(This blog is essentially a repeat of one I sent last year, but given that so many have lost employer-based health coverage recently I thought it would be timely for those impacted.)
When you lose your employer-based coverage you essentially have two options for health insurance, COBRA and the health insurance exchange. In this blog I discuss things to consider when trying to decide between the two options.
COBRA
Most people are familiar with COBRA coverage. When someone loses their employer-based group health coverage, the company is required to offer continuing coverage for at least eighteen months. Typically, the employee will lose the employer subsidy built into group health insurance and must pay the full cost of the coverage, although in some cases the employer will cover a portion of the COBRA premiums for a period of time. With COBRA the employee maintains the same coverage they had when they were employed.
HEALTH CARE EXCHANGE (ACA)
Understanding how plans work on the health care exchange is more complicated. I often find that people default to COBRA coverage even though they may realize significant savings by switching to an exchange plan.
It is important to understand when you can sign up for an exchange plan. Generally, you can sign up for an exchange plan only during open enrollment, which runs from Nov 1 to Dec 15 for plans that are effective Jan 1. But if you lose your employer-based coverage, you are granted a sixty-day special enrollment period to sign up for an exchange plan. You are also eligible to sign up if the company you previously worked for subsidized your COBRA premiums for a period of time and that subsidy ends. Finally, if you reach the end of the eighteen-month COBRA period and will lose that coverage, you also qualify for a special enrollment period.
ACA plans always begin on the first of the month. If you sign up before the 15th the plan start date will be the first of the following month.
If you do sign up for COBRA and are past the sixty-day window, then you must wait until the next open enrollment period before you can switch to an exchange plan.
Obtaining Subsidies for Health Coverage: A Quick Overview
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 Affordable Care Act (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.
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. Your estimate of your modified adjusted gross income for the upcoming year 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.
Cost-Sharing Subsidies
There is a lesser known subsidy, the cost-sharing subsidy, that kicks in when income drops below 250% of the poverty level. This subsidy is 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 your income was higher or lower than your initial projection. For example, a $4,500 deductible for a couple over the cost-sharing threshold might drop 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
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
Size Subsidy Threshold Subsidy Threshold Medicaid Threshold (Parents*)
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.
Estimating 2020 Income
If you are 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 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 is 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 of 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
Two important factors in determining whether COBRA or an exchange plan will be more cost effective is your age and whether you qualify for a subsidy. The premiums for exchange plans vary by age. The older you are, the more expensive the unsubsidized premium will be. That is generally not the case with COBRA. Most employer-based group plans charge everyone the same no matter what their age. Younger participants are in effect subsidizing older participants. All things being equal, the exchange will generally be the better option for young people and COBRA for older people.
What changes that dynamic is the subsidy. The subsidy is based on income, and everyone at a certain income level pays the same no matter what their age. Younger participants have lower premiums and thus a small subsidy. Older participants have higher premiums and thus larger subsidies. For an older participant, coming in even one dollar under the income threshold can make a dramatic difference in the net premium, often cutting it in half or more, usually well below the COBRA premium.
Of course, before switching plans you need to ensure that you consider all costs and not just 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. In addition, if you switch plans during the middle of the year you will start out with a new deductible, which must be considered as well.
Feel reach out to us if you need help sorting through this.