If you’re like me, you’ve always had healthcare through your employer. In the past, I never paid too much attention to it other than to get the healthplan that my coworkers recommended. However as we were nearing early retirement, I spent an incredible amount of time learning about the Affordable Care Act (ACA), also known as Obamacare, which has totally changed the landscape for health insurance since it was passed in 2010.
The short summary of my research is that Obamacare is really, really good for early retirees. In fact, it’s not only good, it is fantastic.
Healthcare is so expensive and even a minor incident can lead to tens of thousands of dollars in medical bills. I’m not kidding – one night I had food poisoning and had to be taken to the ER in an ambulance. The total bill, before insurance, was around $11,000. Imagine what a broken arm or more serious injury would cost. These costs can derail early retirement plans and deplete one’s savings. And even normally healthy people can have an unexpected medical issue.
Obamacare makes health insurance attainable and affordable. More specifically, it does this in two ways:
- Guaranteed Issue. Health insurers must enroll you regardless of any pre-existing conditions and they cannot charge you higher premiums based on your health status. In practice, this means they can’t deny my wife coverage because of her back issue (ruptured disk), exclude that injury from coverage in the future, or charge us so much that it becomes unaffordable.
- Subsidies and Premium Caps. The amount you have to pay for healthcare premiums is subsidized according to a sliding scale. The lower your income the greater the amount of subsidy (I’ll go into more details below). This subsidy is great for frugal people and early retirees who may not need a lot of income to live well.
The Subsidy Explained
The subsidies in Obamacare are designed to make health insurance affordable for mid and low income families. The table below shows eligibility by income level and family size. Note that there is no subsidy if your income exceeds 400% of the federal poverty level (FPL).
If eligible, the amount of your subsidy is based on capping the cost for the second lowest silver plan offered in your region as a percentage of your income. The cap varies but is never more than 9.5% of annual income.
For example, a family of four with income of of $48,500 would be at 200% of the FPL. Under ACA the premiums are capped at 6.3% of their annual income which is $3056 or $255/month. If the second lowest cost silver plan costs more than $255/month, the family will receive a subsidy in the amount of the difference. I think this is a pretty reasonable premium.
I can’t emphasize enough that the subsidy is based on *the cost of the second lowest silver plan* offered in the family’s region. However the family can get a more or less expensive plan and can will receive the same amount of subsidy in dollar value.
Some very important notes:
- There are a lot of details here and I would encourage you to go to your state’s health exchange website and play with the premium calculator.
- Below 250% of the FPL, one can qualify for cost sharing subsidies which reduce your deductibles, coinsurance, copayments, and max out-of-pocket costs. Depending on your income level, these reductions can be dramatic. For example, on CoveredCA (California’s Health Exchange) the maximum out-of-pocket for one could vary from $6,250 to as little as $2,250.
- The income threshold is a hard cutoff. If you make one dollar more than the 400% FPL income limit you will not be eligible for a subsidy.
- If your income is too low, you may be forced into your state’s Medicaid pool or be unable to receive a subsidy. The exact cutoff depends on the state.
Lessons for Early Retirees and the Frugal
The main lesson is that obtaining a subsidy is critically dependent on your income for the year. Earning just a little bit more than the threshold could mean paying thousands of dollars extra in premiums or deductibles. There are also multiple cutoffs at 400% (subsidy eligibility) and at 250%, 200%, and 150% for cost sharing that you want to pay attention to.
For early retirees (actually for everybody), if you can control your income for the year you can maximize the subsidy benefit. Here are some examples of ways to do so:
- For the employed with W2 income, increase the amount saved in retirement accounts (e.g. 401k or IRA) to lower your income.
- If you are self-employed, at the end of the year you can look at your net income and decide to move up an expensive purchase that you were planning to make in the next year to get you under the threshold.
- If you are selling investments, track your capital gains to stay under the threshold. Using specific identification of shares when selling will maximize your flexibility.
- If you are withdrawing from retirement accounts, reduce the amount taken to stay under threshold. If more money for living expenses is needed, consider taking the funds from taxable accounts (where only the gains count as income).
- If your income is on the high side, it may be possible to bunch deductions/expenses/withdrawals so that you qualify for the subsidy every other year.
If I sound like I’m a fan of Obamacare, that’s because I am. I think it’s a great piece of legislation that really helps make healthcare affordable and decouples the dependence most americans have on their job for health insurance. This gives everyone more freedom to switch jobs, start their own business, or retire early. The law’s passage was a key piece in our achieving financial independence and made early retirement possible. However, I’m not a complete Pollyanna about Obamacare. There are a lot of problems with it’s implementation (we had many issues signing up and setting up our coverage) and of course there’s still debate about its long term impact on government costs (which we all pay for through taxes).