Early Retiree Healthcare: A Case Study

More than 14 years after passage of the Affordable Care Act (ACA), I still encounter folks who are waiting longer than necessary to retire. Many of them are convinced retirement is out of reach financially until they hit Medicare eligibility at age 65.

Given the prohibitive cost of private health insurance, these would-be retirees continue to work, sometimes in soul-crushing jobs. They fail to realize that ACA can fill the gap until Medicare kicks in. Meanwhile, the clock keeps ticking.

To make matters worse, there is an astonishing lack of media coverage touting the widespread availability of this benefit.

In today’s post I will share my own experience with ACA, and try to dispel the myth that one must wait until the canonical age of 65 to retire.

Broad Strokes

Government programs are notoriously complex. ACA is no exception. Moreover, each state has a different set of rules governing its administration.

There will be no escaping this complexity if you choose to take the ACA plunge. The good news is that there is a bottomless well of resources on the web to help you navigate it (the links I’ve embedded throughout this post should provide more than enough information to get you started).

The purpose of this post is to present the broad strokes of ACA, using my own experience as a case study. With this I hope to arm aspiring retirees with a kernel of knowledge, and the confidence to contemplate an early retirement free of the fear that healthcare costs will break them financially.

Related: Maximize ACA Subsidies and Minimize Health Insurance Costs

A Caveat

Despite its popularity—principally among the 20 million-or-so Americans who use it—the ACA has withstood repeated attempts at repeal over the course of its existence. Although the zeal for ACA repeal is currently at an ebb, that tide could change.

That said, the ACA has had fourteen years to burrow its way into the American psyche. Like Social Security, which itself endured repeated efforts at repeal early in its existence, I don’t see ACA going quietly into the night.

That is my opinion—take it with a teaspoon of salt.

The Eligibility “Loophole”

ACA eligibility is based on income, not assets. The financial benefit you receive is called a subsidy, and the amount of this subsidy is calculated using a sliding scale. The official name for this subsidy is the Premium Tax Credit (PTC).

If you receive the PTC in advance, as I do, it is called APTC (exercise for the reader to guess what the ‘A’ stands for). This discounts your health insurance premiums today, rather than forcing you to wait until tax time to get a refund.

The lower your income, the greater the PTC you are eligible to receive (that is where the sliding scale comes in). It doesn’t matter if you have $10 million in the bank, a $5 million-dollar home, a $20 million-dollar yacht, or any combination thereof. These are assets, and the government doesn’t take them into account when considering your eligibility for ACA.

When you stop working, your earned income goes to zero, thereby instantly making you eligible for ACA subsidies. (The amount of your PTC varies by age, too—the older you are, the more you are eligible to receive—but income is the primary determinant of your PTC amount.)

A Case Study

As a 58 year-old single male, the maximum PTC I am eligible to receive in 2024 is $832 per month (or $9,981 per year). Think of this as a gift from Uncle Sam; the only restriction being that I spend it solely on health insurance premiums.

The amount of PTC I actually receive is $795 per month (the $37 difference is due to a technical detail, but I promised to keep us out of the weeds). Suffice it to say that, effectively, I am receiving the maximum PTC allowed for a single filer my age.

My Plan

The health plan I use is called Cigna Connect Flex Silver 5750. This is a Silver-level plan. It boasts a $0 deductible, a primary care copay of $0, and specialist and urgent care copays of $10 and $15, respectively.

Crucially, my annual individual out-of-pocket maximum is $3,150. Even if I incur $100K in covered medical expenses in 2024, the maximum I would be out is $3,150. By any standard, this is a very generous health insurance plan.

My Cost

This plan is not cheap. It would cost me $818 per month (or $9,816 per year) on the private market. Because I receive the PTC in advance, however, I pay just $23 per month for it ($818 minus $795).

Sound too good to be true? It isn’t. Here is a table that summarizes the medical procedures I have had so far in 2024, and my share of the cost for them.

But Wait, There’s More!

In addition to qualifying for the PTC, you may be eligible for an additional benefit called Cost-Sharing Reductions (CSRs). CSRs lower your costs even more by discounting copays, coinsurance, deductibles and/or out-of-pocket maximums. Your income must fall below a certain level to qualify.

CSRs are the reason the deductible, copays and out-of-pocket maximums on my Cigna plan are so low.

The only eligibility requirement for CSRs, besides having a low enough income, is that you choose a Silver-level plan, and that you purchase it from HealthCare.gov (if your state is one of the 19 that has its own a marketplace, you must purchase your Silver plan on your state’s marketplace to qualify for CSRs).

Prescription Drug Benefits

As you might expect, my Cigna plan also comes with a pretty standard (and robust) prescription drug formulary.

I currently take one prescription medication, for which I pay $12 for a 90-day supply.

Financial Engineering

In order to qualify for these benefits, you will be required to do a bit of financial engineering. Specifically, you will have to find a way to generate the right amount of income in the calendar year you claim ACA benefits.

In IRS language, this is the adjusted gross income (AGI) you report on your federal income tax return. Your AGI must not fall below a certain floor; otherwise you will find yourself in Medicaid territory (that’s Medicaid, not Medicare—there is a difference!), and thus ineligible for any ACA healthcare plans. Neither must your AGI exceed a ceiling that would all but erase your PTC.

Your AGI must fall into that goldilocks zone that both maximizes PTC (and ideally triggers CSRs), and keeps you out of Medicaid.

In the state of Colorado, where I live, this zone falls between 138% and 400% of the federal poverty level (FPL) for a single filer. In 2024, this translates to $20,121 and $58,320, respectively (the FPL for 2023, which is used in calculations for 2024 PTC, is $14,580). These amounts will be higher for those with spouses and/or dependents. The closer my AGI is to $20,121 on my 2024 tax return, the more PTC I receive.

Fine-Tuning AGI

As a retiree, I no longer receive earned income. Instead, the majority of my taxable income comes from interest, dividends and capital gains. Two sources of this income are of particular importance to this discussion, however:

• Selling ETFs in my taxable brokerage account (preferably at the long-term capital gains rate)


• Converting a portion of my Traditional IRA to my Roth IRA (this is treated as ordinary income by the IRS)

Because both are considered taxable events by the IRS, both contribute to AGI. And because I have full control over the amount of income each generates, I can dial in my AGI to a pretty precise number.

In practice, the number I aim for is about 5% north of the Medicaid floor, or 143% of FPL. This allows me to maximize ACA subsidies, while at the same time avoid falling into the Medicaid trap.

Can It Work for You?

Everybody’s situation is different—some have spouses, some dependents to support; some even have pre-existing medical conditions (this should not preclude you from ACA eligibility, by the way).

Some may even receive too much income in retirement to qualify meaningfully for ACA subsidies. (Although recent changes in the law expanded eligibility to those whose AGI exceeds 400% of FPL.)

Nevertheless, some variation of this strategy can likely be used by younger retirees to fill the healthcare gap until they reach Medicare eligibility at 65.

Related: Does the American Rescue Plan Change Healthcare Planning for Early Retirees?

Challenges

I have been at this for five years, so I have the routine pretty dialed. Signing up for ACA the first year was challenging, however, and not just because the program was new and unfamiliar to me.

Catch-22

The first time you apply for ACA, you will be required not only to provide your estimated income in the year you claim benefits, but also evidence of said income. That evidence will likely come in the form of your most recent federal income tax return. This creates a catch-22.

Because you will be applying for ACA for the first time, you probably just left your job. This means your most recent tax return includes income from that job; likely too much for a meaningful ACA subsidy.

Even though you will earn no income from work in the year you wish to claim benefits, the program will use last year’s tax return to estimate next year’s income. Therefore, your benefit amount—if you choose to receive it in the form of APTC—will be significantly diminished.

A Workaround

I managed to get around this silliness by phoning my state’s marketplace and talking to an actual human being. I was instructed to draft a letter explaining my conundrum, and mail it to the administrator of my state’s ACA marketplace.

With that formality, my problem was solved. Your experience may be more (or less) arduous. But even if you fail to solve it, and you are forced to pay full price for your plan the first year you’re on ACA, you will receive your full PTC when you file next year’s tax return.

This may be painful, but it will only be an issue the first year you use ACA. It should certainly not cause you to throw out the ACA baby with the bureaucratic bathwater.

HSA Eligibility

If, like me, you choose a zero-deductible plan via the ACA, you will not be eligible to contribute to a health savings account (HSA). HSA contributions are available only to those who have high-deductible healthcare plans (HDHP).

Although the ACA does provide access to HDHPs, their availability is dwindling.

Personally, I am willing to trade this benefit for a zero-deductible plan with an out-of-pocket maximum of $3,150. Your mileage may vary.

Change is the Only Constant

Not unlike the income tax code, the law around the ACA is in a constant state of flux.

Fortunately, both the federally administered program (HealthCare.gov), and my own state’s marketplace (in Colorado, where I live, this is ConnectForHealthCO.com), keep beneficiaries apprised of new developments with timely communications.

It pays to keep abreast of these changes, lest they impact your pocketbook. In my experience, however, any changes to the ACA have generally worked in my favor.

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[I’m David Champion. I retired from a career in software development in March 2019, just shy of my 53rd birthday. To position myself for 40+ years of worry-free retirement, I consumed all manner of early-retirement resources. Notable among these was CanIRetireYet, whose newsletters I have received in my inbox every Monday morning for the last ten years. CanIRetireYet is one of exactly two personal finance newsletters I subscribe to. Why? Because of the practical, no-nonsense advice I find here. I attribute my financial success in no small part to what I have learned from Darrow and Chris. In sharing some of my own observations on the early-retirement journey, I aim to maintain the high standard of value readers of CanIRetireYet have come to expect.]

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