How to Prevent Retiree Health Insurance Costs From Skyrocketing Under OBBBA

Hello everybody. My name is Ty Bernicke, and today I’m going to talk to you about how to prevent retiree health insurance costs from skyrocketing under OBBBA.

Health Insurance Options Before Medicare

The reason that this is so important to understand is because many people who retire prior to Medicare kicking in at age 65, that need health insurance to get to age 65 will go on Affordable Care Act insurance or a state run version of Affordable Care Act insurance.

Some states have a slightly modified version of the federal plan,

How ACA and State Marketplace Plans Work

All the plans that I’m aware of, and the different states, the cost of the health insurance that you get prior to Medicare kicking in at age 65 through ACA or a state run plan, is affected by the amount of modified adjusted gross income you have. So the higher your modified adjusted gross income is up to a certain point, the higher the premium that you’ll pay for the insurance.

Why MAGI Management Is Crucial for Retirees

And so if you can keep your modified adjusted gross income lower, you get more tax credits to offset the cost of health insurance. And so managing your modified adjusted gross income is extremely important as and is going to be more so, as I’ll explain in just a minute. But before I get into that, it’s important to know what is included in modified adjusted gross income.

What Counts Toward MAGI

What is included are things like wages, salary pay, social security income, pension income, net business income, municipal bond interest, which is normally not subject to federal taxation, is included towards modified adjusted gross income, as it applies to the premiums that you’ll be paying for your health insurance. Distributions from IRAs, 401(k)s, 403(b)s are included as you take those distributions for income in retirement.

And if you have investment accounts that are not inside of an IRA or a Roth IRA, you might receive a 1099 every year on your dividends or capital gains and interest income. And that is also all included towards modified adjusted gross income.

What Is Excluded from MAGI

But what’s more important—maybe more important than what is included—is what is excluded from modified adjusted gross income.

What is excluded would include things like qualified Roth IRA distributions and any distributions of the basis from non-qualified investments. And what I mean when I say non-qualified investments, that would include things like anything outside of an IRA, 401(k) or some sort of qualified retirement plan. Again, you can take all that basis out and it doesn’t count towards modified adjusted gross income.

Strategies to Lower or Control MAGI

So if you can organize your investment accounts so that you can pull income from these different types of investments that aren’t included, where the income is not included in modified adjusted gross income, it can save you a lot of unnecessary health insurance costs. And I’ll explain why here in just a minute.

The Return of the Premium Cliff: Why It Matters

The reason that the OBBBA Act is so significant as it applies to this type of planning is because something called the cliff is coming back.

So prior to 2021, we had a cliff and that cliff is coming back.

Real-World Example: The Wisconsin Subsidy Cliff

And so again, every state can be different. So I’m just going to use one example of one state. And it happens to be the state that I reside in, which is Wisconsin, which you may have already guessed from my accent, which I apologize about, but, with Wisconsin, the way that it worked prior to 2021 for ACA insurance, prior to age 65 for people that needed that health insurance, most of our clients would go on ACA insurance and that resided in Wisconsin.

Although we have clients all over the United States and many different states, the way it worked for the Wisconsin residents and the way it works similarly in many other states. But it depends on the state you reside in, as we had a cliff that for a married couple filing a joint tax return, if their modified adjusted gross income was $68,961.

Once it hit that level, it would cost $27,000 more for the ACA insurance, for a married couple filing a joint tax return. If they are $1 lower than this amount, it literally would save them over $27,000. And so obviously, if there is anything that we could do to keep people below that level, we would do it.

Planning Ahead to Avoid Skyrocketing Costs

And many people will look at this and think, well, gosh, with the amount of investments that I have, I’m never going to be below that level. But we have many people that have portfolios of $1 million, $2 million, $3 million, and even more than that that are able to stay below that level through proper planning,

Assuming they know how to organize their investments prior to retirement to get them an income stream from those types of investments that don’t count, to keep their money towards modified adjusted gross income, to keep that income very low and thereby avoid this extra $27,000 cost.

So there are additional tax credits that people can receive if they go below this level in the state of Wisconsin. But once you’re $1 over that, you hit the cliff and it went up exponentially higher.

Next Steps and Additional Resources

So I hope that you use this information to figure out a plan for you going forward, because the cliff is coming back.

Time is of the essence. Unless something changes between now and the end of the year, we know that this reality is coming. If you have any questions about what I went over today,

Please feel free to schedule a quick call with one of our advisors. Or you can go to bernicke.com for more information. And again, I hope you got some valuable information today that’ll save you some money for the future.