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. This blog looks at this potential opportunity and provides an overview for anyone considering using the government health care exchange.
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 kick in when MAGI drops below 400% of the poverty level based on your family size. 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.
Cost-Sharing Subsidies
In addition, there is a lesser known subsidy that kicks in when income drops below 250% of the poverty level. These cost-sharing subsidies 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.
Medicaid
Finally, if your income is below 140% 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.)
Income Thresholds
Here are the income thresholds in 2020 for the two subsidies and Medicaid, based on family size:
Family Premium Cost Sharing Medicaid
Size Subsidy Threshold Subsidy Threshold Threshold*
1 $49,960 $31,225 $17,236
2 $67,640 $42,275 $23,336
3 $85,320 $53,325 $29,435
4 $103,000 $64,375 $35,535
5 $120,680 $75,425 $41,635
6 $138,360 $86,475 $47,734
*Note that the Medicaid threshold is considerably higher for dependents 18 years old and younger so it is possible that the parents would qualify for an exchange plan but the children would qualify for Medicaid.
Given that COBRA is unsubsidized, it is likely that if your income will be below the thresholds above for 2020, a plan obtained on the exchange will be far less expensive than COBRA.
Estimating 2020 Income
For those in transition, estimating and providing documentation for your 2020 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 I 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.
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. If you land a job late in the year, the annual income should not increase that much relative to the initial estimate. 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 (401K contributions, etc.) to keep your income below the threshold.
You should also be aware that taking distributions from 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. What I did when doing the comparison for my family’s health coverage was download all the claims we submitted during the prior year on COBRA and then recalculate what the total cost would have been using the provisions of the exchange plan that best fit our needs. We opted to go with the exchange plan.
Deadlines for Enrolling
Open enrollment for 2020 runs through December 15. If you miss this open enrollment period, you will have to wait until 2021 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 eighteen 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.
Feel reach out to us if you need help sorting through this.