For Health Insurance Consider an ACA plan as Opposed to COBRA

By William LaChance

In our financial planning practice, we spend a fair amount of time with people in a job transition. Below are some tips for those in that situation to consider.

You can purchase a plan on an Affordable Care Act (ACA, also known as “Obamacare”) exchange and potentially qualify for a subsidy even if COBRA is available to you. In addition, if you live in a state that has expanded Medicaid coverage, you might qualify for fully subsidized health care if your annual income is low enough.

The income threshold to qualify for a premium subsidy has increased dramatically with recent changes in the law. For example, a family of four could in theory qualify for a premium subsidy with annual adjusted gross income as high as $372,000. The premium subsidy is actually a tax credit the government gives out in advance based on your estimated adjusted gross income for that year. That credit will be reconciled when you complete your tax return for that year. If your income comes in higher than you estimate you will pay back some of the subsidy in the form of a lower refund higher tax due. If your income comes in lower than your estimate you will receive a credit for the difference in the form a higher refund or lower payment due.

In addition, there are lesser-known cost-sharing reductions (CSR, also known as cost-sharing subsidies) that are available to reduce the out-of-pocket exposure for eligible enrollees. These subsidies kick in when income drops below 250% of the poverty level. These subsidies are not reconciled at the end of the year so if you are not sure what your income will be it is best to estimate low.

Before switching plans, you need to ensure that you consider all costs and not just the change in the premium (assuming you don’t qualify for a cost-sharing subsidy). The plans available to you on the exchange may have different deductibles, out-of-pocket maximums, coinsurance percentages, etc. when compared to your COBRA plan. Any comparison should include all these factors.

You have a 60-day window from the date your group coverage ends to sign up for a plan on the exchange. After that window you can only enroll during open enrollment, which in New Jersey runs from November 1 to January 31 each year. In New Jersey, the ACA website is Get Covered New Jersey.

If you need help with this feel free to reach out. We help about 40 people a year sign up for plans through Get Covered NJ. There is no cost to you.

Pros and Cons of Rolling over your 401K/401B Retirement Plan

When you leave an organization there are three options for what to do with your retirement funds:

  • Keep funds at old organization.
  • Rollover funds into retirement plan at new organization.
  • Rollover funds to an IRA

The primary reason you would want to keep funds at the old organization is that with employer-sponsored plans you are allowed to make penalty-free withdrawals from that employer-sponsored plan if you are age 55 or older when you separate from service (or you will turn age 55 later that same year). With an IRA you must be 59 ½ to make a penalty-free withdrawal. You also cannot make a penalty-free withdrawal from the new employers 401K since you are still working there.

The primary reason you would want to rollover the funds to a new employer plan is that you are allowed to take loans from an employer sponsor plan up to 50% of the account balance or $50,000, whichever is greater. You cannot take a loan from an IRA nor can you typically take loan from an employer-sponsored plan if you are not an active employee.

If neither of these situations applies, then it is generally a good idea to rollover the employer plan to an IRA. With an IRA you have the following advantages:

  • No 10% penalty for withdrawals for first time home buyers (up to $10,000)
  • No 10% penalty for withdrawals for qualified higher education expenses
  • No 10% penalty for withdrawals for to pay for medical insurance if you have been collecting unemployment for at least 12 consecutive weeks.
  • Much broader investment options
  • Availability of Roth conversions

You can also consider a partial rollover to the new 401K and/or partial rollover to an IRA if the employer plan allows that.

Strategies to Take Advantage of Big Shifts in Tax Brackets

Folks who are in job transition often experience big shifts in income from year to year. Income is often high in the year of separation due to severance payments, vacation payouts, stock option vesting, unemployment income, etc. If a job is not secured right away the income in the following year could be very low.

There are strategies to take advantage of the shift in tax brackets. In the high income year, you want to defer income and accelerate expenses. In the low-income year you’ll want to do the opposite. Here are some strategies for the high income year:

  • Make additional contributions to your tax-deferred investment accounts (401K, IRA, HSA etc.)
  • Delay deferred compensation to following year if possible
  • Prepay your January mortgage payment to increase your mortgage interest deduction if you itemize.
  • Utilize Donor Advised Fund to “Lump” charitable deductions. Donate appreciated securities if possible.
  • Pay quarterly estimated state income taxes in December instead of January and prepay real estate taxes, if possible (tax deduction limited to $10k)
  • Sell investments at a loss (up to $3,000 can be recognized in a single year) and use proceeds to purchase a similar (but not identical) investment to avoid a wash sale

Here are strategies to utilize in the low-income year:

  • Take Roth conversions on an IRA up to an amount that will “fill up” the lower tax bracket
  • Sell investments at a gain to lock in a lower capital gains rate. To the extent you are in the 12% tax bracket, your long-term capital gains rate will be 0%.
  • If over 59 ½, withdraw money from your IRA (or under 59 ½ if you qualify for one of the exceptions) and pay taxes at the lower rate. You can still contribute that year.
  • If you separate from your company at age 55 or over, withdraw money from your 401K and pay taxes at the lower rate without paying the 10% penalty 
  • Pay quarterly estimated income tax in January and defer payment of real estate taxes until January, if possible (tax deduction limited to $10k)
  • Be aware of tax credits you may become eligible for (Earned Income Credit, American Opportunity Credit, Lifetime Learning Credit)

If You Are Forced to Take on Debt During Transition

  • Tap lower rate sources of credit (home equity loans, cash value policy loans etc.) before taking on credit card debt
  • Understand the rates you are paying on credit card debt particularly for cash advances. Prioritize the interest rate over any card benefits if you think you will carry a balance.
  • Verify your credit reports annually.
  • Being close to or maxing out your credit limits may negatively impact your credit score. It’s a good idea to keep your balance on revolving lines under 30% of your limit.
  • Paying more than the minimum due may improve your credit score.
  • Don’t miss a payment. Payment history makes up 35% of your credit score.

About The Author

Bill LaChance is an independent financial advisor. Bill’s firm combines financial planning, investment management, tax planning and tax preparation. Prior to launching his financial planning practice, Bill spent 22 years in corporate finance in the retail industry and before that was a CPA with a large accounting firm. Bill has a B.S. in Accounting from Bryant University and an MBA in Finance from Indiana University. Bill is a Certified Financial Planner as well as an enrolled agent authorized to represent taxpayers before the IRS.