Affordable Care Act Fundamentals
A popular way for early retirees to obtain medical insurance is through Affordable Care Act health plans, also known as Obamacare. With these plans there’s no special enrollment period, no underwriting, and you can’t be denied based on pre-existing conditions. Costs can vary widely depending on where you live, your income level, the type of coverage you choose, and your health status.
If you purchase your ACA plan on the marketplace, and your income is low enough, generally below 400% of the federal poverty level, you may be eligible for premium tax credits, or subsidies. The premium tax credits will be the difference between the premium for the second lowest cost silver plan available through the Marketplace and your required household contribution. So, depending on where your income falls relative to the federal poverty level, you’ll pay a percentage of your income - known as your required household contribution -- and the government will pay the rest.
Premium tax credits are often referred to as advanced tax credits because the IRS pays them to your insurer every month and you reconcile them on your tax return unless you choose to pay the full premium and reconcile at the end of the year. Bear in mind that if your income estimate is too low, you could end up paying some of those subsidies back so it’s important to report changes as they occur if you want to avoid tax season surprises.
Income Limits with regard to the ACA
Eligibility for premium tax credits is based upon Federal Poverty Levels. These are the Federal Poverty Level numbers announced in 2021, and they are applied with a one-year lag, so your eligibility for a premium subsidy for 2022 is based on the 2021 FPL numbers.
Originally, if your Modified Adjusted Gross Income exceeded 400% of the FPL, you lost premium subsidies completely. But the American Rescue Plan Act of 2021 eliminated the ACA “subsidy cliff” for 2021 and 2022 so if your Modified Adjusted Gross Income does exceed 400% of the FPL you won’t lose thousands of dollars in premium subsidies. Instead, you will pay $8.50 more per year in premiums for every $100 of extra income you earn and health-insurance premiums costs will be capped at 8.5% of income.
* A note of caution regarding managing your income for the ACA. If your income is below a certain percentage of the Federal Poverty Level, you will not get accepted by the ACA Marketplace, instead you will be sent to Medicaid. In states that didn’t expand Medicaid, the minimum income is 100% FPL and in states that expanded Medicaid, the minimum income is 138% FPL.
Use the Marketplace Calculator to estimate your costs.
If a family of 4 keeps their AGI below $104,800, or slightly below the 400% FPL threshold, this is an example of the help they might receive:
Estimating your AGI in My Plan
In order to estimate your AGI in NewRetirement, go to Insights > Taxes > Gross Taxable Income by Source. Subtract any tax-advantaged savings contributions from the Federal Tax Deductions Chart. In this plan we see an AGI of $103,275.
Modeling the cost of an Affordable Care Act health plan
Enter the Medical Expenses prior to age 65 net of premium tax credits. As per the above estimate, in this plan the expenses are $360 per month for each spouse.
Also see our article: Roth Conversions and the Affordable Health Care Act.