Changes in Health Insurance Planning for Early Retirees
Posted April 2, 2021
Planning for health insurance and the rising cost of health care in early retirement have been complex since the Affordable Care Act in 2010. Unfortunately, something that was supposed to bring down the cost of health insurance had the opposite effect. Many people with individual insurance plans found themselves priced out of affordable health insurance.
If a couple decided to retire earlier than age 65, they would need to acquire health insurance through either the health insurance marketplace (aka Obamacare) or through a “non-approved” when they qualify for a Medicare health insurance plan. Many early retirees find that when retiring pre-Medicare, an ACA-approved health insurance plan can be costly.
Obamacare works by providing individuals or families below the 100% and 400% federal poverty level a substantial federal subsidy on their health insurance premiums. This means that married couples that retire at 62 in my community in North Carolina could have health insurance subsidies between $2,461 and $2,927. If the couple kept their modified adjusted gross income (MAGI) between $17,420 and $69,680, they could receive free to almost free health insurance. The central planning problem for many retirees is that their income is higher than $69,680. Having higher income results in not receiving any subsidy, and not receiving a subsidy results in the couple paying full price for the health insurance, ranging from $20,277 to $39,935.76.
If you are just $1 over the 400% federal poverty line, you lose 100% of the insurance premium subsidy; This is known as the subsidy cliff. The subsidy cliff provides a challenging situation for early retirees in planning for their health insurance. Taking too much income in a given year could land you with a big fat tax bill of up to $35,124 if you received the maximum subsidy possible. If you were not receiving a subsidy, you could potentially be allocating 29% to 57% of your income to health insurance costs if your MAGI was $69,681, which most people can’t afford to do.
To fix this issue, you can take out significant chunks of money from your retirement accounts to pay for the health insurance premiums, but then you pay more in taxes and run the risk of spending down your nest egg too quickly. Some early retirees choose to use alternative health insurance options like a Christian Cost Sharing program or some non-ACA approved health insurance programs.
American Rescue Plan Act to the Rescue
I have laid out the landscape and challenges early retirees faced in previous years when planning for healthcare and health insurance costs. However, on March 11, 2021, President Biden signed the American Rescue Plan Act to change how the ACA premium subsidies work and eliminate the subsidy cliff for 2021 and 2022. The American Rescue Plan Act caps the premium of an individual or family ACA plan at 8.5% of the household income. This 8.5% premium cap means that an ACA health insurance plans’ subsidy and pricing are now on a sliding scale and make planning and paying for health insurance more manageable and predictable for early retirees. For the next two years, there is no longer a potential $35k tax bill waiting for you to make one dollar too much, and you don’t have to worry about spending over 30% of your income on health insurance.
It’s important to understand that this enhanced subsidy is only good for 2021 and 2022, so there is a limited timeframe to take advantage of this change. It is important to note that current retirees on an ACA plan will need to relook at Healthcare.gov or talk to their health insurance agent to see if they want to make changes. The new open enrollment period is between April 1 and May 15.
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