One of the biggest risks for the early retiree has been the rising cost of health care and the pressure on savings when health issues arise. The Affordable Care Act could reduce that risk.
We've all seen it--clients who are unrealistic about their spending habits, overly optimistic about the strength of their portfolios and the direction of the markets, and who just can't wait to embark on a leisurely retirement in their 50s or early 60s. But all too often, health-care expenses in the period between early retirement and Medicare eligibility have cratered those plans and dreams.
Enter Obamacare. Love it or hate it, the Affordable Care Act (ACA) offers an element of predictability in the health-care marketplace. Premiums based on pre-existing conditions are a thing of the past. The only criteria for setting premiums are age, geography, family size, and whether or not the applicant is a smoker. And, interestingly, not all states consider smoking status when setting premiums.
Levels of Coverage
There are four levels of coverage designated as Bronze, Silver, Gold, or Platinum. Premiums are lowest at the Bronze level and highest at Platinum. The difference is the out-of-pocket costs, which are highest for Bronze and lowest for Platinum. Bronze plans cover approximately 60% of the enrollee's total cost, 70% for Silver, 80% for Gold, and 90% for Platinum.
All plans must cover "essential health benefits" such as preventive care, prescription drugs, lab services, mental health treatment, pediatric care, maternity care, hospitalization, and emergency services (with no pre-authorization required). There are no longer lifetime limits on the amount of coverage.
Under the old rules, basically there were no rules. The insurance companies could use occupation, age, health history, or more to determine premiums. Under the ACA, rates for older adults cannot exceed three times the rate of a younger person. This is the heart of the concern that not enough young people will participate in ACA plans for the economics to be financially viable. However, this pricing restriction can be very beneficial to the younger retiree.
This is where the planning opportunity comes in. Government subsidies in the form of a tax credit will be available to help pay insurance premiums based on income. This assistance is available for people with family income that is between 100% and 400% of the federal poverty level. For 2014 that range is $15,730 to $62,920 for a family of two.
Premium calculations for purposes of the subsidy are based on the second lowest-cost Silver Plan, although the participant is free to choose a higher- or lower-cost plan. The maximum premium for those eligible for the subsidy is between 2% and 9.5%, based on family income. Since health-care premiums are higher for older people but the amount of the subsidy is based on income, the older enrollees derive a greater relative benefit.
Family income is defined as modified adjusted gross income (MAGI) using the IRS definition. MAGI includes wages, salary, foreign income, interest, and dividends. It also includes non-taxable income (i.e., muni bond interest) and non-taxable Social Security income. MAGI does not include income in the form of gifts or inheritance, and it does not take assets into account.