Leaving your employer to retire early or start a business can be exciting! One of the biggest challenges in either case is what to do about healthcare. Health insurance purchased on an individual market can cost more than $10,000 per year in premiums for those in their 50s and 60s.
Health insurance exchanges were set up to help people purchase coverage if they’re not already covered by an employer, Medicare, or Medicaid. These exchanges include Healthcare.gov at the federal level, and various state exchanges like Wahealthplanfinder.org in Washington State. Subsidies were also created to reduce the cost of purchasing coverage.
Following the 2016 election, the future of the Affordable Care Act (ACA) and the health insurance exchanges was unclear. At Merriman, we’ve been watching developments closely because they can impact many of our clients. Currently, the program remains largely intact as it was originally implemented.
Whether you’re looking to get health insurance on the individual market because of early retirement, leaving an employer to start a business, or you’re looking for any other reason, here are key points to keep in mind.
By planning ahead, it may be possible to significantly reduce the cost of health insurance.
Subsidies to reduce the cost of health insurance are based on income, not net worth. We’ve worked with clients who had a net worth well above $1 million and still qualified for health insurance at reduced costs. We helped structure income from investment accounts to maintain the current standard of living, but remain in a range on their tax return that qualifies for the subsidy. (Generally, this means staying below about $40,000 for an individual and $60,000 for a married couple.)
Doing this requires planning ahead of time. It may mean realizing additional capital gains one year, and realizing less the following year. It also requires carefully timing when to take money from taxable, Roth, or traditional retirement accounts.
You can take the subsidies up front, or you can get reimbursed on your tax return.
For one couple, who retired in their 50s, we helped reduce monthly premiums from more than $1,000 to less than $400 by controlling income. In their case, they used the subsidy to reduce monthly expenses and manage cash flow.
If they had paid full monthly premiums for health insurance, but still qualified for the subsidy, they would have instead gotten that amount back as an additional refund when they filed their tax return.
If you want the subsidy up front, you must go through the exchanges.
Health insurance on the individual market can be purchased through the exchanges (Healthcare.gov or state exchanges like Wahealthplanfinder.org), or it can be purchased from the insurer directly.
To qualify for a subsidy to reduce monthly premiums, health insurance must be purchased through the exchanges. The exchange will verify income to qualify for coverage.
Insurance purchased directly from the insurer may still qualify for the tax credit at the end of the year as described in the previous section, but will not qualify for a subsidy to reduce monthly premiums.
If you estimate wrong, you could have a large tax bill come April 15.
As described above, it’s possible to reduce monthly premiums from more than $1,000 per month to a few hundred dollars per month. This happens when estimated income for the year is low enough that the government covers the difference.
When doing your tax return at the end of the year, if your income is higher than estimated, you may have to pay back some, or all, of the subsidy. This can cost thousands of dollars.
If you think you will qualify for the subsidy, but don’t know for sure, it may be good practice to pay the full premium and get any extra back on a tax return at the end of the year.
You may need to verify your income if it changes significantly
Income can change significantly for several reasons. If you retire in December, the following year may have much lower income than the year before. This can also happen if you leave your job to start a business, or if you realize a lot of capital gains one year with fewer the next.
In this case, you’ll likely need to provide documentation to explain why you reasonably expect your income to be lower. The purpose is to minimize the odds of having to pay back a large subsidy on your tax return as described above.
Losing employer health coverage before Medicare starts can be scary, whether it’s for early retirement or any other reason. Fortunately, there may be options to help.
Your Merriman advisor can provide specific guidance. Regulations have changed recently and will continue to do so. We’ll stay on top of these changes to help families we work with make wise financial decisions.