No one likes talking about health insurance.
Even for the biggest financial geeks; health insurance is not as exciting as other topics, such as retirement planning or the stock market. However, Insurance can keep you from financial ruin. The problem is paying for it.
For most households, affording health insurance is one of their biggest challenges, and the high cost of health insurance can prevent people from saving for retirement and paying down debt.
Many individuals and families trying to plan for early retirement find that insurance can be the biggest financial obstacle. Health insurance premiums for families can exceed 20k a year if you don’t know the rules. If you want to save more for retirement, pay down debt, or retire early, we have to drive down medical insurance costs and out of pocket premiums.
Note: I would like to point out that there are some strong feelings about the Affordable Care Act (ACA). My beliefs are based on being a producer of content and a planner. I have a responsibility to separate my personal and political beliefs from the content I produce. The ACA is the law of the land, and everyone has the right to maximize their benefits and reduce their costs.
If there are provisions in the tax code or the ACA that you are not happy with, please contact your representatives.
Note: Please no political comments below.
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” –Judge Learned Hand
If you want to reduce your insurance costs and lower your out-of-pocket insurance premiums, here is what you need to know.
The Affordable Care Act (ACA)
How Did the Affordable Care Act (the “ACA') Begin?
The Affordable Care Act (ACA) was enacted in March of 2010. It is known as the Patient Protection and Affordable Care Act or even ‘Obamacare’. The law has 3 goals: to make affordable health insurance available to more people; to expand Medicare to cover more adults and to support medical innovation. The ACA is a far-reaching law, and even though Americans have lived with the law for 8 years, it is clear that the law introduced new benefits, unique challenges, and moreover, a lot of confusion.
What is the Affordable Care Act?
The Affordable Care Act (or “ACA”) attempts to make health care more affordable in a number of ways. The ACA established exchanges or markets where individuals can compare eligible plans, features, and costs.
The ACA established the Premium Tax Credit, essentially subsidies for individuals and families with a taxable income of no more than 400 times the federal poverty level. For individuals and families that make no more than 250 percent of the federal poverty level, there is an additional and lesser-known subsidy for those that choose silver plans.
Who Can Purchase Insurance Under the ACA?
You may be able to buy insurance on the marketplace if you live in the United States, are a U.S citizen, and if you are not incarcerated.
What you need to know about the marketplace
The marketplace website is where you go to compare and sign up for an ACA policy. The website will ask you a series of questions to determine your eligibility for coverage and indicate what policies are available to you.
You will need to be prepared with an approximation of your income. If you overstate your income, you may receive additional Premium Tax Credits. When you file your taxes the IRS will reconcile your estimated income with your actual income, understating your income could mean you end up owing money back at tax time.
Keep in mind that the marketplace will only show you the plans that you are eligible for, based on your responses to the questions. The marketplace website does not offer any predictive tools, nor will it allow you to model or forecast changes in your income.
Alternatively, you may engage the help of a federal marketplace facilitator or navigator. These individuals are trained to understand how the marketplace works. They are not able to render any advice on taxes, the law or finances. Similarly, you would not call the IRS and ask for tips on how to reduce taxes; therefore, you should not expect the individuals in the marketplace to render advice on taxes, etc.
What plans are available and what do they cover?
The plans sold on the marketplace (exchange) must be comprehensive, cover doctors’ visits, hospitalization, prescription drugs, and maternity care, without restrictions for preexisting conditions. Insurers cannot charge you a higher premium because of your gender or your medical history. Insurers offering policies on the exchange may only vary premiums based on the number of people covered in your family, their ages, and whether you use tobacco products.
Tip: If you haven’t given up your tobacco usage: the ACA allows insurers to charge tobacco users up to 50% more than non-users.
The ACA uses a medal system, like in the Olympics, to make comparison shopping easier. Bronze plans will tend to have a lower annual premium and higher out-of-pocket expenses; a gold plan will have higher premiums and lower out-of-pocket expenses each year; and silver plans will generally fall within the middle, with one exception.
Exception: Should your taxable income fall within 250% of the federal poverty level, you may be eligible for cost-sharing that modifies how much a silver plan will pay for.
What is the Difference Between a Deductible and a Premium?
The premium is the amount of money the health insurance company charges for the plan of medical insurance coverage you have chosen. The deductible is the amount of money you have to pay for medical expenses before your insurance policy starts paying. The deductible is one of the factors that influence your net insurance premiums. Think of it as a teeter-totter: as deductibles increase, premiums will decline, and as premiums increase, deductibles will decline.
Your deductible is the amount of money that is “at-risk” and budgeting and planning should be done to determine what you can honestly handle. The ACA subsidies modify cost further, so you need not only consider the trade-off between deductibles vs. premiums; you also must consider how polices interact with available incentives and assistance.
Tip: Instead of placing too much at risk in your first year, it may make sense to increase the deductible each year as you build up emergency savings.
Help Paying For Health Insurance Premiums
This is the point that you may be wondering: what plan is best for you and your family.
Also, be sure to consider that your insurance premiums are potentially eligible for assistance through the Premium Tax Credit.
The availability of the Premium Tax Credit is based on your Modified Adjusted Gross Income (MAGI). Your MAGI is your taxable income after certain deductions and adds back in certain nontaxable sources of income.
Any discussion about what policy is appropriate for you and your family needs to start with an analysis of your tax return before requesting health insurance quotes. Efforts taken to reduce your MAGI may reduce out of pocket insurance premiums, as wells as potentially modifying your yearly out-of-pocket expenses, co-pays, deductibles, etc.
A family that has optimized their MAGI through tax planning may be able to purchase a gold policy with lower deductibles and co-pays for less money than a family who has not engaged in tax planning can purchase a bronze plan.
The ACA is full of exceptions and factors that modify other decisions. None of these decisions happen are stand-alone.
Fortunately, the Affordable Care Act does not consider assets. Families with sizable assets that have done tax planning may be able to purchase ACA coverage under more favorable terms than those who have not.
Tip: You may be able to reduce your out of pocket health insurance premiums by maximizing the amount of the Premium Tax Credit you may be eligible for.
What is Your Modified Adjusted Gross Income?
Your Modified Adjusted Gross Income is your gross income adjusted for deductions (AGI) then modified by adding back in certain deductions and non-taxable income (MAGI). For many taxpayers, your MAGI will be close to the AGI on your tax return. With two notable exceptions, taxpayers with non-taxable Social Security benefits and individuals with non-taxable bond interest.
Tip: Municipal bond interest is added to the calculation of the Premium Tax Credit. Consider repositioning bonds into tax-deferred savings vehicles.
Caution: Tax planning is unique for every household. There are various exemptions and phaseouts, and everyone has unique goals and concerns. Nothing in this guide is designed to be tax, legal or financial advice, and I urge you to consider retaining qualified advice before making major decisions regarding your healthcare.
How to Reduce Modified Adjusted Gross Income
Before doing any tax planning, it is important to estimate what is possible and forecast how the tax reductions strategies will affect your out-of-pocket insurance premiums. It’s even possible you have already reduced your taxable income as low as necessary or even reasonably possible. As well, some efforts necessary to reduce your MAGI could end up costing more than what you could recoup from insurance cost savings.
If you have decided that maximizing your Premium Tax Credit makes sense for you, you may want to consider:
- Funding a Health Savings Account (HSA)
- Funding Qualified Retirement Savings Accounts, such as an IRA, a Sep IRA, a Solo 401(K) or a Traditional 401(K)
What kind of savings are possible?
For a family whose taxable income is just outside of the maximum income limits, reducing MAGI below the maximum limits can have significant cost savings. For individuals and families inside of the limits reducing MAGI modestly could potentially save 20% or more a month. If MAGI can be reduced to below 250% the federal poverty level premiums and out of pocket expenses could be reduced significantly.
A latent benefit of reducing MAGI is it will also reduce your income taxes. The same planning to maximize the Premium Tax Credit also may help qualify for several other income-sensitive credits and deductions such as the Retirement Savers Credit. When various programs are combined reducing MAGI $10k could save over $7500.
“Tax law is full of thresholds and phase-outs and other complications, so that when somebody tells you that it is easy that you just can take X% of Y and Z% of A and you have your answer, they may be right most of the time, but their answer will be wrong often enough that you don't want to do it”. – CPA, Peter J Reilly
Advanced Tax Planning
Once you have established a tax strategy, it may be worthwhile to engage in more advanced tax planning. Advanced tax planning is beyond the scope of this article. There is no one size fits all solution to tax planning, every situation is different. CPA Peter Reilly contributor at Forbes has written the definitive laws of tax planning and has said it best: “tax planning needs to be run through the tax return.”
Tip: The ACA does not have an asset test, however; your assets will have an impact on the extent of tax planning that is possible. To reduce your MAGI you will need to consider your sources of income and consider making changes.
What about Health Sharing Ministries?
There is a lot of information online comparing Health Sharing Ministries to traditional insurance. What is not often considered are examples comparing heavily subsidized health insurance to health sharing ministries.
Comparing the two is easily an article in and of itself, here's what I would like to add to the topic:
Health Sharing Ministries are not medical insurance, you may not deduct the cost of health sharing ministries on your tax return if you’re self-employed or a small business owner. You may not use them in conjunction with a Health Savings Account.
Since Health Sharing Ministries are not insurance, purchasers are not afforded the same regulatory protection as traditional insurance. If we could hold all the variables constant and compare a health sharing ministry with equal cost and benefits to health insurance policy, the health insurance policy would have better consumer protections.
Tip: to learn more, I discuss this further here.
The decision to participate in Health Sharing Ministries normally comes down to cost.
Before assuming that a health sharing ministry is more cost-effective than medical insurance, you must consider the tax benefits and potential subsidies. Also, you must consider the potential risks. Medical debts are listed as the number one reason for personal bankruptcy filings. Having adequate insurance not only can save you money, but it can also protect your assets.
To maximize your benefits under the ACA it is best to plan ahead. Waiting until tax season (Mid Jan. to April 15th) to conduct tax planning can be a costly mistake, as many tax planning strategies such as funding a 401k need to be completed prior to Dec. 31rst. Consider how long you expect to need to purchase insurance under the ACA and plan to cover that period. Many people purchasing policies on the exchange will have some form of self-employment income, planning ahead for deductions and expenses could reduce out of pocket expenses.
Tip: A sole-proprietor, freelancer, or small business owner may want to reconsider expensing assets all in one year under sections 179.
Consider Your Goals
Many financial experts such as Dave Ramsey suggest that you pay down debt before maxing out your retirement accounts. Engaging in tax planning to facilitate reducing insurance premiums costs may necessitate contributing more to tax-deductible accounts and paying less towards debt. You will need to consider if the savings in out of pocket insurance premiums is worth delaying the speed at which you pay down debt. This is a decision you will need to weigh heavily.
Knowing Who The “TERRIBLE GUYS” Are.
In planning, it may necessary to pay a bad guy a nickel to avoid paying a terrible guy 50 cents (the terrible guy being the insurance company). To reduce your taxable income, assets may need to be repositioned to tax-deferred accounts that may have slightly higher fees. Repositioning assets may trigger capital gains taxes and you will need to consider if the one-time tax cost is worth the ongoing savings in insurance costs. To engage in advanced tax planning the services of a tax pro or attorney may be necessary.
Hacking The ACA in 7 Steps
- Determine Eligibility
- Compare anticipated income (MAGI) with income limits for available assistance
- Forecast how reductions in income (MAGI) will impact insurance premiums
- Compare ACA coverage with assistance to other forms of private medical insurance
- Should you determine ACA policy represents the best value, engage in any necessary tax planning
- Sign up for the program that offers you and your family the best protection
- Revaluate yearly as your income and goals may change over time
Where You Can Go for Help
Many advisors and blogs will offer their opinions on the best way for you to protect yourself from medical expenses. These individuals will likely have different incomes and risk tolerances.
A young blogger just starting down their path to saving, financially will have little to lose.
An individual that has amassed a large nest egg may find even a sizable medical emergency only represents a small fraction of their net worth.
To expand on this further, certain professions are harder on the body than others. A teamster, factory worker, farmer, etc, are likely to have different medical needs than a CPA or IT professional. The same can be said for hereditary dispositions verse a family without cause for concern.
It is important to weigh out the pros and cons each plan will offer and the benefits it could provide. Do your research and discover which plan is right for you and your healthcare needs. Should you need some assistance finding affordable health insurance feel free to reach out to me here.
Bonus: 5 Tips to Act on Before Year-End
If you are in the market for securing Affordable Care Act health insurance in 2020, there are many things to consider and act on RIGHT NOW that can save (or cost you) thousands in premiums next year.
There are several factors regarding your income (46 examples off the top of my head in fact) that weigh heavily into calculating how much you will pay next year. Factors that you may or may not be aware of, that will play heavily into how much (or how little) you must pay for your health insurance.
When you venture out onto the marketplace application, you will need to be armed with a solid estimate of your household income for the year. The savings that you do or do not receive will be based on your EXPECTED household income for the year that you want coverage, not the year you are applying.
This all centers on a number that you will be asked to calculate, your Modified Adjusted Gross Income (MAGI). This is “the figure used to determine eligibility for premium tax credits and other savings for Marketplace health insurance plans and for Medicaid and the Children's Health Insurance Program (CHIP). MAGI is adjusted gross income (AGI) plus these if any: untaxed foreign income, non-taxable Social Security benefits, and tax-exempt interest.” www.healthcare.gov
Navigating all of this can be confusing and downright overwhelming for most of us and the tendency is to just bury our heads in the sand and hope for the best.
But before you start hyperventilating, although certainly not intended to be a comprehensive list of strategies, they are the low hanging fruit available to you and well worth a good look.
1. Interest on Savings and Bonds
This is the first type of income that you may be collecting that can affect your health coverage costs in 2018. Interest on savings and bonds is counted towards income and your income is what largely sways how big your premiums are going to be.
TIP: Consider selling bonds and repositioning your savings into tax-deferred investments.
2. Dividends and Capital Gains
Just like interest on savings and bonds, your capital gains and dividends will factor into your estimated household income on your marketplace application.
TIP: Consider selling non-qualified stocks, mutual funds, and other investments prior to 2018.
3. IRA and 401k Distributions
Contrary to many people’s belief that these may be non-taxable, unlike ROTH IRAs, these too are income that you must plan ahead to avoid taxable distributions.
4. Rental and Self Employment Income
The Affordable Care Act uses net rental and self-employment income to calculate your premium savings.
TIP: Got some big expenses coming up that you were thinking about incurring this year? Maybe some business purchases? Think again. Consider paying expenses and business purchases in 2020 instead of 2019 to help reduce your overall household income.
5. Roth Distributions
Distributions from a ROTH are non-taxable and are not calculated as a factor in your household income (score!).
TIP: Consider a ROTH conversion prior to December 31st of this year.