In our financial planning practice, we spend a fair amount of time with people in a job transition. In the past we have spoken with several people who pay for their health insurance through COBRA and don’t realize that they could potentially save hundreds of dollars a month in premiums because of subsidies available when they purchase their health insurance from the government’s health-care exchange. Recent changes to the law expanded these options to even more income levels. This blog looks at this potential opportunity and provides an overview of the government health-care exchange for anyone looking for affordable healthcare options.
Gaining Subsidies for Health Coverage: A Quick Overview
You can purchase a plan on the 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 way the health care exchanges work is that private insurers provide the insurance for individuals and families either not covered under a group plan from an employer or covered by an employer plan designated as not affordable.
The ACA plans are grouped in tiers based on the percentage of cost paid by the patient through deductibles, co-pays, coinsurance, etc. Bronze plans have the highest deductibles, co-pays, etc. and thus the lowest premiums. Gold plans have the lowest deductibles, co-pays, etc. and thus the highest premiums. Silver is the tier in the middle.
Subsidies for Insurance Premiums
Individuals and families with modified adjusted gross incomes (MAGI) below certain thresholds qualify for premium subsidies from the federal government. The government directly pays the insurers, thus lowering your premium. MAGI is adjusted gross income from your tax return (income before deductions and exemptions) — adjusted up for items such as tax exempt income, income that dependents earn, etc. that are typically not part of adjusted gross income (AGI).
The premium subsidies are tax credits that you receive in advance. You estimate your modified adjusted gross income for the upcoming year, which then determines the subsidy. When you complete your tax return at the end of the year, the subsidy is recalculated based on your actual MAGI and you’ll either pay back some of the subsidy or receive an additional amount depending on whether your actual MAGI was above or below your estimate.
Prior to the American Rescue Plan Act of 2021, premium subsidies kicked in when MAGI dropped below 400% of the poverty level (based on family size). The American Rescue Plan Act extended eligibility for ACA health insurance subsidies purchasers with incomes over 400% of the poverty level. The Inflation Reduction Act of 2022 extended this provision through 2025. Previously there was an income “cliff.” If your adjusted gross income was one dollar over the threshold you lost the entire subsidy. Now the subsidy slowly phases out based on the cost of the benchmark plan as a percentage of your income. This extends the subsidies to a far greater number of people. The cost of the benchmark plan depends on the ages of the participants since premiums on ACA plans increase with age. Older participants with more expensive plans will have higher income thresholds and larger subsidies.
While premium subsidies help pay the cost of the health insurance itself, 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. Unlike cost-sharing subsidies, CSRs are available only on silver plans.
Depending on your income, you will end up with lower deductibles, co-pays, etc. with no additional premium. Unlike the premium subsidy, there is no reconciliation at the end of the year for the cost-sharing subsidy if it turns out your income was higher or lower than your initial projection. For example, the deductible for a couple might be $4,500 if over the cost sharing threshold dropping to $3,600 if income drops below the first threshold, $1,400 if income drops below the second threshold and $800 if income drops below the third threshold.
Finally, if your income is below 138% of the poverty level you will no longer qualify for an exchange subsidy and instead will be referred to the state Medicaid program, assuming you live in a state that opted to expand Medicaid. (The Supreme Court ruled that states were not required to expand Medicaid, and many did not.)
The chart above shows the income thresholds in 2023 for the two subsidies and Medicaid, based on family size for 2023 coverage. Given that COBRA is unsubsidized, it is likely that if you qualify for a subsidy on the exchange, a plan obtained on the exchange will be far less expensive than COBRA.
Estimating 2023 Income
You will be able to go in later and adjust your estimated income for the year, up or down, if your situation changes – including getting a new job. Keep in mind that you may have to pay back some or all of the subsidy if the income from your new job causes your annual income to exceed your initial estimate. But I would not worry too much about this. If you were to land a job early in the year, your income will likely end up over the threshold and you will have to pay back the entire subsidy. But that would only be a month or two of subsidy since your ACA coverage would stop when you gain access to employer coverage. If you land a job late in the year, the annual income should not increase that much relative to the initial estimate since you only have a few months of earnings. Landing a job in the middle of the year might be the most problematic if it puts your income level just over the threshold, but there may be ways, such as pretax 401K contributions, to keep your income below the threshold.
For those in transition, estimating and providing documentation for your 2023 income can be problematic since you do not know when you will land a new job. Be sure to think through the implications of the estimate you provide. Some people we have spoken to do not want to end up on Medicaid because they see doctors who do not accept Medicaid patients. In that case, you may need to employ strategies (such as Roth IRA conversions) to boost your income high enough so that it makes it over the Medicaid threshold. This is especially true for early retirees that may not have any reportable income.
You should also be aware that taking distributions from pretax retirement accounts will increase your income and therefore decrease the amount the subsidy (increasing the marginal tax rate on that income). You may want to consider other options, if available, for current cash flow needs.
Deciding between COBRA and the Exchange
Of course, 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 you do should include all these factors.
Making this comparison involves:
a) Reviewing if your doctors are in-network (or you are willing to switch)
b) Looking at your prior year spending by reviewing the information on your prior year’s health plan provider. They usually have a way to run a report for all this information.
c) Each plan on the exchange may have different deductibles, out-of-pocket maximums, and coinsurance percentages. The best site I have found to compare health insurance plans costs is https://health-plan-compare.com/ (we are not affiliated with this site in any way), If you decide to give it a shot, make sure you see the note that the server will clear your entries if you let the input information sit for a while. It’s super frustrating to lose your work, so be aware.
Deadlines for Enrolling
Open enrollment for 2023 runs through January 31. If you enroll in January coverage will start February 1. If you miss this open enrollment period, you will have to wait until 2024 to enroll unless you qualify for a special enrollment period. The only time you can switch from COBRA to an exchange plan outside of open enrollment is if the 18 months of COBRA coverage expires or if you are in a situation where your former company pays your COBRA premiums for a period of time and then stops.
If you already have an exchange plan and want to keep the plan you have you can do nothing and it will automatically renew.
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.