This week I’m dipping into the mailbag to answer some questions from a reader named Don about the Affordable Care Act subsidies and the income limits to watch out for if you don’t want to lose your subsidy or face an unexpected increase in health care costs.
In the past, I talked about the ACA (or “Obamacare”) making early retirement a lot easier where I went over two case studies. One case study was for an older couple approaching traditional retirement age. The second case study was my own situation of a family of five including three children.
On to today’s question! Don from Ohio says:
I’ve been a long time reader and really appreciate your perspectives and analysis. I currently work for a large corporation and I’m working with my wife to plan a second career that allows me to spend a bit more time with our 3 boys (6, 4 and 1). As we’ve looked into health care it looks like we’ll have some good options with a government subsidy (assuming we only produce enough income to cover our $65,000 annual spending). I want to get your thoughts and perspective on a couple items related to health insurance.
Don goes on to explain that he wants to start his own business using the knowledge he’s gained in his main career, and that his wife already works as a freelancer. The new business wouldn’t be full time at first, and would allow Don to spend more time with his family. Don also has significant financial investments, but not quite enough to declare their family fully financial independent yet.
Some might call what Don wants to do “semi-retirement”. Whatever you call it, it sounds like a great plan to cut back on work and still make enough to cover Don’s and his family’s needs.
Don’s first question:
Have you seen any good tables or charts that clearly shows what MAGI qualifies for what subsidies based on number of dependents? I’ve seen general summaries but I’m concerned I could report an extra couple of thousand in MAGI that causes thousands of extra dollars in health care cost. I’d love to have the right information to make effective cost/benefit decisions.
To answer the question, first let’s go over how the ACA subsidies work, then we’ll find that table you’re looking for. It’s unfortunately a pretty complex calculation to determine what your individual subsidy will be. Your household’s subsidy is determined by your MAGI (“modified adjusted gross income”), your household size, zip code and state you live in, and the price of the “second lowest cost silver plan” (SLCSP to borrow the IRS’s abbreviation).
Health Insurance Premium Subsidies
The ACA says you’ll only have to pay a certain amount of your income for health insurance, which can range from 2% of your MAGI up to 9.5% of your MAGI. The exact percentage of your income that you’ll pay is determined by the ratio of your MAGI to the federal poverty level (FPL) for your household size (check out Table 2 from the IRS instructions for Form 8962, Premium Tax Credit).
This “percent of FPL” is a critical concept in the Affordable Care Act. Too low or too high, and you won’t qualify for a subsidy. The percent of FPL also determines whether you qualify for extra cost sharing which can drastically reduce your out of pocket medical costs. As a result, you want to make sure your MAGI, and therefore your “percent of FPL” is high enough to qualify you for subsidies but not too high where your subsidy is tiny or gets eliminated completely. You also want to make sure your percent of FPL qualifies you for cost sharing subsidies if you’re near the 100% to 250% of FPL range.
For those not familiar with the federal poverty level, here’s a table for the 2014 FPLs that the IRS will apparently use for 2015 ACA subsidy calculations (they used the 2013 FPL table for 2014 taxes):
- Household size of 1: $11,670
- Household size of 2: $15,730
- Household size of 3: $19,790
- Household size of 4: $23,850
- Household size of 5: $27,910 ( <– that’s you, Don!)
- Household size of 6: $31,970
So what is Don’s “percent of FPL”? $65,000 MAGI income divided by $27,910 (FPL for a family of 5) equals 233% of FPL.
What’s Don going to pay for health insurance? When I look up 233% of FPL in Form 8962 instruction’s Table 2, I see Don will pay 7.46% of his MAGI toward the “second lowest cost silver plan” if he chooses that plan. That’s $4,849 on a $65,000 MAGI.
The subsidy that Don gets is the cost of the SLCSP minus the $4,849 he’s expected to pay for that SLCSP. Taking a look at Don’s healthcare.gov plans available to those in Ohio, I see the second lowest cost silver plan has a premium of $10,080 per year. This means Don’s subsidy will be around $5,231 per year. Oddly enough the healthcare.gov site says Don’s subsidy will be $5,088. That’s pretty close, but I’m not sure why there is any difference. Ultimately, when you file taxes each year you might get a little extra credit back or have to pay a little more if you took too much credit during the year.
The $5,231 subsidy can be used to pay for any plan including lower cost bronze plans. I found a bronze plan for Don’s family that would be $2,000 per year cheaper than the second lowest cost silver plan (although with a much higher deductible and copays).
Cost Sharing Subsidies, or How to Get a cheap Gold Plated Silver Plan
For those with MAGI’s in the 100% to 250% of Federal Poverty Level range, there are “cost sharing subsidies” that reduce copays, deductibles, and out of pocket maximums. These cost sharing subsidies only apply to silver level plans.
As MAGI increases, the cost sharing subsidies decrease. I won’t get into the fine details of how the cost sharing subsidies work, but they basically rewrite the silver plans to make them cover a higher percentage of the average policyholder’s medical expenses. A normal silver plan pays for 70% of the policyholder’s medical expenses.
With the cost sharing subsidy, silver plans will pay between 73% to 94% of medical expenses, depending on MAGI. For MAGI’s between 100-150% of the FPL, the plan covers 94% of medical expenses. For MAGI’s between 150-200% of the FPL, the plan covers 87% of medical expenses. For MAGI’s between 200%-250% of the FPL, the plan covers 73% of medical expenses.
The sweet spot to get the most benefit out of the cost sharing subsidy is a MAGI of 100% to 200% of the FPL. That translates to a MAGI of $27,910 to $55,820 for a household of five. In the 200% to 250% range, the cost sharing subsidy covers 73% of medical expenses, which is only 3% more than the 70% coverage of expenses under regular (non-cost sharing subsidy) silver plans.
Let’s take a look at what the cost sharing subsidy covering 94% of medical expenses get you. In my case, I can get a silver plan with $0 copays for primary care physician, $20 for specialty physician, $100 ER copay, $0 deductible, and $2,000 out of pocket maximum. The same plan without the cost sharing subsidies comes with $10 copays for primary care physician, $60 for specialty physician, $250 ER copay, $7500 deductible, and $12,500 out of pocket maximum.
That’s why I call the silver plans available to those with low MAGI’s “Gold Plated Silver Plans“. With heavy cost sharing subsidies that come with a MAGI of 100-150% of FPL, you end up paying almost nothing for frequent visits to the doctor’s office. Suffering from a few major medical events in a year won’t cost more than a few thousand dollars once you hit the out of pocket max.
Other “Percent of FPL” considerations if you have kids
If your MAGI is below a certain level, children may end up on Medicaid or CHIP (Children’s Health Insurance Program). That can be good or bad. The good news is that Medicaid or CHIP means very cheap or free health insurance for children insured under those programs. At our income level, we would pay $50 per kid per year up to $100 max for CHIP health insurance. I’m not sure if it’s universal in all 50 states, but Medicaid and many CHIP plans cover dental care in addition to health care.
The bad news with Medicaid and CHIP is that some parents fear limited access to doctors and medical facilities and don’t want the stigma of having their kids on Medicaid or CHIP.
Since we will probably end up with CHIP insurance for our children, I checked the dental and medical provider databases to verify that we wouldn’t have to find new medical professionals. Nope, we’re good. Our family doctor (and the other 10 doctors in his practice) and dentist both accept Medicaid and CHIP. So do 140 other medical providers in our county.
If we needed lots of medical care or specialists, then the limited network of Medicaid/CHIP doctors might be a problem. But we rarely visit the doctor outside of annual physicals, so whatever limitations on provider networks and coverage isn’t a big deal. That could change at any moment, and we can always change our insurance coverage once per year during annual enrollment if CHIP fails us and we need broader networks or more comprehensive coverage.
Here is a handy chart showing income eligibility for every state in the nation. In North Carolina, children over age six qualify for CHIP at MAGI’s between 134-211% of the FPL, with Medicaid available for income levels below that range. It’s not exactly a poverty level program since families of five earning up to $59,000 per year are eligible for CHIP benefits.
For Don in Ohio, the chart I just linked says “N/A” for CHIP eligibility but says kids are eligible for Medicaid at MAGI’s up to 206% of the FPL. For Don’s family of five, that works out to a MAGI of $57,500. So Don would have to reduce his income just a bit to get down to $57,500 if he wanted to qualify his children for Medicaid instead of regular health insurance.
Avoiding the Perilous Subsidy Cliffs
Don, here’s the chart you are looking for. I made it myself.
This chart shows what you’ll pay for health insurance at different income levels. It also shows the income levels where the various subsidies weaken or disappear.
- Below 100% of FPL: you won’t qualify for any subsidies
- Between 100% and 138% of FPL: you won’t qualify for any subsidies if your state is in the two-thirds of all states that extended Medicaid
- 138-150% of FPL: You’re getting huge premium subsidies and qualify for large cost sharing subsidies with 94% of medical expenses paid on Gold Plated Silver Plans
- 150%-200% of FPL: You’re getting significant premium subsidies and qualify for moderately large cost sharing subsidies with 87% of medical expenses paid on Gold Plated Silver Plans
- 200-250% of FPL: You’re getting significant premium subsidies and qualify for slight cost sharing subsidies with 73% of medical expenses paid on Gold Plated Silver Plans
- 250%-400% of FPL: You will probably still get health insurance premium subsidies though they may be small for young people at the upper end of the income range. You’ll never pay more than 8.05% to 9.5% of your MAGI for health insurance.
- 400%+ of FPL: No subsidies for you, Mr. Deep Pockets!
At $65,000 income, Don’s MAGI is 233% of the Federal Poverty Level for a household of five. Since Don is over 200% of FPL, he won’t get the juiciest cost sharing subsidies (87% of expenses paid just below 200% of FPL vs. 73% of expenses paid at 233% of FPL). But Don will still get a significant subsidy toward his health insurance premium (over half of the premium will be covered by the subsidy).
If Don wanted to get his MAGI below 200% of the FPL to $55,820, he could get access to the cost sharing subsidy and pick up one of the Gold Plated Silver Plans with an 87% medical expense coverage. However, it would also likely put his children on Ohio’s Medicaid program for children.
Don, It really boils down to how hard you want to tweak your income to save some health care dollars, and are you okay with your kids being on Medicaid. If either of the adults in your household have major medical issues (or they arise later), that 87% Gold Plated Silver Plan could come in handy. However you should definitely verify that you’ll have access to your preferred doctors and hospitals if your kids end up on Medicaid for kids.
For my other readers who don’t have kids or whose kids are already out of the house, here’s the same chart adjusted for households of one or two people.
On to Part 2 of Don’s question:
2. Given we only really need $65K (I know, that’s a high number for you!) in income to live off of my plan has been to funnel any extra income to a solo-401K. This keeps MAGI lower and continues very affordable health care. Of course if we are fortunate to produce a significant amount more we might just have to deal with the higher health care costs. Am I missing anything here? Seems straightforward to me.
You pretty much have it figured out, Don! If you need to live off of $65k per year and manage to earn that from a combination of your and your wife’s self employment income, then you are set. If you don’t need any extra income above that level to fund your lifestyle, then a solo 401k is a great way to shelter extra income from taxation and to keep that income out of your MAGI that goes into the ACA subsidy calculations.
I started a solo 401k for Root of Good (it seriously says “Root of Good 401k Plan” on my Vanguard documents) for exactly this reason. I don’t necessarily need the income today since I have taxable investments to fund my living expenses, so I put everything I earn from the blog and other side hustles into the solo 401k. Contribution limits are pretty high at $18,000 per year plus 25% of your business income up to $53,000 total.
If you earn $65,000 per year and wanted to hit a lower income target in order to increase your premium subsidy or get below 200% of FPL to snag one of those 87% or 94% Gold Plated Silver Plans, the solo 401k or traditional deductible IRAs are great ways to shrink your MAGI.
I’d like to thank Don for his great questions. It was a good opportunity to go over the details of the Affordable Care Act’s subsidies and the impact of changes in AGI on those subsidies. If you’re able to control your AGI to some extent, you can save a lot of money by being mindful of the AGI breakpoints. Don’t fall off the cliff!
Where do the Affordable Care Act exchange and subsidies fit in your early retirement plans? Are you benefiting from the ACA right now?
photo credit: flickr user Bernt Rostad