There has been a lot of talk and controversy about the Affordable Care Act since its inception. While I believe there are positives and negatives to the ACA, my goal is to help educate people on the basics of the plan and how they can potentially reduce their health insurance premiums for 2017. If you want to be covered under a health insurance plan on Jan. 1, you need to apply for health insurance within the open enrollment period which ends this Dec. 15.
You might have heard that applicants are finding their health insurance premiums have risen during the past year. This is mainly because of many insurers experiencing substantial losses and the phasing out of the Affordable Care Act’s reinsurance program. Many of the insurers available at healthcare.gov had losses, because anyone who applies for coverage, regardless of current health or pre-existing conditions, is accepted and granted insurance. While nobody likes higher premiums, it is a blessing for many who couldn’t previously get health insurance. Before the ACA, insurance companies could decline coverage if they believed the applicant wasn’t in good enough health to insure.
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A reason why people used to work until they were eligible for Medicare at age 65 was because they couldn’t get health insurance on their own if they left their employer’s health insurance plan. With the guaranteed coverage of the ACA, it has allowed some people to retire earlier than they previously would have. With the loss of work paycheck, it’s at this time that most really can’t afford to pay higher health insurance premiums on their newly reduced income. However, some retirees may be eligible to receive a federal subsidy on their health insurance premiums with proper planning.
When a person applies at healthcare.gov, they are asked to give their expected income for the future year. If the income is below a certain threshold for a single person (47,520) or a married couple ($64,080) the applicant might be eligible for a subsidy on their premium. The Healthcare.gov website shows a health insurance premium of $1,498 per month for a married couple that are both 62 years old. When the expected income of $60,000 is entered for 2017, a monthly subsidy of $1,267 becomes available, reducing their total monthly health insurance premium to only $231. As one’s expected income gets closer to the threshold, their eligible subsidy reduces and, appropriately, the subsidy increases as their expected income decreases.
Imagine this same couple who said they wanted to have $75,000 combined per year of income in retirement from their Social Security, pensions and IRA withdrawals. This will put them over the $64,080 threshold, so they’ll pay the full $1,498 per month or $17,976 per year. It may make sense for this couple to reduce their IRA withdrawals or any other income to stay under $64,080, because most of that extra money is just going toward higher health insurance premiums. Alternatively, the couple might be able to limit their income beneath the threshold by instead living off bank savings, an after-tax investment account or a line of credit on their house. A couple could potentially use these assets because they aren’t treated as ordinary income like an IRA withdrawal or Social Security is. This makes it possible for them to have the $75,000 to spend each year but still qualify for the federal subsidy. In this scenario, they could still be eligible for the subsidy of $1,267 per month, get health insurance for $231 per month, and still have the $75,000 to spend like they originally planned.
Unfortunately, some people might not have excess cash in the bank or after-tax savings to use. If they only have pre-tax IRA savings from their 401(k)/IRA, they might want to look at deferring their Social Security benefits or pensions to lower their income to help become eligible for the health insurance subsidy.
The Affordable Care Act can potentially help people retire earlier and be guaranteed health insurance. While health insurance premiums may be increasing, those with proper planning might be able to minimize their health insurance costs.
Andrew Hermsen is a wealth adviser at Hermsen Wealth Management and an accredited investment fiduciary (AIF). He can be reached at (920) 496-0123, firstname.lastname@example.org or www.hermsenwealth.com.