of their spouse or partner who is still working. In fact, some company plans offer coverage for a domestic partner, roommate, or parent who is a dependent of their child.
Assuming your spouse’s company allows it, you can be added to their health insurance plan by asking your spouse to contact their human resources department for further information. It is important to get added to your spouse’s plan within 30 days of losing your job-based health insurance, as it is considered a “qualifying event” under the Affordable Care Act (ACA). If you miss this window, you will have to wait until the next Open Enrollment Period to switch to a spouse’s health insurance.
Another area you may overlook is the fact that certain employers will negotiate – and provide – continued coverage if you consult or continue to work part-time. The ACA requires employers to offer health insurance coverage to employees working 30 or more hours per week. Some companies are more generous with those limits and only require 20 hours. It pays to ask.
Generally, group health insurance coverage will be the most cost-effective option if you can get it.
A HEALTH CARE PLAN IS A KEY COG TO YOUR RETIREMENT PLAN
Do you ever wonder how early retirement is a possibility for some and not for others? The fact is that the costs associated with health care is what often causes a worker to delay their retirement. However, beneath the surface, there may be more affordable options available, as mentioned in this article – albeit under the right set of circumstances.
With that said, if you are retiring before age 65, it’s paramount that you do your homework and research the various health care options that may be applicable to your specific situation. Or, if you don’t have the time or expertise, consider hiring a professional to help you understand what all the costs are, and to make the right choice for you.
Stay tuned for our next article about health care and early retirement, where we go over COBRA coverage, including when to use it and when to not use it.
COBRA Insurance: A good option for Pre-Medicare Retirees?
Maybe you’ve heard of COBRA as a back up health insurance plan if you were to ever lose your job, but have you considered how COBRA can also help you make that transition into retirement a little easier?
The Consolidated Omnibus Budget Reconciliation Act (COBRA) was a law signed by President Reagan in 1985 and among other things, mandated an insurance program that gives employees the ability to continue health insurance coverage after leaving employment. It is regulated by the Department of Labor.
Generally, COBRA coverage allows you to continue your health insurance coverage for a period of 18-36 months in the case of:
Voluntary or involuntary job loss - 18 months
Reduction in hours worked that would cause you to lose your health insurance – 18 months
A qualified beneficiary experiences a 2nd Qualifying event, i.e. Death or divorce from a covered employee, Medicare entitlement (in some cases), or loss of a dependent child status under the plan – 36 months
Let’s start with an example to see how this works…..
Mark, age 64, has decided to retire from his employer this year. He is still 1 year from Medicare eligibility, but has decided he and wife Samantha, age 63 are ready to start their retirement and begin the traveling they’ve always dreamed of doing while they are healthy to do so. Mark has decided to use his COBRA option and continue with their current health insurance plan because they like all the doctors they have and don’t want to make a change.
What things did Mark need to consider in that decision?
COBRA ELIGIBILITY –
Does his employer provide COBRA? Yes, they are required to offer COBRA because there are more than 20 employees.
What if his company had LESS THAN 20 employees?
Depending on the state Mark lives in there may be something called “Mini-COBRA”. These are state continuation laws for COBRA that require employers to have the COBRA option if they have as low as 2 full-time employees. Only 6 states do NOT have state continuation requirements: Alabama, Alaska, Hawaii, Indiana, Michigan & Montana.
Note: To confirm the rules of your state, you would want to check with the State Insurance Commissioner’s office.
Mark knew he qualified as he was covered under his employer’s plan at least 3 months prior to his retirement and end of health insurance coverage.
COST – COBRA is expensive. When he was working for his company the cost of the health insurance was shared with his employer. Now Mark will need to pay 100% of the premium - both his and his employer’s share of the costs PLUS up to a 2% administration fee. The average cost of COBRA of employer-sponsored health coverage by firms is about $7,000 for single coverage and $20,000 for family coverage.
LIMITED TIMELINE TO ENROLL – Mark had 60 days to decide from the time he received his COBRA election notification from the employer or the day he lost coverage, whichever was later.
TIMELINE TO MEDICARE – COBRA could carry Mark and Samantha for 18 months. Mark will turn 65 in 12 months and then will transition to Medicare. Samantha will be able continue her 18 months COBRA coverage for 6 months after Mark’s transition to Medicare, but she would still have 6 months until she is eligible for Medicare.
Samantha would have to find other health insurance coverage for those final 6 months. This could be in the form of Affordable Care Act (ACA) coverage or Non-ACA Short Term Insurance Plans – all of which we’ll cover in future blog posts.
To illustrate one of the nuances of Medicare timing with COBRA, let’s change the example just slightly where Mark is age 66 and Samantha is 63. Mark has worked PAST his age 65 Medicare eligibility and stayed on his employer plan with Samantha receiving dependent group health insurance benefits. Now Mark is retiring at 66 and will transition directly to Medicare. However, Samantha cannot because she still has 24 months until she can get on Medicare.
Does Samantha have any different options when her COBRA coverage ends in 18 months?
YES - If an employee became entitled to Medicare less than 18 months before the qualifying COBRA event, COBRA coverage for the employee's spouse and dependents can last until 36 months after the date the employee becomes entitled to Medicare.
Mark was eligible for Medicare 12 months before his qualifying COBRA event -retirement. So Samantha can keep her COBRA coverage 24 months (36 – 12) from the time Mike retires – Samantha’s age 63. This would extend her COBRA coverage to when she transitions to Medicare at A65.
Of course, there are other options Mark could choose from to carry he and Samantha to Medicare. Is there a reason why he would have chosen one of the more expensive options?
He’s already met his out of pocket maximum for the year – If he and Samantha met their deductible by March because of some unexpected high cost medical care and he is going to retire in April, it would not make sense move to a new plan where they have to start over with a new deductible.
Ongoing medical treatment – If they were in the middle of extensive ongoing medical treatment, they might not want to change plans/doctors/prescription coverage mid-treatment.
Other COBRA nuances that are important to note:
If the termination of your health insurance plan was because your company was sold or went bankrupt, COBRA is NOT available. COBRA is only available if there is a health insurance plan in existence to carry out COBRA.
COBRA and Mini-COBRA do not apply to companies who provide self-insured health insurance. So, if your company provides their own health insurance and does not utilize a health insurance company for their health coverage, they are NOT required to offer COBRA.
We will be covering other options Mark and Samantha have available to them throughout the course of this blog series. If COBRA seems like it could be a good solution for you and your family, a great beginning resource is the Department of Labor website. You will also want to consult with your company’s HR department as each group health insurance plan has a Summary Plan Description that will lay out the specifics of how COBRA works for your firm.
The Top Benefits and Drawbacks to Know About Healthcare Sharing Ministry Plans
Continuing with our health care for early retirement blog series, our next featured article discusses a strategy known as Healthcare Sharing Ministry plans.
The main benefits associated with this type of plan include discounts on healthcare, limited out of pocket costs and predictable monthly payments. It should be noted that these plans are not considered insurance. More on this a bit later.
Big picture, Healthcare Sharing Ministry plans are provided by organizations whose members share the costs. There are 2 parts to the monthly cost that a participant pays – 1) the shared amount, and 2) the unshared amount.
The shared amount of the monthly cost operates like insurance premiums, whereas the unshared amount is like a deductible. The unshared amount portion of the cost typically run around $500 for individuals, $1,000 for couples, and up to $5,000 for families. Whereas, the shared portion can range between $64 - $627/month, depending on the coverage selected and plan provider.
Unsurprisingly like the name would indicate, Healthcare Sharing Ministry plans are Christian based. Therefore, one should be aware that coverage may be limited against things that the group morally disagrees with. For example, birth control is typically not covered.
Another common stipulation is that they often require the participant to be actively religious. In addition, these plans do not have to accept individuals with habits they disapprove of, such as drinking or smoking recreational substances.
THINGS TO CONSIDER WHEN DECIDING IF HEALTHCARE MINISTRY PLANS ARE RIGHT FOR YOU
In general, Healthcare Sharing Ministry plans work best for people who:
Are in good health
Ineligible for a substantial tax credit based on income
Lack other options through work
Desire coverage that is only intended to protect against catastrophic events
Unable to afford current health insurance premiums
Some of the flaws associated with healthcare ministry plans include:
Because healthcare sharing is not regulated like insurance, it is not guaranteed and means that consumers have almost no legal protections
Situations where the lack of legal protections might be harmful are when claims go unpaid, coverage gets denied, or the ministry goes bankrupt
A pre-existing condition may disqualify an individual, require the member to pay a higher monthly amount, or negatively affect their payments caps
There are no caps on the amounts you might have to pay for healthcare costs that aren’t covered
USE CAUTION
Given some of the drawbacks discussed above, it’s wise to proceed with a certain level of caution when evaluating whether Healthcare Ministry plans are a good fit for your situation. On the other hand, these types of plans are fairly popular among the Christian faith, as evidenced by the 1.5-million Americans who participate in such plans.
The bottom line is that while for some early retirees this type of plan can be a cost-effective alternative to traditional insurance, it’s important to review the membership requirements before joining to ensure the terms within the plan are aligned with your specific needs.
Concierge Healthcare Plans: Wave of the Future?
In this blog entry, we’ll discuss the 5th of the 7 options a pre-Medicare retiree may have available: concierge healthcare.
Concierge healthcare may be the newest of these pre-Medicare choices; it’s certainly the most rapidly changing. It stems from the dissatisfaction of patients and practitioners alike with the current healthcare system in the United States. Instead of long waits for an appointment where the physician may only have 15 minutes to see the patient, uncertain costs, and insurance haggling, concierge care seeks to do things different, and better, for all parties involved.
What Is Concierge Healthcare?
Concierge healthcare is a membership-based care plan from the practitioner or facility you join. Similar to joining a gym, or subscribing to an online streaming service like Netflix, you pay a monthly or annual fee to join the membership of your chosen practitioner, which then entitles you to the services included in that membership. Typical services include rapid access to office visits, ability to text with your physician, telemedicine appointments, and inclusion of routine services in the membership cost. This may include things like annual physicals, preventive screenings, or lab work. Another hallmark of most concierge plans is the amount of time your physician can spend with you, which may be 30 to 60 minutes.
How is this possible? The patient load carried by most membership-based physicians is far lower than that of traditional practices because the physicians can set their own prices and know what they will get paid, rather than an insurance company deciding it for them. This provides better quality of life for the physicians, many of whom are struggling with burnout and leaving the field of medicine due to heavy daily appointment loads and frustrations with inability to provide the level of care they’d prefer to provide to patients.
What Concierge Healthcare is NOT: Insurance!
Just as important as knowing what concierge healthcare is, and how you might benefit from it, it’s important to know its limitations. First and foremost, it is not health insurance. This means that most individuals considering this type of healthcare will use it in addition to insurance. Many health insurance experts suggest that it can be ideal to combine a concierge plan with a high deductible insurance plan, because the routine care you need could be covered by the concierge plan, while unforeseen or urgent medical issues can be covered by insurance. Concierge healthcare’s costs are not deductible with your insurance company, and do not serve to meet any copays or other insurance-related costs. However, if a concierge physician recommends other medical professionals, tests, lab work or similar items, your insurance may cover those, depending on your insurance plan.
Who Should Consider Concierge Healthcare?
When concierge healthcare first emerged, it was positioned most commonly in a couple of ways: either for primary care needs, under which it’s also named “DPC” – Direct Primary Care, or a way to work with specialists. Good examples of individuals who should consider those models of concierge care include parents of young families who find themselves at the pediatrician’s office frequently, or individuals with chronic care issues who see a particular specialist often. Why might concierge care be good in these situations? The rapid access to care, deeper relationship with the practitioner, and flat fees might make it a better fit for both needs and costs.
As concierge healthcare has continued to gain interest, other possibilities have emerged. For example, some urgent care facilities are offering membership plans as a way to have fast and easy access for both minor issues, like colds, flu, or ear infections, as well as major issues like car accidents which may include the need for CT scans, x-rays, and lab work. Individuals can join, but so can small businesses, especially those that might not otherwise offer a group healthcare plan to employees. Membership may include all of these items without additional cost, or minimal extra cost. While this still wouldn’t replace health insurance, it may allow individuals buying insurance to purchase a lower cost plan, or higher deductible plan, knowing that many more of their unexpected needs have a cost cap.
Some concierge plans have started to offer different packages to meet different needs. For example, a primary care physician might offer the standard model mentioned previously in this article, but also offer a lower cost plan that eliminates in-person visits and lab work, but offers telemedicine appointments, and ability to text or email on an unlimited basis with the physician.
What Does It Cost?
Most concierge healthcare plans range from $100/month ($1200/year) to as high as $20,000/year for more specialized services.1 However, as the marketplace for these services continues to develop, more economical plans are also becoming available. The question for consumers and practitioners alike will be whether this model can deliver on the improvements in both quality of care and quality of life for the practitioner that it seeks to provide. Like many things in business, it’s likely that some providers will thrive, while others will struggle. Some consumers will find value in these plans, and others won’t use it enough to justify the additional expense on top of insurance. If you believe a concierge healthcare plan may be right for you, be sure to consider how you’ll use it, how often, and how the cost fits into your budget.
Short Term Health Insurance Plans: A good option to bridge the gap before Medicare?
Short Term Health Insurance Plans are health insurance plans that fill that short term gap in health insurance coverage you may have anywhere from 3-6 months up to a year. These plans were more recently in the news when President Trump signed an Executive order in August 2018 allowing these plans to cover individuals for up to one year versus the previous 3-month regulation, however, these plans have been in existence for decades.
Let’s discuss how this health insurance option might work during your pre-Medicare years and what things you should consider when evaluating this option.
You’ve retired early at age 63. Because you were comfortable with your health insurance providers as covered under your old employer plan, you decided to use COBRA insurance to take care of your needs. But COBRA only lasts 18 months. As a result, you will have a 6-month gap before you turn age 65.
You COULD opt to go into the ACA Marketplace and purchase a policy, but because your income does not allow you to qualify for tax subsidies*, ACA Health Marketplace plans are going to be even more costly than COBRA. In addition, you had heard that Short Term Health Insurance plans generally have LOWER PREMIUMS. BUT WHAT ARE THE RISKS?
MEDICAL UNDERWRITING – These policies require you to be medically underwritten to get approval which means you can be turned down for pre-existing conditions. This is unlike ACA Compliant health insurance which cannot decline you for pre-existing conditions.
LIMITS ON COVERED BENEFITS – There could be limits on number of doctor visits, costs covered for a hospital stay and limits on prescription drug coverage.
OUT OF POCKET COSTS – While most policies do have an out-of-pocket limit, this is usually for cost sharing ONLY. For things that are not cost-shared – like deductibles or copays – there is no limit to what you will pay out of pocket. This is unlike ACA Compliant health insurance which has an out-of-pocket limit for all costs – both cost sharing and not. For the 2022 plan year, the ACA out of pocket maximum is $8,700 for an individual and $17,400 for a family.
OPTION TO RENEW – At the end of your term, the insurance company can choose NOT TO RENEW the policy, quite possibly based on a claim you made while covered under the policy.
OTHER CONSIDERATIONS….
INDEMNITY POLICIES – Some of these contracts can be sold as indemnity policies where the health insurance company does not limit the coverage to certain doctors or hospitals. But what this also means is that there are no negotiated limits as to what these doctors or hospitals can charge you.
For example, if you unexpectedly get diagnosed with a condition that requires expensive procedures or treatments, the health insurance company will pay up to their coverage limits, but you could be on the hook for the remainder of those costs.
STATE LIMITATIONS – Because these policies do not cover people with pre-existing conditions, there are certain states that do not allow the sale of these policies: California, Massachusetts, New Jersey, and New York.
A handful of other states apply such strict rules to these policies that insurance companies that provide short term health insurance will not offer these short-term health insurance policies in those states. Please check your state’s health insurance website to see if this product is available.
WITH ALL THESE RISKS AND CONSIDERATIONS, CAN THIS BE A GOOD “BRIDGE OPTION TO MEDICARE?
Generally, if you are healthy and a low user of healthcare services, Short Term Health Insurance Plans can be an inexpensive short-term option to make sure you have coverage. More specifically, it’s better served for catastrophic events like a car accident.
However, if any of the risks above would be concerning to you, there are other options available that will be covered in this blog series. Ultimately, only you can decide what is going to be your best option to cover your retiree healthcare needs before Medicare.
WATCH THIS VIDEO TO LEARN MORE ABOUT SHORT TERM HEALTH INSURANCE PLANS
For additional guidance about Short Term Health Insurance Plans, we recommend watching the following video: Health Insurance Before Medicare. This is a self-help online course created by Paragon that is meant to help pre-retirees and retirees better understand common planning issues before the age of 65 in greater detail.
FOOTNOTES AND SOURCES
*The ACA Marketplace and its associated tax subsidies will be covered later in the series.
“ACA Open Enrollment: For Consumers Considering Short-Term Policies”, Published: October 25, 2019, https://www.kff.org/health-reform/fact-sheet/aca-open-enrollment-for-consumers-considering-short-term-policies/
A Healthcare Choice Available to Every Pre-Medicare Retiree: Affordable Care Act (“ACA”) Coverage
The seventh and final option of healthcare coverage we’ll be discussing in our Pre-Medicare blog series is the one that’s available to every pre-Medicare retiree: coverage through the Affordable Care Act (“ACA”) laws. This law recently celebrated its 12th anniversary on March 23, 2022. Regardless of politics, it’s fair to say this law significantly changed the landscape for retirees by eliminating the need to remain working until employer healthcare coverage could bridge the gap to Medicare. Now, regardless of age of retirement, a healthcare choice exists. However, whether you find it to live up to the “affordable” part of its name, might be another matter entirely.
Our discussion on the ACA coverage is going to be split up into two blog posts, because it’s a meaty subject. First, in this article, we’ll discuss an overview of the ACA system and things to consider if you are considering this coverage. Then, in our next post, we’ll put financial strategy to work by looking at one component of the ACA system – premium subsidies – and discuss how to optimize income to better take advantage of subsidies that reduce your out-of-pocket costs for monthly premiums.
ACA Coverage Basics
The Affordable Care Act established a marketplace for healthcare in each state, by requiring each state to either offer their own health insurance exchange or use the federal marketplace. In 2022, 33 states use the federally run exchange which is found on www.healthcare.gov. The other 17 states and the District of Columbia run their own exchanges.
Consumers use the exchange to shop for a healthcare plan of their choice. Generally speaking, coverage runs on a calendar year basis, with open enrollment occurring annually from early November through mid-December for coverage to start on January 1st of the following year.
If you don’t purchase coverage during open enrollment, you may still be able to buy ACA coverage if you have a special qualifying event, which includes things like the loss of your job or existing coverage, moving to a new coverage area, or a family event like marriage, divorce, or death.1
The healthcare coverage plans will vary, but the ACA law made some provisions mandatory for all plans. This includes access to coverage without underwriting, regardless of pre-existing conditions. Additionally, insurance companies cannot charge a person more in premiums because of their health circumstances. The only criteria that insurance companies can use to price premiums are an individual’s age, location, tobacco use, and whether the plan covers dependents. All plans are also required to cover 10 essential health benefits including hospitalization, emergency services, maternity, mental health, preventive services, and pediatrics, to name a few.
Learn more about health care for early retirement
Plans, and their costs, will also vary by the type of network of care providers it makes available. Some plans are structured as an HMO or PPO, with certain preferred physicians and service providers considered in-network, and others being out of network and costing more out of pocket. Other plans may allow you to use almost any doctor or healthcare facility.2 So, one important tip when choosing an ACA plan is to make a list of any physicians you consider essential to your care, and make sure they are covered by the plan you choose. Online plan information will usually help you find an index of in-network providers.
Plan Structure and Costs
The plans of coverage available under the ACA are generally arranged into four “metal” categories: bronze, silver, gold, and platinum. The critical thing to understand about the structure of these plans is that financially, they operate a little bit like a seesaw. Plans on the ‘lower’ end of the metal spectrum, or bronze plans, are going to have a lower monthly premium, but higher deductibles and total out-of-pocket maximums. Plans on the ‘higher’ end of the metal spectrum, or platinum plans, will have higher monthly premiums, but lower deductibles and out-of-pocket costs.
The idea behind plan pricing is that someone who wants to have coverage but may generally be healthy and not go to the doctor very much might prefer a plan with a cheaper monthly premium, knowing they may spend more when health events occur. On the other end of the seesaw, sits someone who may have pre-existing conditions, chronic care needs, or prefers a higher monthly premium so that unexpected costs are limited. This is easy to see and understand in a table.
I want to stop here for a moment and acknowledge that some readers might have just done a double-take, wondering if there was a decimal point that was missing from the figures in the chart. Unfortunately, no, the monthly premiums and total costs you see are accurate. Keep in mind, too, that the monthly premiums will be paid regardless of whether any healthcare needs occur in that calendar year. The only offset to these shocking prices that I’ll mention is that I’ve chosen to represent two individuals, both of whom are reasonably close to Medicare eligibility, which begins at age 65 under most circumstances. With ACA coverage, the older one gets, the more expensive it is. So, if you’re reading this blog entry and you are significantly younger than age 62, then your premiums are likely to be a good bit lower. For perspective, the healthcare.gov website shares lowest-cost plans for a 35-year-old as $410/month for a bronze plan, and $875/month for a Platinum plan.4
This chart probably helps to explain why the biggest criticism of the ACA healthcare is that, while it provides access to healthcare, its options aren’t necessarily affordable. Keep reading to get some relief from your sticker shock.
Subsidies: What They Are and How they Help Offset High Premiums
For many Americans, the good news is that there’s financial help that reduces the monthly premiums shown in the previous table. Under ACA, these are called “subsidies” and are tax credits from the federal government that help to offset monthly premiums, serving to reduce, or even eliminate, monthly premium costs.
Subsidies are calculated at the start of a plan year with the application for coverage, via the financial information the individual files with the health insurance company. They are based on an individual’s estimated taxable income for the upcoming year. If an individual qualifies for subsidies, then the health insurance company will receive directly from the government the monthly amount of the estimated subsidy. The individual pays the difference to the insurance company each month.
At the end of the year, via the individual’s federal tax return, actual income is reported, and actual subsidy is determined. If the individual should have paid more, then they’ll likely owe it through their tax return. If the subsidy should have been larger, then a tax refund may be received (all other things being equal).
Since subsidies are income based and not based on net worth, retirees who have saved up a nice nest egg shouldn’t automatically assume they’ll be disqualified from subsidies. In fact, in our next blog post, we’ll look at financial details around subsidies, and discuss how to position one’s income to maximize the opportunity for an ACA subsidy.
Footnotes/Sources:
1 https://www.ehealthinsurance.com/resources/affordable-care-act/understanding-obamacare
2 https://www.healthcare.gov/choose-a-plan/comparing-plans/
3 Online quotes using www.healthcare.gov on 4/8/2022 for criteria mentioned in table.
4 Healthcare.gov for zip code 32256.
ACA Subsidies and How a New Retiree Can Maximize Them
Highlighted in our previous discussion were the high premiums that many consumers pay for ACA coverage, unless they qualify for tax credits from the federal government. These are called subsidies, or advanced premium tax credits (APTCs). Subsidies play a very significant role in helping make coverage affordable. In fact, for 2022 a whopping 89 percent of enrollees qualified for APTCs, according to Health Affairs.org. Prior to subsidies the average monthly premium for all enrollees was $585. Because APTCs covered 86 percent of consumers’ monthly premiums, the average consumer was paying only $111 per month. 1 Clearly this represents a dramatic savings.
Basics to Know About ACA Subsidies and How They’re Calculated
To understand how to maximize subsidies received, first we must understand how subsidies work. The underlying income threshold that subsidies are based on is the federal poverty level (FPL). This is a measure of income, issued annually, by the Department of Health and Human Services. Income below this level qualifies individuals for various federal benefits and programs2. In 2022, for a single person household the FPL is $12,880; for a household of two it’s $17,420. While numbers exist for larger households, this article will focus only on single and two-person households, representing the shape of most pre-Medicare retiree households.
For many retirees, it may be tempting to stop reading at this point, because thinking about the federal poverty level when strategizing how to optimize retirement seems contradictory! Most retirees don’t want to retire and be below the poverty line. Please keep reading; the goal isn’t for a retiree to live on that low of income; it’s just a measure of how subsidies are calculated.
Prior to 2021, to qualify for a subsidy your annual income could not exceed 400% of the federal poverty level. So, using 2022’s numbers for a single person that would be $51,520 ($12,880 FPL x 4), for a family of 2 it’s $69,680 ($17,420 FPL x 4). This income limit is known as the “subsidy cliff”: income below that level would achieve a nice amount of subsidies to reduce monthly premiums; but income above that level would mean NO subsidy help at all.
Why focus on the system from 2020 and earlier? Because in 2021, President Biden signed into law The American Rescue Plan Act (ARPA) as part of the response to the Covid pandemic, which eliminated the subsidy cliff, but only for calendar years 2021 and 2022. The subsidy cliff will return in 2023 unless Congress passes legislation to extend it. So, retirees looking to get subsidies in 2023 and beyond may need to cap their tax-reportable income at or below 400% of the federal poverty level for their household size.
How to Optimize Retiree Income for Achieving Subsidies: Tax-Free Asset Possibilities
The gist of optimizing ACA subsidies is this: retirees don’t have to be poor; they just need to have low income on their tax return. So, how might a retiree do that?
The easiest way to do it is to spend assets you’ve saved that don’t have tax consequences at all in the current tax year, such as cash in the bank. So, if you’ve saved up a nice cushion of cash, spending a portion of it each year can be a great way to keep taxable income low. In fact, don’t overdo it – you need to report at least 100% of the annual FPL to qualify for subsidies; anything below 100% means that you would need to rely on your state’s Medicaid program, if it was expanded under ACA rules.
Another tax-free vehicle that could be tapped are Roth IRAs or employer plan Roth savings. These withdrawals come out tax free if you’ve met all the appropriate tax rules regarding age and account length.
After-Tax Investment Accounts: Capital Gains Taxes Likely Lower than Income Tax Rates
Aside from using tax-free options, after-tax investment accounts are a preferential resource. These assets are typically subject to capital gains tax rates. On long-term assets, which are those held for greater than 365 days, long-term gains are taxed at lower rates than income.
Depending on your taxable income, capital gains will range anywhere from 0% taxation, up to as high as 20% taxation. Income taxes, by comparison, range from 0% to 37% max. Of note, above certain income levels, there may also be an extra 3.8% ‘kicker’ on top of the capital gains rate, in the form of the Net Investment Income Tax.
Still, someone subject to 23.8% taxation instead of 37% is saving over 13% in taxes. Someone subject to 15% capital gains taxation is likely within the 22% (or higher) tax bracket, thus saving at least 7% in taxes.
The other tax-saving opportunity with after-tax accounts is the ability for gains to be offset by losses, either from the current year or a previous tax year that are carried forward. So, sometimes it’s possible to withdraw gains with no taxation!
Income Timing Optimization
Another layer to optimizing income, for the purpose of taking advantage of ACA subsidies, is strategizing the timing of taxable income sources, such as Social Security and pensions. Usually once these benefits are begun, it’s impossible, or at least very difficult (in the case of Social Security) to stop receiving the benefits. So, it’s important to map out which income sources will carry you through age 64, the amount of income, and whether that puts you over the subsidy cliff threshold.
Let’s look at an example.
Bob and Cindy Jones would like to live on $72,000 total income in retirement ($6,000/month). This includes any taxes they need to pay to the federal government or their state for income taxes. In 2022, let’s assume the “subsidy cliff” applies for the sake of this example. In which case Bob and Cindy would make too much money to receive subsidies if all of that is taxable income, since 400% FPL is $69,680. How can Bob and Cindy have their cake and eat it too, or have the lifestyle they want and keep tax-reportable income low enough to avoid a subsidy cliff? By choosing sources of income carefully.
Let’s say that Bob’s Social Security is $2,500/month ($30,000/year). Cindy’s Social Security is $1,500/month ($18,000/year). So, they have $48,000/year of Social Security income. In addition, Bob has a pension providing him $1,000/month ($12,000/year). Combined with Social Security, this accounts for $60,000 of their annual income need.
What about the other $12,000 per year they want to live on? They can either come from a) their bank savings with a balance of $50,000, or b) an IRA also worth $50,000. The clear choice is to draw from their bank savings because their total taxable income will remain at $60,000. However, if they use the IRA, tax-reportable income for subsidies will be $72,000 and they would be disqualified under subsidy-cliff rules. Taking it a step further, they also could use a combination of bank savings and IRA withdrawals, as long as they stayed below the $69,680 income cap.
What kind of subsidy help does this potentially provide? According to the Kaiser Family Foundation’s Health Insurance Marketplace Calculator3 for 2022, at $60,000 of income, Bob and Cindy would qualify for $1,612/month of subsidy, which adds up to $19,347 per year. This is estimated to cover 82% of the monthly cost.
Their cost for a Silver plan is $356/month, for a total of $4,266 per year. Without help from subsidies, or APTCs, their cost would be $1,968/month, or $23,613 per year.
So, just by being aware of their income tax level for the year, and which piece of their nest egg they spend, they can qualify themselves for over $19,000 of financial assistance from the government!
As mentioned, once 2023 rolls around, if Congress hasn’t expanded the help provided by ARPA, this will be a critical money-saving strategy for retirees to employ.
Could a Health Savings Account (HSA) be THE best account to invest in?
Today we will be answering questions from Mr. Skeptical (who may or may not be one of my family members) on Health Savings Accounts (HSA). I hope you find this blog post useful and the Q&A format easier to get through than an article laden with IRS statutes, random dates, and dollar amounts.
What is an HSA and why should I care?
The easiest way to understand what an HSA is – is to think of your IRA or 401K, BUT with savings dedicated to medical expenses. We should care because it helps us save on taxes – not once, not twice – but on THREE instances! More on that later.
I think I’ve heard of these accounts – does my HSA balance disappear at the end of the year if I do not use it?
NO! You are thinking about a Flexible Spending Account (FSA). The balance within an HSA stays in your account as it would in a normal investment account, if you have this account through an employer – you can take it with you when you change jobs or retire.
Can anyone open an HSA and enjoy all these great tax savings you speak of?
Don’t we wish… Unfortunately, you can only enjoy benefits of an HSA if you have a High-Deductible Health Plan (HDHP).
Great, and how do I know if I have one of these HDHPs?
There is a very simple way to tell if you qualify to open an HSA - check your health insurance coverage summary statement or your health insurance website that explains your benefits. For someone who is single, your Health Plan will qualify if you have a deductible of $1,400 or more, with maximum Out-Of-Pocket costs of $7,050. If you are married or have a family, the deductible must be higher than $2,800 with maximum Out-Of-Pocket expenses limit at $14,100.
Sounds like I won this lottery too, so how much can I contribute to an HSA each year and how does it benefit me?
If you are single, you can contribute $3,650. If you are married or have a family and are using the family plan, you can contribute $7,300. For those age 55 or older, you can add another $1,000 which increases the limits to $4,650 for singles and $8,400 for a married couple – on the same HDHP. In situations when both spouses have two different high deductible health plans, are over age 55, and have their own separate HSAs – then each spouse would be able to contribute $4,650 for the total contribution of $9,300.
This is THE FIRST instance of saving on taxes because your contributions to an HSA are tax deductible – just like your IRA or 401K contributions are. In other words, if you and your spouse both put $4,650 into your respective HSAs, and your combined annual income is $100,000 – your taxable income is reduced by $9,300. Now you are paying taxes on $90,700 instead of $100,000!
Okay, but what happens when my investments in an HSA pay dividends or realize Capital Gains, what will that cost me?
This is THE SECOND instance of saving on taxes! Just like in IRAs or 401Ks; what happens in an HSA, stays in the HSA. There is no tax liability for anything that takes place inside of your HSA.
So, it really is like an IRA or a 401K, but meant to cover my Medical Expenses. So, do I owe taxes when I take money out to pay for my Medical Expenses?
THE THIRD instance of saving on taxes is that if you take out money from your HSA to cover “qualifying medical expenses” taxes are not due. That’s right – you get to take a tax deduction when you put money into this account, you pay no taxes on the growth within your account, AND you pay no taxes when you take money out to pay for your medical expenses. It is as if someone took the best features of Traditional and ROTH IRAs and combined them!
It really sounds like if one is eligible, one should definitely take advantage of these benefits… But what’s with the quotation marks around qualifying medical expenses? What can I really use this account for?
Simply put the list is long. One would be best to cross-reference your needs with IRS Publication 969 and 502 which go into far more specifics. Generally, funds can be used to pay for prescribed medications, Over-The-Counter medications, dental treatments, copays, eyeglasses, treatments, and equipment.
Interestingly enough, you generally CANNOT use HSA funds to pay for health insurance premiums. However, you CAN pay for long-term care insurance, COBRA healthcare continuation coverage, and healthcare coverage while receiving unemployment compensation. If over age 65 you can pay for Medicare Part B and D premiums but NOT for Medicare Supplements. Since Medicare is not considered a HDHP – you cannot contribute to your HSA while on Medicare.
Let’s say you have been saving into your HSA for a long time, have a substantial balance… But are healthy and don’t really need all these savings. What can you do with it?
Option #1: You can use these savings for things other than medical expenses – but you will have to pay both a 20% penalty and income taxes on the withdrawn amount. Option #2: Leave it to your spouse – the HSA would behave as if it was your spouse’s account all along. Option #3: Leave it to your estate – your HSA will stop being an HSA and the balance will appear on your estate tax return. Option #4: Leave it to an individual other than your spouse – your HSA account will stop being an HSA and the beneficiary will owe income taxes on the balance.
Final Remarks
This concludes our blog series, Health Care for Early Retirement. If you want more information about obtaining health care before you turn 65, we recommend checking out the video included below. Otherwise, please stay tuned for our upcoming health care series that is in similar vein but covers the period of time during retirement – Medicare.