Healthcare in Early Retirement has to be one of the most thorny, yet least discussed problems that the aspiring early retiree can come across. It’s often referred to as ‘the elephant in the room’ because everyone knows it’s there looming in the background yet few seem to want to acknowledge it, or even know what to do about it.
That’s entirely understandable, and Mr. PIE and I are as guilty of this as the next person of kicking the can down the road when it comes to addressing the problem. Here we are, just 6 months away from pulling the plug on our jobs and only just starting to figure out some options. It’s a huge issue, yet we at least feel like deer in the headlights when trying to confront it. There are so many moving parts and unknowns. The media touts the high cost, our current administration is trying to rewrite the healthcare rules, and we as consumers are left confused, angry and unsure of our options.
We have a two part problem to solve. The first is that we are planning on quitting our jobs and leaving behind company healthcare in July 2018. That leaves us with 6 months of healthcare to find and fund for 2018. The second part of the problem is understanding the ACA income limits and finding a healthcare plan for our family for 2019 onward. If I could add a third problem it would be figuring out dental insurance for our family, but for now that elephant will have to stay in the dentist’s waiting room. Maybe there will be a whole post on that in the future!
The first problem could be easily solved if we were to work a full calendar year and quit our jobs in December 2018. The simple reason we are not doing that is the kids and school. With our half year plan the small PIE’s can finish their respective school years before moving on to their new school in NH. Our oldest son will be finishing 5th grade and due to start Middle school, so this is a great time to make the move. We aim to minimize disruption for them by doing this, and hopefully this will help them to settle in quickly to their new school.
Problem 1: Partial Year Healthcare Coverage
Let’s take a look at the first problem to begin with. We will be eligible to sign up for ACA when we quit our jobs in July 2018. This is because losing our family health insurance that I carry through my employer is a Qualifying Life Event which makes us eligible for a Special Enrollment Period. That enrollment period lasts for 60 days from the date of the qualifying event. Remember that number. You’ll need it later.
The problem with signing up for ACA in July 2018 is that we will have 6 months of income from our employers which will put us well over the limits imposed by the ACA for receiving Premium Tax Credits or Cost Sharing Reductions. Even if Mr. PIE were to defer a large percentage of his regular salary in 2018 we still both get bonuses and restricted stock unit (RSU) pay-outs in the first half of the year. The cost of unsubsidized health insurance for our family of four is not insignificant. I’ll share some numbers later.
Let me take a moment to address the other elephant in the room. We are highly compensated people and yet here I am bemoaning the cost of full price health insurance. Shouldn’t we just suck it up and be grateful that we can afford it when many others can’t? Probably. However, like many other parts of our financial lives, we will be finding ways to minimize costs within the rules. Until the U.S. figures out how to provide healthcare for its citizens in a reasonable manner that most of the rest of the developed world has figured out, we’ll be working within the system we are given to minimize our costs.
So lets look at options and what the rules are for those options.
I’ve already mentioned that we can sign up for the ACA within 60 days of quitting work. We will also have the option to use COBRA through my company. COBRA is a law that allows continuation of group health coverage that otherwise might be terminated. This coverage is at full company group rates which are significantly more expensive than health coverage for active employees. COBRA participants generally pay the entire premium themselves. COBRA coverage can be used for a maximum of 18 months, and can be terminated by the holder at any time in that period.
Here’s key point number 1 to remember: once COBRA is terminated the holder is then NOT eligible to sign up for the ACA unless they have another Qualifying Life Event. You have to wait until the next ACA open enrollment period.
Key point number 2: If you are entitled to elect COBRA coverage, you must be given an election period of at least 60 days after losing coverage to choose whether or not to elect continuation coverage. If you elect to take coverage within those 60 day, coverage is retroactive and the retroactive premiums must be paid.
Key point number 3: If you waive COBRA coverage during the election period, you must be permitted later to revoke your waiver of coverage and to elect continuation coverage as long as you do so during the election period. Then, the plan need only provide continuation coverage beginning on the date you revoke the waiver.
So lets take a look at the premium payments for the ACA and COBRA and figure out what we could be paying for 6 months of coverage for our family of four.
OUCH! Those ACA premiums are for the cheapest bronze plan and come with a hefty deductible. This is for 6 months of insurance for a very healthy family who are very unlikely to even use any services in those 6 months! Remember I said that unsubsidized healthcare was expensive?
The amusing part to this is that when I requested the COBRA costs from my HR department, they sent me a PDF designed to lay out COBRA benefits for employees who have been laid-off. It turns out that the costs for laid-off employees are subsidized and the premiums are only $234 a month! If I could just figure out how to get laid-off sometime in the next 6 months…….
Minimizing Healthcare Costs for Partial Year Coverage
So how can we minimize these costs using the rules I laid out above? Here’s our current plan. this comes with the caveat that we will check and double check the rules for COBRA and the ACA to ensure that they really truly can be used as I will show below:
The ‘need health insurance’ question has some flexibility in it’s answer. I can imagine that if any one of our family needs some kind of minor health care service, we would be better off paying out of pocket if the cost is anything up to $1,448 – the difference between overall ACA costs and the overall COBRA costs.
So that’s our first problem solved, let’s move onto the second problem: understanding coverage levels and how they relate to income in 2019.
Problem 2: What Can We Expect to Pay for Healthcare in 2019?
This is not such a thorny problem, and to be honest I have been encouraged by the results I have found for the cost of healthcare and the amount of flexibility we have in choosing our income. As is the case for many early retirees, the majority of our income will be from dividends and capital gains, and as such our actual taxable income will be significantly lower than the cash flow we gain from our investment portfolio. Any additional income we choose to create will be from Roth conversions and Capital Gains Harvesting.
What I sought to understand from this investigation was what income levels trigger changes in Premium Tax Credits and Cost Sharing Reductions. What is the maximum income we can have and still be eligible for some subsidies? I also found that I needed to know what income levels triggered the possibility of the small PIE’s being eligible for CHIP (Childrens’ Health Insurance Program) and that I also needed to know whether the kids being covered by CHIP was a good idea. The Healthcare.gov website has this handy table to help to understand the ACA income limits for a family of four in New Hampshire
When looking into CHIP income limits I came across this information from the Kaiser Family Foundation. It seems to be 2017 figures, and I can’t find any 2018 figures:
The bottom line is that CHIP eligibility for our kids starts with an income below 323% of the Federal Poverty Level. For 2017 the Federal Poverty Level for a family of 4 was $24,600, making CHIP kick in at an income of $79,458.
But would we want the kids covered on CHIP? We’re leaning towards no for a couple of reasons. The first is simplicity. Although CHIP coverage appears to be pretty comprehensive, there are still issues around finding providers and some instances of care requiring pre-approval. The second is that we don’t want to rely on a program that may well change in terms of coverage and eligibility levels. CHIP funding expired at the end of September 2017 and has yet to be reinstated.
Armed with the numbers from these two tables, I was then able to put some sample numbers into Healthcare.gov and take a look at what types of premiums we would be paying at each income level
For each example I chose the Silver plan with the lowest monthly premiums. These are the plans that maximize Cost Sharing Reductions. We’re also happy to have a High Deductible Plan due to the fact that we’re all pretty healthy and we generally don’t use anything close to our deductible each year. Also note that for CHIP I’m working with 2017 numbers for the 2018 plan, although there shouldn’t be large differences in the results. The final caveat is that these are 2018 estimates. Our first full year of ACA coverage will be 2019. Who knows what the state of healthcare will be at that point? Maybe by then all these numbers will be irrelevant? However, we’ve got to work with the information that is available to us, and this is the information we have right now.
These sample numbers only look at the ‘one dollar more or one dollar less’ scenario, showing the extremes of each income level. The monthly premiums and deductibles rise gradually between the income levels shown in the table. It’s also worth noting that while I have chosen to compare the cheapest Silver plans, once the Cost Sharing Reductions have disappeared and the deductibles rise to close to their highest allowed level of $12,600, buying a Silver plan would no longer be the best choice for us. For example, with an income of $98,399 we could buy a Bronze plan for $470 a month with $12,700 deductible.
What this investigation tells us is that we can increase our income with Roth conversions and tax Gain harvesting up to a limit of $98,399, and still have somewhat palatable monthly costs that fit in with our planned withdrawal strategy. In any one year we must be able to pay the deductible of close to $13,000, and also be ready to increase that to around $14,000 due to the out of Pocket Maximums for these plans.
It also shows us that we have a lot of flexibility in choosing what our income level is and how much we are willing to pay for healthcare. In any one year we could choose to have an extremely low income and low healthcare costs, or increase our income with Roth conversions and tax gain harvesting and choose to pay more for our healthcare as a result.
That’s until it all changes again!
Have you addressed the elephant in the room yet? Do you know what healthcare will look like for you and are you happy with the result? Any ideas how I could manage to get laid-off in the next 6 months? (kidding!….)