Health Insurance in Retirement: COBRA vs Marketplace

As a high earner on the cusp of retirement, should you consider utilizing COBRA versus purchasing Health Insurance on the Marketplace?

As many of you know, we at Bernicke Wealth Management thoroughly enjoy helping our clients navigate life’s moments, and in particular… Retirement!  Although we work with retirees every day, we understand the uncertainty that can present itself when a person begins to contemplate if now is the “right time” to take the plunge from a full-filling career to the great unknown of retirement.  There are many factors to consider when retiring, but one aspect that we find great satisfaction with is helping individuals find clarity on health insurance prior to Medicare eligibility. Because every person’s situation is different, pulling together this important part of retirement can be a little like piecing together a jigsaw puzzle.

At first, it can seem overwhelming and complicated, but once the pieces are organized and assembled to create a complete picture, it all makes perfect sense!  For individuals considering retirement now but are concerned about health insurance for themselves or a loved one, COBRA may be the piece to make your retirement picture complete.

American Rescue Plan

Before the American Rescue Plan (ARP), individuals who needed to purchase health insurance through the federal Marketplace would need to apply for coverage. Their monthly premiums would be based on their estimated annual Modified Adjusted Gross Income (MAGI).  If the estimated yearly MAGI is above the 400% poverty level ($69,681 for a family of 2), there would be no premium tax credits, leaving the individual responsible for the entire monthly insurance premium.* For 2021 and 2022, the American Rescue Plan made significant changes to marketplace access and affordability for many Americans.

The law extended eligibility for premium tax credits to individuals earning above the 400% income poverty level. For 2021 and 2022, people with an income above that level will not be expected to contribute more than 8.5% of their household income towards a benchmark plan (i.e., the second-lowest-cost silver plan in their area).**

ARP is supposed to be a temporary thing. In 2023, ACA is scheduled to revert to its original structure of capping premium tax credits at the 400% income poverty level, but COBRA premiums are not influenced by household income.

Health Insurance Prior to Medicare

If you want to retire early, need health insurance for a few or even several years prior to being eligible for Medicare, and are anticipating your MAGI to be much higher than the 400% income poverty level, you may want to consider opting in on COBRA insurance and here is why:

  1. Post-retirement bonuses, stock payouts, partnership distributions, or other taxable payment packages can be received from your previous employer without creating a higher COBRA insurance premium burden. Plump up your money market accounts or other ACA-friendly investment accounts to anticipate the potential return of capped premium tax credits in 2023.
  2. If you are older than 59.5, you may also consider withdrawals from existing retirement accounts, pay ordinary income tax on the funds now, and park the proceeds similarly to item #1. Because you will have already paid the tax, the distributed funds can be used to supplement your household income in the years when premium tax credits are possibly based on MAGI with no negative impact on those credits.

As mentioned previously, every situation we encounter is unique.   Contact us to learn more about how to navigate gracefully into the freedom of retirement.

*(source: kff.org, couple age 62, non-tobacco users, EC County, WI).

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Bernicke Wealth Management, Ltd. (Bernicke) is an independent, multi-disciplinary firm with 20 employees. Our financial advisers provide wealth management services for individual investors, businesses, foundations, and nonprofits, including investment planning, retirement planning, estate planning, and tax planning.

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