In my financial planning practice I spend a fair amount of time with people in a job transition. Recently I have spoken with a few people who pay for their health insurance through COBRA, not realizing that they could potentially save hundreds of dollars a month in premiums by obtaining subsidized policies from the government’s health care exchange.
You are allowed to purchase a plan on the affordable care act exchange and 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 unemployment insurance has run out and 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 not designated as affordable. In New Jersey, where I live, five insurance companies are offering 55 different plans for 2016, up from 51 plans in 2015. The plans are grouped in tiers based on the overall 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. Platinum plans have the lowest deductibles, co-pays etc. and thus the highest premiums. The two tiers in the middle are silver and gold. The government considers the silver plans to be the “baseline” plans that most people will opt for.
Individuals and families with modified adjusted gross incomes (MAGI) below certain thresholds qualify for premium subsidies from the federal government, which 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 income drops below 400% of the poverty level based on your family size. The premium subsidies are actually tax credits. 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. There is a new form, 8962, which you will need to fill out. Any difference between this recalculated subsidy and the subsidy that was provided to the insurance company during the year will either increase or decrease your final tax bill. Therefore, you will want to make sure that the estimate you provide during enrollment is as accurate as possible. The government will typically require that you send in documentation at the time you enroll to prove that your estimate is reasonable.
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. (similar to a gold or platinum plan) 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.
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.
Here are the income thresholds in 2016 for the two subsidies and Medicaid, based on family size:
Family Premium Cost Sharing
Size Subsidy Threshold Subsidy Threshold Medicaid Threshold
1 $47,080 $29,425 $16,423
2 $63,720 $38,475 $21,983
3 $80,360 $50,225 $27,724
4 $97,000 $60,625 $33,465
5 $113,640 $71,025 $39,206
6 $130,280 $81,425 $44,947
Given that COBRA is unsubsidized, it is likely that if your income will be below the thresholds above for 2016, a plan obtained on the exchange will be less expensive than COBRA. To qualify for a subsidy you must apply on the exchange. You cannot purchase a policy directly from the insurance company.
For those in transition, estimating and providing documentation for your 2016 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 to boost your income high enough so that it makes it over the Medicaid threshold.
You will have the ability 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 your income from a 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 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.
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 our own health coverage was download all the claims we submitted during the prior year on COBRA and then recalculated 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.
Open enrollment for 2016 begins on November 1 and runs through January 31. To get a plan effective on January 1, 2016 you must enroll by December 15. The plan effective date for those enrolling from December 15 to January 15 will be February 1 and it will be March 1 for those enrolling January 15 through January 31. If you miss this open enrollment period you will have to wait until 2017 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. If you are in a situation where your former company pays your COBRA premiums for a period of time and then you pay for the remainder of the eighteen months, please note that the switchover to you having to pay the premiums does not count as a qualifying event for a special ACA exchange plan enrollment.
Please reach out to me if you need help sorting through this. This is a service I provide at no cost to my clients.