Health insurance open enrollment comes around the same time every year. Last week, we wrote a post about open enrollment for those people who are already on or who are going to soon be on Medicare. This week we’re going to review open enrollment for the health insurance exchanges that were created by the Affordable Care Act.
Having adequate health insurance is a foundational part of any complete financial plan. Many people are offered health insurance coverage through their employer or, if they are old enough, from Medicare. It gets a little more complicated for self-employed people or for those who are currently out of a job.
Foregoing health insurance is generally ill-advised, as we’ve all seen how healthcare costs have skyrocketed in recent years. Although health insurance premiums can be expensive, they pale in comparison to what a medical catastrophe can cost. A great option for many individuals who don’t have easy access to health insurance is to purchase it from their state’s health insurance exchange. But what makes buying these policies so tricky is that, depending on your income, you may be eligible for a subsidy to purchase the insurance. Here’s what you should know about open enrollment for insurance through the healthcare exchange.
Exchange Open Enrollment
Open enrollment for the health insurance exchanges began on November 1 and goes through January 15 of next year. However, in order to have coverage starting on January 1, you must be enrolled by December 15.
The way that this insurance works is that each state runs its own exchange. This means each state will have different health insurance policies available at different prices. You can visit HealthCare.gov and provide your information to get quotes on your state’s exchange. This is how you would get quotes for exchange insurance in New Hampshire, for instance. Other states, like Massachusetts, have a dedicated website for their exchange and do not use Healthcare.gov to provide quotes or the application process for health insurance.
If you don’t know whether your state has its own dedicated health insurance website, it’s best to start on Healthcare.gov and put in your ZIP code; the website should redirect you to the appropriate site if your state’s insurance is not listed there.
Other Enrollment Times
While the general open enrollment period is only a couple of months long, you can still apply for exchange-based insurance under certain circumstances. For instance, if you or your spouse who is carrying the health insurance loses coverage, you have up to 60 days to apply for exchange-based health insurance, and this timing can be outside the normal open enrollment window.
Other common situations include changing your residence or experiencing a change in your household. This could include things like getting married, having a child, or getting divorced. If one of these situations applies to you and you currently don’t have health insurance elsewhere, it may make sense to review whether you can obtain insurance outside of normal open enrollment.
What Is the Healthcare Subsidy?
Many individuals who receive health insurance through their employer receive some help from their employer in paying the premiums. Usually, the employee will pay a portion of the insurance through a pretax paycheck deduction, with the difference paid by the employer.
For those getting insurance through the exchange, they need to pay the entire cost of the insurance themselves unless they qualify for a subsidy. The subsidy is a tax credit that is partially or fully paid in advance that is designed to help offset the cost of the insurance, similar to the way many employers help offset the cost to employees using the company’s health insurance. Unlike working for an employer, however, eligibility for the subsidy is based on income, not a stipulation of employment.
How Much Is the Healthcare Subsidy?
The way the healthcare subsidy is calculated is a tad tricky. It’s based on the second-lowest-cost Silver plan in your state, your income, and the number of people in your household.
To start at the beginning, as discussed before, each state has its own unique health insurance exchange. The plans available and their costs will vary from state to state. However, within each state’s exchange there are various “metal” plans available: Bronze, Silver, Gold, and Platinum. The difference between these plans is their cost and the amount of coverage the plan provides. As the hierarchical metal levels imply, Bronze plans will cost the least but will come with higher deductibles and out-of-pocket costs. Platinum plans, on the other hand, will offer the most coverage but will come with a higher monthly premium.
For the subsidy amount, however, the government is strictly looking at the second-lowest-cost Silver plan to calculate the maximum subsidy.
Example: Mike lives in New Hampshire, is 60 years old, and is looking to purchase health insurance on the exchange. There are a few Silver plans available: Silver Plan 1 for $900 a month, Silver Plan 2 for $1,000 a month, Silver Plan 3 for $1,200 a month, and Silver Plan 4 for $1,250 a month. The most his subsidy will be is $1,000 a month ($12,000 annual tax credit) because that is the cost of the second-least-expensive Silver plan in his state.
It’s important to note that different individuals in the same state may have different maximum subsidy amounts. This is because much of the cost of the plan is based on your age. The younger you are, generally, the less expensive the monthly premium will be. In the example above, Mike’s maximum subsidy amount will likely be much higher than someone in their 30s who is looking for insurance on the same state’s exchange.
Once the total subsidy is calculated, the next step is to determine how much of the total subsidy you may qualify for. Again, this is based on your income and how many eligible individuals are in your household. It’s calculated by taking your income and comparing it to the federal poverty guideline for the number of people in your household. The more people in your household, the higher your income threshold is.
Once you know the threshold for your household, you then compare that to the contribution percentage based on your income. The higher your income, the more you are expected to pay for the insurance yourself, up to a point where the subsidy phases out completely.
An easy way to get an estimate of what your credit might be is by using an online calculator that takes into consideration all these separate factors. But to give you an idea of the exact workings, we’ll look at a relatively easy example.
Example: Mary is single, lives in New Hampshire, and has an AGI (adjusted gross income) of $38,640. Her income is conveniently 300% of the Federal Poverty Guideline for 2021 for a household of one ($12,880 * 3). At a federal poverty percentage of 300%, the expected contribution of her income is 6%, or about $2,318 annually ($38,640 * 6% = $2,318). The cost of the second-lowest Silver plan in her state is $500 a month ($6,000 annually). Since she is expected to contribute 6% of her income, her annual credit is $3,682 ($6,000 - $2,318).
How Is the Credit Paid?
The healthcare subsidy is a special form of tax credit that can be paid in advance. For most tax credits you will not know whether you qualify or what the exact amount is until you file your tax return the following year. But that does little good for those who need to pay premiums for insurance month to month.
To fix that issue, there is an option to receive the credit in advance in monthly installments. You do this by estimating your annual income when you apply for insurance. If your income is expected to be low enough, based on your household, you can receive the credit in advance to reduce your monthly premiums.
Since this is an estimate of your income and not your reported amount the next year, there is a chance that you may underestimate or overestimate your income. When this occurs, you simply “true up” your tax credit when you file your tax return. If you received too much, you’ll pay the overage back. If you received too little, you will receive the additional credit on your return. (Note the pay back requirement was suspended for the 2020 tax year, but still applies to 2021 and future years).
Since no one likes owing taxes and cash flow can sometimes be a crunch, we usually tell our clients who are eligible for a credit to estimate lower. That way they are more likely to receive a larger credit back than owe a large lump sum on their tax return.
How the Healthcare Credit Can Be Used
There are some common misconceptions about the credit and how it can be used. First, you need to have insurance through the health insurance exchange for your state in order to qualify. Even if your income is low enough, receiving insurance through your employer, COBRA, or even buying private insurance not on the exchange makes you ineligible for the subsidy.
Second, although the credit amount is calculated based on the second-lowest-cost Silver plan, this does not mean you need to buy that plan. The credit will count toward Bronze, Gold, Platinum, and even other Silver plans that aren’t the second-lowest cost. Depending on your healthcare needs, it may make sense to purchase a Bronze plan if you are in good health or a Platinum plan if you use insurance frequently. The credit will still apply for those plans, assuming you are eligible.
Example: Going back to Mary from above, in this instance she decides to buy a Gold plan that costs $750 a month ($9,000 annually). Her total calculated credit was $3,682. Her monthly premium would be the difference between the credit and the insurance cost, about $443 a month (($9,000 - $3,682)/12).
Healthcare Subsidy Changes from the American Rescue Plan
If all these subsidy complexities weren’t enough, there are additional special provisions that currently only apply to tax years 2021 and 2022. These came out of the American Rescue Plan, which was passed in March of this year.
Expanded Subsidy Tax Credit
An enormous change for 2021 and 2022 is that there is no longer a cliff exclusion for those whose income is over 400% of the poverty guideline for their household. For prior years and currently, after 2022, if your household’s income is over 400% of the limit you would no longer be eligible for the credit. Even for one dollar over!
For individuals who were on the cusp, it required delicate tax planning to ensure they qualified for the credit. For at least this year and next, the expected contribution is capped at 8.5% of income. Of course, for incomes high enough, a person may still phase out of the credit. However, eliminating this cliff cutoff will allow many previously ineligible individuals to claim some credit over the next two years.
Bonus Benefits If You Receive Unemployment Income
An even better benefit for those who have received, or have been approved to receive, unemployment benefits in 2021 is that their income is considered low enough to receive a full credit. This is regardless of what their income ends up being for the whole year.
Of course, the credit is based on the second-lowest-cost Silver plan. If you’re purchasing a plan that costs more than that Silver plan, you will still be paying some of the cost out of pocket. But, at the very least, you will not have to worry about phasing out of the credit in 2021.
Other Health Insurance Factors to Consider
There are many factors to consider when it comes to picking the right health insurance and deciding where to get it from. There are various outlets outside of the exchange depending on your situation, including employer insurance, coverage through your spouse, private insurance, COBRA, Medicare, Medicaid, etc.
On top of that, you will also need to determine which plan may be best for your situation. This includes evaluating PPOs against HMOs, the total premium costs, out-of-pocket maximums, deductibles, and whether you qualify for a health insurance subsidy credit, among other items.
For assistance reviewing your health insurance options, we strongly suggest reaching out to a qualified insurance agent or financial planner to review your options.
Having adequate health insurance is an important pillar of a complete financial plan. A potentially great option is to acquire health insurance through the healthcare exchange. Open enrollment has started and lasts for a few weeks, so if you need insurance, it’s best to start looking now.
A potential additional benefit is a tax credit subsidy when you buy insurance through the exchange. Calculating the subsidy is complex and takes into consideration your income, your household size, and the cost of the insurance on the exchange. There are potentially additional benefits for those using the exchange in 2021 and 2022, which may make it more lucrative.
Health insurance, and the potential tax benefits associated with it, can be quite complex. Enlisting the help of a qualified professional is often a good idea.
Nick Prigitano, CFP® is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.