Tax Reform and Health Insurance: New Options for the Self-Employed & Early Retiree


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Today’s guest post comes from JW of The Green Swan, a father, husband, and healthcare banker who has reached financial independence in his early thirties. To learn much more about J-Dub and his story, please see his Christopher Guest Post from my question and answer series.

Some time ago, he turned me on to the idea of purchasing a catastrophic plan and paying the penalty for carrying a non-ACA-compliant plan. For certain individuals, that was actually the most cost-effective healthcare coverage option. With the penalty going away in 2019, the option could be more attractive to the early retiree.

I requested a post that expanded on this idea, and he graciously accepted. Thank you, kind sir.

Tax Reform and Health Insurance: New Options for Early Retirees

 

You may not have heard the news recently, but the United States just passed into law a complete overhaul to the tax code. But what you may not have heard was tucked inside that bill was a repeal of the Obamacare individual mandate. Oh, did you miss that point when reading the 500+ page bill to simplify our tax code?

For folks living in the world of financial independence or the pursuit thereof (why else are you reading the Physician on FIRE…), the repeal of the individual mandate has the potential to change the way you buy health insurance in early retirement for the foreseeable future.

So how about a little Q&A:

 

What’s the Individual Mandate?

 

The individual mandate was the part of Obamacare that required everyone to get health insurance or pay a penalty. You could have insurance from Medicare, Medicaid, from your employer, or bought individually on the state or federal insurance exchanges, but if you don’t have qualified insurance a penalty is levied when you file your taxes.

The purpose behind the mandate was to force the young and healthy into the exchanges so they are pooled with the older, sicker, and more costly patients to basically subsidize their insurance premiums. The government subsidies for insurance offered on the exchange represented the carrot. The penalty, if you don’t buy, was the stick…

 

Why was the Individual Mandate Repeal Included in a Tax Law?

 

The individual mandate has always been a hotly contested subject ever since Obamacare passed. The Republicans challenged the legality of the mandate and took it all the way to the Supreme Court. Do you remember the decision that came down back in June 2012? Maybe that is a date that only sticks out in the mind of a healthcare banker…

Well, the mandate stuck because the Supreme Court ruled the government isn’t forcing people to buy health insurance, just that they are levying a tax (the “penalty”…) if they don’t buy it and the government has the right to pass new taxes. So the mandate stuck…because it is a tax, not a penalty, and therefore the government isn’t “forcing” you to buy something. And here we are now with that tax being repealed as part of the Republican tax reform.

Ahh, the circle of life…

 

What’s that Mean for the Obamacare Exchanges?

 


To be clear, the mandate is going away beginning in 2019. There are no changes for 2018. The 2018 Obamacare insurance marketplace window has already closed (if you buy through the exchanges hopefully you got your insurance already…), the rates are set, and penalties…or uh taxes…will still be levied if you don’t have insurance in 2018.

Beginning in 2019, there will be some wild changes. Early Congressional Budget Office (CBO) estimates are that health insurance premiums will rise an extra 10% and four million fewer people will buy insurance. Who will continue to buy? In all likelihood, the exchanges will represent a place for low income and sick people (e.g. chronic illnesses, etc.).

Low-income folks will still buy on the exchanges because they’ll continue to get the majority of the premiums subsidized. And the sick because they’ll have limited other options (they are getting the shaft in all of these changes…).

For early retirees living modestly on their massive fortunes (and reporting a low taxable income every year), you’ll likely still benefit from the government subsidies. But take advantage while you can, that could be the next thing Washington targets…

 

Do Early Retirees Care?

 

You certainly should care…optionality, my friend! As long as the subsidies are still flowing on the exchanges, that remains a great option. Even if rates go up 10% in 2019, the subsidies will also rise. Here you will find good, comprehensive health coverage at a low (subsidized) price.

Approximately 85% of folks who buy insurance through the Obamacare exchanges receive a subsidy, which is available for income levels up to 400% of the federal poverty level. In 2018 for a family of four with an income (modified adjusted gross income) below $98,400, you’ll receive subsidized healthcare. For a family of two, the income limit is $64,960 to qualify for subsidies.

If the subsidies eventually go away or if you are more of the “Fat FIRE” type (the high cost of living early retiree…) and don’t qualify for the subsidies, another option just got cheaper. With the repeal of the mandate, you can now buy what’s known as catastrophic health insurance (aka emergency health insurance or major medical insurance) without having to pay the mandate tax anymore.

 

What is Catastrophic Health Insurance?

 

Catastrophic health plans were curtailed significantly as part of Obamacare, available only to those under 30 or who have a “hardship exemption”. Clearly these plans were unreachable for early retirees. Catastrophic plans are a type of high-deductible insurance offering bare-bones coverage for very low premiums on a state by state basis.

While it varies from plan to plan and state to state, catastrophic insurance typically covers the majority of healthcare costs including doctor visits, prescriptions, and procedures once the deductible is met.

Under Obamacare, these plans were non-compliant which meant they didn’t offer the “essential health benefits” and other qualifications and, therefore, you’d have to pay the mandate tax just like if you didn’t have insurance at all. However, if catastrophic plans fit your needs, some folks have been known to buy them for coverage, elect to pay the tax, and it still being cheaper overall than buying compliant plans on the exchanges.

 

Who Buys Catastrophic Insurance?

 

Catastrophic plans are there for you when healthcare bills begin to pile up, but generally are insufficient for most individuals and families. Deductibles can be as high as $6,000 or more per person per year.

There are two key demographics that typically find value in these plans though, and those are:

  1. Folks with insufficient income to buy a comprehensive plan
  2. Folks who don’t expect to need many healthcare services but want a safety-net (is that you, Doc?)

 

Regarding the first demographic, this represents primarily folks living in the 19 states that didn’t expand Medicaid under Obamacare. There is now a gap between Medicaid eligibility and where the exchange subsidies kick in. There are nearly 2.5 million people who fall into this gap and generally elect to not buy any health insurance or opt for the cheap catastrophic plans.

In the second demographic, this would include financially independent early retirees. Now that the mandate tax has been repealed, these plans are effectively cheaper for them.

 

catastrophic insurance

a catastrophe waiting to happen

 

I’m sorry, Physician on FIRE, did you say something? Oh, you want a case study? Ok, well thanks for volunteering yourself…

 

Let’s take the good Doc for example. Here we have a generally healthy family including his wife and two boys. No chronic illnesses or pre-existing conditions; no intentions of expanding the family further and trying for a girl; his boys are past the age of when many childhood surgeries happen (ear tubes, tonsils, etc); and as a bonus they have a well-stocked Health Savings Account which can be used to cover the deductible in case of emergency.

A young, healthy family. Doc, do you consider yourself a “young invincible”? I consider myself one… 😊 And I may follow in your footsteps once I make the leap into retirement.

The bottom line…a non-subsidized comprehensive health insurance plan for a family of four could cost upwards of $15,000 or more in premiums per year whereas a catastrophic health plan could cost over 50% less. That saves thousands per year (…which could go toward paying the deductible in case of emergency)!

 


You're still not using Personal Capital? That's how I track the PoF portfolio.

 

Don’t Forget about Short-Term Health Insurance Plans

 

And don’t forget about short-term plans! Did you miss Trump’s executive order in October 2017? Short-term plans are now a more feasible option as well since Trump rolled back Obama-era limitations of plans being 90 days or less. Trump is reverting them back to the prior limitation of lasting up to a year with the ability to renew.

Plan characteristics can vary significantly state to state, but provide lower premium rates and with less comprehensive coverage than traditional health insurance. Similar to catastrophic plans, they are non-Obamacare compliant so they can exclude those with pre-existing conditions and base rates based specifically on your health background.

The change to short-term plans isn’t immediate. Now that the executive order is in place, the administration will begin crafting the new regulation and guidance to carry out the order. Be on the lookout for these plans as a good option in 2019 which can be purchased both on the exchanges and directly from insurers.

 

Final Thoughts?

 

While the health insurance landscape in America can be so frustrating (not to mention costly…) as it continues to change yet again, we need to be aware of our options and the changes coming down the pike.

The recent tax reform and Trump executive order certainly provide greater availability of catastrophic and short-term plans, respectively, but at the same time, health insurance for sicker folks with pre-existing conditions just got more expensive.

While we have a year before these changes become effective beginning in 2019, it’s best to start considering options now.

Thanks for taking a look!

 

Earn a $100 bonus with your first investment using promo code Partner100

 

[PoF: Thank you for the detailed rundown of the new options available next year without a penalty  additional tax levied.

I plan to look at these, along with health sharing ministries, as potential options for our family starting in… you guessed it… 2019.]

 

What are your plans for healthcare coverage in retirement? With the pending elimination of the individual mandate, will you be considering a catastrophic or short-term plan? 

 

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46 comments

  • While I am far away from early retirement, this is an interesting discussion none the less.

    I guess the options I always considered for this situation included catastrophic versus a health care sharing plan that splits cost amongst a group of people.

    Do you think that this sort of “catastrophic only” plan would be appropriate for those of us who are not offered an HSA by their employer? (My plan doesn’t qualify for an HSA) With an HSA, it seems very reasonable. Without it, I can see it becoming expensive quick, particularly if you have a family of four or five.

    • Depends on how much the employer covers the cost of your health plan. Many companies help cover at least a portion of the cost which helps keep them affordable while still providing comprehensive coverage. If it is still much more expensive than a catastrophic plan would be otherwise, then I would probably consider it.

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  • Dr. JB

    Wondering where and when to start looking for a potentially non-ACA compliant plan to cover my healthy family of six in the two months between completion of residency and beginning of my W-2 job. I plan on part-time locums work, so whatever I choose should be a business expense. Thanks,
    Dr. JB

  • This is a great rundown, thanks Green Swan. I’m still working part time so still have my employer plan but I’m always tracking what’s going on in case I decide I want to fully FIRE. I have a slightly different worry as I have Aetna for my coverage and CVS just bought them, so wondering what’s gonna happen there.

    • That’s great, Accidental FIRE. Always good to be aware of options. As far as Aetna goes, I think that is a great place to get coverage through. I’m looking forward to seeing what the combo with CVS will evolve into (I’m picturing expanded roles for minuteclinics, etc) which may provide better options for quality and efficient care at affordable prices. We’ll see.

  • Vagabond MD

    Nice discussion, Green Swan. One concern I have for young early retirees is that medical conditions accumulate as you and your family age. So, in the case of our host, PoF, in his early 40’s, he might be currently well served by a catastrophic plan. Ten years, fifteen years, from now, he and his wife might have some medical baggage that needs medication or maintenance, and the cat plan may not serve him well.

    Of course, ten years from now the landscape might/should be quite a bit different in health care, and that is the real conundrum, planning for a wildly unpredictable future.

    As for my solution, my wife in her corporate position is eligible for retiree (and spouse) health benefits, if she retires at age 55 or later. She is 19 months away, and barring any unexpected job loss, that is our plan.

    • I hear ya, the healthcare insurance landscape is anything but settled.

      Do your wife’s retiree health benefits provide for the option to buy insurance through the employer or actually help cover some of the cost as well? Either or, that’s an awesome option you folks have that very few folks are offered. My employer would offer retiree health insurance in a similar situation as your wife, but I’d have to pay the cost full-freight so I don’t think it would be a great option for us (plus 55 is still a long ways off for me).

  • We’re still on my wife’s employer plan so 2018 will be fine. We’ll need to figure out healthcare once she retires, though. I think the best option for us would be a regular plan. We are relatively healthy, but we go to the doctor a few times every year. The catastrophic plan would be a better fit for someone with no chronic condition at all. Healthcare is a mess here in the US.

    • Thanks for sharing, Joe. And if you folks can manage your reportable income in retirement, you could perhaps qualify for subsidies on those regular, comprehensive plans (assuming the subsidies are still around in 2019).

  • Todd

    To clarify a small point, some high deductible (as high as $10,000 for family) plans that would be considered by many as “catastrophic plans” have been available AND Obamacare compliant. The compliance rules relate to the out of pocket maximum and other benefits rather than the deductible per se. furthermore, these plans are not necessarily cheap at all as many will tell you. I would not count on a huge break/savings once the Obamacare rules for Heath plans are no longer in play.

    • Agreed, some of ACA-compliant plans do have ridiculously high deductibles and yet aren’t cheap. But I think the thought is that many non ACA-compliant plans which have more narrow coverage of benefits (truly for catastrophic cases) will be cheaper alternatives. Thanks Todd!

      • EnjoyIt

        Indeed. For example I don’t need maturity coverage so why should I pay for it.

        Also, currently in our $6K/person deductible plan almost every expense costs more using insurance as opposed to just paying cash. I wonder what will happen with the new catastrophic plans.

        • That isn’t an uncommon phenomenon, but most often paying in cash will result in a higher bill than the negotiated prices the health insurance companies receive (and pass on to you). It is something to consider asking the health provider when faced with a potentially large bill is if paying in cash would be cheaper. Thanks for the great point!

  • Philip

    My family currently has a HDHP, which is nearly identical to the catastrophic coverage I had in college. It allows us to invest in an HSA, and actually ends up being less expensive than having “comprehensive” coverage. As far as what will happen in the future, that’s anyone’s guess. I wouldn’t be surprised if some of us can’t collect social security, till our 80’s, and barring a change to a single-payer system, Medicare could conceivably push eligibility out further.

    • It will be interesting to see what our options are next year. The bronze plans seem awfully expensive for what they are if you don’t qualify for a subsidy. I would hope a catastrophic plan could save us thousands. I would expect insurance companies to offer more and different plans next year when the penalty is lifted.

      Best,
      -POF

      • Philip

        I agree. I would hope that insurance companies are able to be a bit more creative with their plan options. The irony is, that they could use the decreased regulation to actually make plans that are worse, and more expensive. If they do, a Republican congress may have just pushed us closer to a single-payer system. Oh, the irony…..

  • Denverite

    Healthcare pain. I have a healthy family and we hardly ever go to the doctor. I cover my family through a regular plan through my work with a $3000 out of pocket max per year. Out of the complete blue sky my daughter had a sudden and major health crisis requiring hospitalization starting a month and half ago, this past December. So I blew through $6000 out of pocket in two months by meeting out of pocket for both 2017 and 2018 for one family member. Still would have to meet up to an extra $3000 out of pocket this year to get coverage of anyone else in the family, and also–icing on this cake–I might change jobs shortly, with a new health plan, re-setting all the deductibles to zero. 🙁 This stuff can really wallop you bad. So if you get a very high deductible CAT plan, just realize that if your health problem stretches across two calendar years, you’re going to pay DOUBLE.

    • It stinks how the timing of things can really muck things up.

      My out-of-pocket max is at least triple that, and that’s an employer sponsored plan. I would guess a plan like you’ve got would cost $20,000 or more per year on the open market.

      I think the catastrophic plan makes sense for the FatFIRE types worth multiple millions. If you can pay less than $10,000 a year for a barebones plan and expect to pay most costs out-of-pocket, that might work out better than paying $20,000 or more to have a low deductible.

      Best,
      -PoF

      • Denverite

        Your comment makes sense for fatFIRE types absolutely. However, my experience is that you can more routinely expect health issues to arise the older you (and your kids) get. I.e., don’t look back on your health utilization rate in your 30s and 40s when your kids are under 13 or so, and expect it will continue at that same rate from there! The previous year we met the deductible and out of pocket for my husband’s spinal fusion for accumulated wear and tear from climbing, biking, etc. (he’s in his 50s). So CAT health coverage is a gamble, and the advantage is going to go to the house at some point!

        • Great points, Denverite, it can definitely feel like a little bit of a gamble…Sorry to hear your pocketbook got hit bad with it. My wife and I had similar issue, albeit not quite that bad, with a couple minor issues we had to take care of and fortunately hit in one calendar year. **it happens so better to not go into a CAT plan blind.

  • Where can you buy catastrophic plans?

    I was under the impression that they weren’t allowed to sell health insurance that wasn’t ACA qualified with the exception of short term plans.

  • FIREdmyadvisorlongago

    Can anyone address the elephant in the room: as medical therapeutics change and biologics are available and more appropriate for various conditions it is noteworthy to realize that these costs are often not covered by many government insurers and not eligible for foundations grants (as are sometimes offered in the form of copay cards, or copay assistance). I’m talking 20% out of pocket cost for a biologic can run 1500-2000 out of pocket after insurance. If you happen to get one of these rheumatologic or immunologic diseases, Medicare is NOT going to cut it. Are people folding in these possibilities into their projected costs in retirement. How does the FIRE community think about these things (I mean the medical FIRE community…I don’t think the non-medical FIRE community is even aware of these nuances unless they’re already dealing with a chronic or rare disease under treatment).

    • Without digging into the nuances of Medicare Part D, I believe there are out of pocket maxes (similar to out of pocket maxes in commercial insurance plans). But you are right, these are not insignificant sums (~$5k – $10K). This is most definitely on my mind when it comes to retiring early and why I, not unlike PoF, am looking to “FatFIRE” to ensure I have plenty of cushion to cover these out of pocket maxes if I were to need to do so annually. This could come from my “retirement cushion”, cut back on vacay, or I may choose to do a little part-time work to help cover costs if something came up. Thanks for raising this important point and consideration!

  • hatton1

    I can’t believe I missed this post on the day it published. I guess I am a fat-fire type. (I hate this term since I hate anyone calling me FAT!). After reading this I think I should work 3 more months than planned. I told my office staff that I was going to retire on My next birthday on 7/1. I will be 61. I pay health insurance quarterly so I would have my current BCBS plan paid up through 9/17. If I worked until September I could keep the current policy and then choose a catastrophic plan for the next 3.5 years. This all sounds good to me. I was expecting to pay $20000 minimum for a bronze ACA plan. They should be releasing details later this year.

    • You could get a short term (3 month) plan to finish out the rest of the year in 2017. That should not be overly expensive and bridge you to a cat plan in 2018. Nice to have options! And saving a little from that $20k premium will be huge!

  • SL

    Thanks for the post. My wife and I have achieved FI and are exploring when we can retire (she is only working part time now). My biggest challenge is that I have a chronic leukemia that requires medication for life (fortunately I am in remission but still need to take medicine daily). What surprised me the most when searching for health plans on the exchanges, was the lack of hospitals and doctors in the plans. I live in Houston and none of the major hospitals in the medical center are in the market place plans. So if I quit my job I would loose access to the specialist that I have seen for almost 7 years now. I’ve thought of moving to a different state where the plans have access to specific local specialists (of course who knows if the plans in other states will eventually drop those doctors). But for now I feel a bit stuck in my job if I want to visit the doctor and have access to the medical facility that I am so familiar and comfortable with.

    • Oh that’s a shame! You’ve got some great hospitals in Houston. Not sure if you’ve been at MD Anderson? I wonder if your specialist could recommend someone else that was in coverage? You’d hate to move and make that risk. Perhaps the cat plans would have broader networks too.

  • docnews

    Very important topic but not too early to run it. One can change as early as October 1st since the easiest ACA tax exemption is the lack of insurance coverage was for three months or less. (Talking to an insurance agent this harmed the market with poor families rolling the dice on their health to have more holiday money.) Plus all independent contractors (not just FIRE folks) should be looking into the offerings coming this Fall.

    • That’s an interesting point, but true very true… ACA allows one gap in coverage for up to 3 months. Supplementing that gap with a non-compliant plan is a smart route to consider. Thanks!

  • Great information! This is a timely post for me. We are retiring in May and are front loading our 403/457/401 plans to max out by then. We figure our taxable income will qualify us for a $900 per month subsidy for the remainder of the year.

    Since we will be traveling for a couple of years, do you recommend a national coverage plan or will most of them cover emergency room and possibly hospital stays out of network?

    It’s encouraging that you expect subsidies to continue in 2019 as long as income is kept low enough. We are going to pull from our cash funds for a few years to keep taxes and healthcare coverage expenses low.

    Thanks for the great info!

    • If you’re taking the subsidy, you’ll be limited to what’s available in the exchanges. Some areas are down to just one insurer.

      I don’t have any specific details, but in general, you should have coverage that makes sense for the life you plan to live. If you plan to be all over the country, you’d better ensure the insurance isn’t limited to a small geographic area. If you plan to travel the world, look into the options for some basic worldwide coverage.

      Best,
      -PoF

  • Thank you for laying this out for everyone JW – awesome info

  • We would be willing to take on a significantly higher deductible in a catastrophic plan. Even $20 – $25k a year deductible in order to keep basic premiums low and pay for most things out of pocket. Depending on the landscape when we retire (whether subsidies still exist), we could COBRA until the end of that year and shop for a low premium plan for the following year. And like the good ole doc, we are beefing up our HSA accounts while we can to fill in gaps if we need to until becoming eligible for Medicare. Hoping to preserve them for later on though.

    I’m surprised you didn’t mention health-ministries as an option for some. Not advocating for them (haven’t really kicked the tires yet to be truthful) but I know it’s the latest buzz.

    • Your plans sound similar to mine. The guest post was written to highlight options that are new without penalty in 2019.

      Health sharing ministries have been an option for some time, and nothing has changed there. I did mention them as a possibility, though, in my closing statement. “I plan to look at these, along with health sharing ministries, as potential options for our family starting in… you guessed it… 2019”

      Cheers!
      -PoF

  • Tom

    Not sure why you and many others seems to be in favor of Obamacare.

    The plan tried to force young people into paying a ton of money for insurance to help lower costs for older sick folks. I fall into the young(ish) and healthy crowd and forcing me into an expensive plan doesn’t help me out one bit.

    That plan was forced down people’s throats with lies (“your plan won’t go up one dime”) and taxes and it didn’t do anything good except raise costs. The preexisting condition clause was probably the best thing about that bill but it was with so many other bad clauses that it was overlooked.

    One option you didn’t mention are health share ministries which provide great alternatives for people. I fully expect some backlash for recommending them, but ESI money did a great review on them which everyone should read.

    https://esimoney.com/picking-right-early-retirement-health-insurance-reviewing-options/

    • The post doesn’t really favor Obamacare, Tom. It talks about the reality of it and the fact that key provisions disappear next year, opening up the new options that were highlighted.

      I do mention in my commentary at the end of the post (and comments beneath the post) that health sharing ministries are an option we’ll be exploring. It wasn’t detailed because that’s a current option and has been for many years. This post was written to highlight new options made possible by the recent Tax Reform. Kitces just published a great overview of the four biggest health sharing ministries. I like ESI Money’s post, as well.

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