Saving Money on Healthcare Before 65: The Premium Tax Credit
If you're thinking about retiring before age 65, how will you get healthcare prior to reaching Medicare eligibility? How much will this healthcare cost, and how can you save money on the premiums?
First, this article will discuss options to obtain healthcare when retiring before age 65.
Second and probably most interestingly, the article discusses the "Premium Tax Credit". For those who qualify, the government will pay for all or a portion of health insurance premiums for those who enroll in Marketplace coverage through healthcare.gov.
There are income limits to qualify, but very interestingly, there are currently no asset limits to qualify! This means even those with significant assets can potentially qualify for this tax credit with a little pre-planning.
Also keep in mind that you'll be retired at this point, so your income now while you are still working is also irrelevant when determining if you'll qualify.
Obtaining Healthcare When Retiring Before Age 65
Method #1: COBRA Coverage. COBRA is a federal law that requires most employers with at least 20 employees to provide continuing coverage to employees after employment is severed for at least 18 months. The benefit of COBRA is that employees can stay enrolled in their current healthcare plan for at least 18 months. The downside is that it's often very expensive. Your employer can provide more details about how much COBRA would cost to continue coverage if you stay enrolled in your specific healthcare plan after leaving employment.
Method #2: Spouse's Employer Plan. For married couples, this option is often more cost effective than COBRA coverage, although the quality of the plan may also change. When one spouse retires before age 65 and the other spouse continues working, the retired spouse will usually find it more cost effective to obtain coverage through their spouse's employer plan rather than continue coverage through their old employer by enrolling in COBRA.
Method #3: Marketplace Coverage. Created after the Affordable Care Act became law in 2010, Healthcare.gov is a resource for those who are shopping for health insurance plans that haven't yet obtained Medicare eligibility. The website allows you to view Marketplace Health Insurance Plans available in your area. First, you enter some basic information such as zip code, age, income, and if you have dependents or not (you do not enter your name or any contact info). Next, the available healthcare plans are displayed along with premium costs, deductibles, and other basic information about the plans. The plans are provided through credible insurance companies like Independence Blue Cross, Cigna, United Health, and many others. The website makes health insurance shopping relatively simple and is a great resource for those considering retirement before Medicare eligibility at age 65.
When someone uses Method #3 to obtain health insurance prior to Medicare eligibility at age 65, some or all of the premium costs can be paid for by the government if household income is low enough. The income limits are actually not that low (see below). Keep in mind that you'll be retired at this point, so your income while working is irrelevant.
Again, income is all that matters: there is no asset test. As a result, with proper pre-planning, even those with significant assets can potentially qualify for this benefit.
Paying for Marketplace Plans: The "Premium Tax Credit"
If you qualify for the Premium Tax Credit, the government will pay all or a portion of your health insurance premiums. The government can either send payment directly to the insurance company on your behalf, or they can provide a tax credit when the tax return is filed.
Here's how to qualify for the Premium Tax Credit...(only the most relevant criteria to the age 50+ demographic are listed below. See this page for a full list of qualifications: The Premium Tax Credit)
1 - You must be enrolled in a health insurance plan through the Healthcare Marketplace described as Method #3 above.
2 - You can't be enrolled in another government funded healthcare plan such as Medicaid or Medicare.
3 - You can't have employer sponsored health insurance.
4 - Your "Household Income" must fall below certain limits. To qualify, your income must be at least 100 percent but no more than 400 percent of the "federal poverty line" based on your family size. "Household Income" is defined as AGI + certain additional income sources such as tax exempt interest income and the tax exempt portion of social security benefits. More details about calculating "Household Income" can be found at healthcare.gov.
Here are the income guidelines for 2020 according to the US Department of Health and Human Services (source: HHS).
Note that the household income limit isn't extremely low: For a family of 1, 400% of the federal poverty level is about $50,000. For a family of 2, 400% of the federal poverty is about $68,000. "Household Income" has to be below these levels to qualify for the Premium Tax Credit, but that doesn't necessarily mean your expenses need to be below these levels.
Note one important item not listed above: Assets. Whether someone has $10,000 or $100,000 or $1,000,000 is not at all relevant when determining eligibility for the Premium Tax Credit, other than to the extent that your assets generate taxable income through dividends or interest. Investment income does count against your eligibility for the Premium Tax Credit.
The Premium Tax Credit is a sliding scale: The lower the income, the larger the credit. Healthcare.gov has a helpful calculator you can use to see the size of the credit for different amounts of household income based on your specific situation.
Here is the bottom line: If you can keep taxable income low enough, you may qualify for the government to pay for all or a part of your health insurance premiums before obtaining Medicare eligibility age 65. Depending on your healthcare plan and family size, this can be a $10,000+ per year annual savings!
Keeping taxable income low to qualify for the Premium Tax Credit - Three Family Examples:
Family #1 - This family has pension income that, on its own, is above the income levels required to qualify for the Premium Tax Credit as described above. This family will have a hard time qualifying for the Premium Tax Credit unless they can reduce household income with significant deductions elsewhere. Because pension income is fixed and inflexible, options are limited.
Family #2 - This family has significant dividend and interest income from a non-qualified investment portfolio. This family has a little more flexibility to reduce household income compared to the person with a fixed pension, but it may still be difficult to qualify. What they could theoretically do is primarily use non-dividend paying stocks to limit the taxable income generated by their investment portfolio. However, it's probably not wise to prioritize qualifying for the Premium Tax Credit above other more important investment considerations and also potential capital gains taxes triggered if adjustments to the allocation are required.
Family #3 - This family has the majority of their net worth in their personal residence and retirement accounts such as 401k accounts, 403b accounts, and Traditional IRA accounts. This is a fairly common scenario. This family may be able to realistically set themselves up to qualify for the Premium Tax Credit with a little pre-planning.
For Family #3 to qualify for the Premium Tax Credit, they'll need to fund living expenses from sources that will not generate "household income" that pushes them above the thresholds listed above.
Assuming Family #3 is a family of 2, they'll need to keep "household income" below about $68k to qualify for some Premium Tax Credit. The lower they keep their income, the larger the credit they'll receive. Visit healthcare.gov and enter different income estimates to view the sliding scale.
To keep income low, Family #3 should use after-tax assets first to fund expenses prior to obtaining Medicare eligibility at age 65. This may include bank accounts, after-tax CDs, and after-tax investments with losses (after-tax investments with gains would trigger capital gains, which counts as household income). This money can be used without triggering any additional household income. Using this money won't count against them at all when determining the size of their Premium Tax Credit.
Family #3 should not use any pre-tax retirement accounts such has Traditional IRA accounts and 401k accounts to the extent possible. Using these accounts would trigger household income that could potentially reduce or eliminate their Premium Tax Credit.
What's Actionable From This?
If you are considering retirement before age 65 and will not have the ability to get healthcare through a spouse's employer, you may find Marketplace Coverage is your best option.
You can receive a government-funded subsidy for Marketplace Coverage healthcare plans if household income is below certain thresholds.
As mentioned earlier, the Premium Tax Credit can realistically result in annual healthcare premium savings of $10k per year, more or less, depending on your family size, your household income, and the healthcare plan you select.
Using after-tax assets like bank accounts, CDs, and/or after-tax investments with losses to fund expenses does not trigger household income that counts against your ability to qualify for the Premium Tax Credit.
As a result, in the years leading up to retirement, it can make sense to place extra emphasis on building after-tax assets. These assets can later be used to fund expenses between retirement and Medicare eligibility at age 65 without counting against your Premium Tax Credit (unless you sell after-tax assets that have capital gains).
To increase the chances you qualify for a Premium Tax Credit:
1 - Plan ahead by building after-tax assets in the years leading up to retirement
2 - Choose which accounts you take money from wisely (use after-tax money first)
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