By Bill LaChance
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 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 new 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 51 different plans. Last year there were only three companies offering 29 plans, so the market has become more competitive.
Individuals and families with modified adjusted gross incomes (MAGI) below certain thresholds qualify for 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 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. So 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.
The subsidies kick in when income drops below 400% of the poverty level based on your family size. Below 140% of the poverty level you will qualify for Medicaid, 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 for subsidies and Medicaid, based on family size:
Family Size Subsidy Threshold Medicaid Threshold
1 $46,680 $16,423
2 $62,920 $21,983
3 $79,160 $27,724
4 $95,400 $33,465
5 $111,640 $39,206
6 $127,880 $44,947
Given that COBRA is unsubsidized, it is likely that if your income is below the thresholds above for 2015, a plan obtained on the exchange it will be less expensive for you 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 2015 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 do something such as a Roth conversion 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 which would include 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. The plans available to you on the exchange may have different deductibles, out of pocket maximums, coinsurance percentages, etc. 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 last year from our previous health insurer 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.
There is one last consideration. The wording in the original Affordable Care Act implies that subsidies can be made available only in states that operate their own exchanges. Many states, including New Jersey, declined to operate their own exchange and instead rely on the federally run exchange. The government contends that it was not the intent of the drafters of the law to limit subsidies only to policyholders with state run exchanges (the law was poorly worded). So it offers subsidies to policyholders in all states. Lawsuits have been filed claiming that the government is in violation of the law as it was written. The Supreme Court is expected to rule on this in June. If the ruling goes against the government it is possible that subsidies in states like New Jersey might be taken away. Personally, I don’t expect this to happen but you never know.
February 15 is an important date because that is the end of this year’s open enrollment period. If you do not sign up for a new plan before then you will need to wait for the 2016 open enrollment period, which begins in November. The only time you can switch from COBRA to an exchange plan outside of open enrollment is if your COBRA coverage expires.
To see if you qualify for a subsidized plan, the place to go is healthcare.gov. The number to call for help is 800-318-2596. You can also reach out to me if you have questions, particularly regarding tax implications.