If you do not have access to employer-sponsored healthcare coverage, and do not yet qualify for Medicare, your most affordable healthcare option is likely to be through the federal or state marketplace, created by the Affordable Care Act. And if you qualify, the premiums you’ll pay can be further reduced by these programs.
“The formulas for qualifying, and to what benefit level you qualify, are complex,” noted Ben Martz of Hart, McConahy & Martz, an independent insurance agency in Erie, Pa., “but, as part of the American Rescue Plan, income ceilings have been raised and benefits increased, so more people are qualifying and receiving larger benefits.”
The programs vary from state to state. In Pennsylvania, for example, instead of applying through the federal marketplace, www.healthcare.gov, you’ll sign up through the state exchange at www.pennie.com. Here’s how it works:
People without access to an employer-provided plan, such as self-employed individuals or those who have retired before the Medicare age of 65, can qualify for coverage and an advanced premium tax credit (APTC), which serves to reduce their monthly premiums. Qualification is based on a combination of age and household Modified Adjusted Gross Income (MAGI). Initially the ceiling to qualify for the APTC was an income of less than four times poverty level, but that ceiling has been raised, due to an infusion of federal spending, as of June 1, the benefits have increased.
For example, an individual with a $180 per month premium had their monthly premium reduced to less than a dollar. In another example, a 60-year-old qualified for an APTC of $557 per month, leaving her with a monthly premium of $165.
“The key to maximizing your benefit is strategic planning in the source or your income during your time of eligibility,” Martz offered. “We suggest clients work with their financial advisors to determine the most effective means to maximize their benefits.”
At HBKS, we collaborate with insurance professionals like Ben Martz and consult with our HBK CPA partners on the tax issues that also come into play in determining how to take retirement income. For example, for a 62-year-old retiree with multiple retirement accounts, such as Qualified (taxable), Roth (tax-free) and Non-Qualified (partially taxable) has several different withdrawal strategies to consider. We weigh the tax consequences of withdrawing Qualified (taxable) funds versus the impact on their APTC as this is the largest investment account for most retirees. We also manage capital gains on non-qualified or after tax accounts that could increase their income to the point of being disqualified from the APTC benefit. Keeping taxable income down to reduce health insurance premiums would also serve to reduce their tax burden. Social Security is another important decision to consider as Social Security is partially taxable up to 85% depending on your income. Even if Social Security is the most tax efficient way to take retirement income at the time, it is fully counted in the MAGI income calculation for determining APTC. The tax efficiency you received could be effectively eliminated by the increase in health care premiums. When to take Social Security is a very important decision when entering retirement and all factors should be considered before making an election.
When you apply, you must project your income for the coming year. For example, if you apply at open enrollment on November 1, 2021, you must project your MAGI for 2022. Accurately projecting your household MAGI will be key, another aspect to work through with your financial advisor. For example, an individual born in 1960 projects income for 2022 of $40,000, and nets an APTC of $557 per month, leaving her with a monthly premium of $165. But by selling stocks and taking capital gains, her 2022 MAGI increases to $80,000, retroactively reducing her tax credit to $201 monthly, and requiring her to pay back the difference for the year of $4,272.
The complexity of applying doesn’t need to be overwhelming. If you have the right team of professionals, you can put your mind at peace that all of these variables are being considered when making these important decisions entering retirement.
By choosing the right plan, network and accommodating the qualifications is a complicated process. Your advocate is a financial advisor who can also draw on the expertise of insurance and tax professionals to ensure you get the best plan and maximize your benefits.
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
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