Signing Up for ACA/Obamacare Health Insurance for Early Retirement

At last, it’s official: we are early retirees who have health insurance.

“At last” because it was not as easy to get that Affordable Care Act (ACA)/Obamacare insurance as we’d believed it would be, despite all my familiarity with the health care exchanges, and despite how many times I have gone through the estimation process on our state exchange site.

But I’ll get to that. And to the big surprise that we wish we’d known about — and that you should know about if you’re planning to retire early and buy an exchange plan.

Here’s how it all went down.

Estimating Coverage and Costs for Health Insurance Plans

California has its own exchange, Covered California, which we used instead of Healthcare.gov, but the process is otherwise pretty similar. Whether it’s on the federal exchange or a state exchange, you can go in anytime and estimate what your health insurance would cost at certain income levels.

The Healthcare.gov form is spread out over multiple pages, so I can’t show it here. But the California form is all on one page, and asks for the same basic information:

I have been plugging numbers into this tool for years, to continually assess what we’d need to save for health care in our early years of early retirement, so was more than familiar with it. And plugging in some numbers kicks out info like:

Using the federal tool, I pretended we live in Mesa, Arizona, and with the same parameters, the plans there came out on Healthcare.gov as:

If you plug in similar income levels in different states, the costs can vary dramatically at higher incomes, but at lower incomes that are covered by the premium assistance tax credits, the net costs come out very similarly.

Picking An Estimated Income

Of course, playing around with an estimator tool and actually buying health insurance are two very different things, and the first step in getting the real deal was actually nailing down an income figure for 2018. Retirement cash flow and retirement income are two very different things, and for us in the early retirement income model we built for ourselves, given the subtraction of depreciation from our rental income, and the subtraction of cost basis from our sales of index fund shares, the only straight up income we’d have would be dividends and a small amount of interest from our personal loan repayment.

Under that model, we could have a very low income from a tax and health insurance perspective, though it would still net us ample cash flow. And that very low income would mean extremely low cost health insurance. Based on what we’d originally estimated our income to be, we might have even been able to get super cushy insurance like this:

In fact, there is even a chance that we could have to work to stay above Medicaid eligibility levels based purely on income, not cash flow. And in California, where MediCal (the state program name) is notoriously bad because so few doctors accept it, we did not want to be forced into the program.

In the end, though, we decided to project significantly higher for our income for 2018, for a few reasons:

1. We have realized that we will earn some money in retirement, and anything we earn will be fully considered as income, not just some marginal part of that.
2. Mark already has a few contracts lined up for this year, basically to pad us while we’re in this ridiculous health care limbo, and also while the markets continue to climb irrationally.
3. I have a few paid speaking gigs lined up that will count as income.
4. If we earn less than our projection, we can get an extra tax credit when we file our 2018 taxes. If we aimed lower and came in above that, we could have to pay back the tax credit and some cost sharing reduction (CSR) subsidy, plus potentially a penalty. We’d rather get money back than owe.
5. Given the legal battles over the CSRs, we feel icky using them when there are others who need them far more than we do. The tax credits are a different thing, and we feel less ambivalent about them. So we feel better projecting an income that qualifies for tax credits but not CSRs.

Of course, projecting a higher income meant a pricier plan. Instead of the low premium, essentially zero deductible and low copays from the Silver 94 plan, our Silver 70 (meaning it covers approximately 70 percent of costs) now looks like this:

Both Healthcare.gov and CoveredCA.com (and all the state exchanges I know of) have prominent links to update your information, so if we get halfway through the year and realize that we aren’t earning extra income, then we’ll go in and revise down our projection, and reduce our premium costs more.

The Surprise and Headaches // What We Wish We’d Known

So here’s a fun fact we just learned that we hadn’t seen written about anywhere:

When you apply for coverage, they run your projected income against your past tax returns. If there’s a significant difference, you get flagged.

Obviously, for early retirees leaving higher paying jobs for zero paying non-jobs, your income is going to reduce a whole lot. Meaning we’re all going to get flagged.

In our case, getting flagged meant getting kicked into California’s Medicaid Hell Maze, which meant days of calling various offices only to be told they couldn’t help us, until we finally got a hold of the person in our county social services office who could go into the system, reassure it that we weren’t Medicaid-eligible, and then kick us back out into the regular exchange plan system.

This added days, and many, many hours of phone time — plus stress! — to what is already a fairly opaque process.

If we had it to do over again, we wouldn’t break the income out in the application form the way they asked for it (W-2 income, dividends, rental, pensions, etc.), and would have just put our whole total into the W-2 box. We still would have been flagged because the total is much lower than our last tax return shows, but it might not have been flagged for the Medicaid Hell Maze.

The Benefit of a Qualifying Event

Surprising as this may be to those who know my love of planning, I waited until fairly late to apply for coverage. California’s open enrollment goes six weeks longer than national open enrollment (until January 31 instead of December 15), and I mistakenly believed that the coverage was retroactive like COBRA. (Dumb, I know.) But we had such a long to do list otherwise, plus the stress of wrapping up work, and this was one thing that seemed like it could slide — so I let it slide.

I ended up applying over the holidays, thinking that was still well before the end of open enrollment, and would make a January 1 start date for our insurance easy. I learned too late, though, that even with the longer open enrollment period, the deadline for a January 1 start date was still December 15, just like on Healthcare.gov. (D’oh!)

But here’s the good part: because we had a qualifying event (in our case loss of health insurance because of job loss), we were eligible for a January 1 start date even though we applied in late December. Of course, the Medicaid Hell Maze process took us into the first week of January, so I definitely had a few weeks of mild panic that we’d be uninsured in January. (We could trigger COBRA retroactively, but that’s well over $1000 a month for the two of us, so not a good option.) But after we escaped the maze, I went back to the Covered California folks (who are all super nice, btw) and asked if they could please backdate our start date, because Hell Maze. But also mostly because qualifying event. And they made it happen.

So that’s a big lesson worth sharing: if you’re getting exchange health insurance because you’re retiring, flaunt that qualifying event and get your coverage sooner than you might otherwise be able to. And keep asking.

Side note: Even though the ACA individual mandate was repealed in the so-called “tax reform” bill, there is still a penalty for being uninsured in 2018. Though you’re allowed a gap in coverage of up to two months without having to pay the penalty. So if we’d been uninsured for January, we wouldn’t get hit with the penalty.

The Case for Mortgage Payoff

So you know that debate in the early retirement community about whether it makes sense to pay off your mortgage or not before you retire? Here’s some hard proof of why we felt so strongly about paying ours off.

While none of us know how long the ACA will survive in its current form, as long as it does, there is an extremely large incentive to keep your income down. And if you save proportionally more to be able to keep paying off a mortgage in retirement, you push your income higher, and potentially lose a sizeable tax credit.

Let’s say you need an additional $10,000 in annual income from all sources to cover your mortgage payments. If we’d added $10,000 to our estimates this year, we would have gone from the plan above, with a $755 monthly tax credit ($9,060 per year) to this:

Notice the tax credit there? Zero. So we’d earn $10,000 more but our health care costs would go up by $9,000+. Not a great outcome. We’d actually have to earn $19,000 more to net out at $10,000 more, and that’s not taking into account tax implications of that higher income.

That’s why it’s so important to know where you are in relation to the tax credit and subsidy cliffs. (<– Great post by Justin at Root of Good that I link to all the time.) At certain income levels, adding enough to cover your mortgage might be no big deal, but at others, you come out far worse.

Though we aimed pretty high this year, we take comfort in knowing that we can live happily and comfortably on a very small income, and can get that cheap health insurance if we scrap our side hustles. (Although we have no intention of doing that until it’s clear whether the ACA is actually going to survive. Whether it’s this system or another, we — and millions of other people — would just appreciate knowing what to plan for. In the meantime, we have no intention of burning bridges to paid work, even though our top priority is enjoying our retirement, not earning money.)

Keeping Up on Health Care Developments

Beyond eliminating the individual mandate for health insurance in 2019 and beyond, Congress has yet to make any meaningful changes to the Affordable Care Act, and it certainly hasn’t repealed Obamacare as promised. That’s not to say any of us can bank on this legislation being here long-term: the White House is currently taking administrative action to weaken the ACA by, among other things, loosening the rules on short-term and catastrophic plans to allow them not to comply with the 10 essential services and other ACA requirements. Some experts predict this will draw healthy people out of the market, as will the demise of the mandate, and further destabilize the exchanges.

We shall see. Whatever happens, I’ll keep writing about it here, because this stuff is a BFD for those in the early retirement camp in the U.S. (And everyone in the rest of the world, keep your gloating to yourselves!) ;-) Stay tuned!

Let’s Talk Health Care!

Anybody else have some harrowing health insurance sign-up stories you’d care to share? Have other questions I haven’t answered here? Trying to figure out the question of what your projected income will be, and want to share your logic? Let’s discuss it all in the comments!