The Affordable Care Act (Obamacare) is a potentially great way to help lower income individuals afford health care. I’m a supporter of ACA despite the trappings of ever bigger government running our lives because disease and accidents do not discriminate between rich or poor. In a nation as rich as ours, nobody should die or get stuck in a permanent loop of poverty just because they can’t afford medical treatment.
The two most common reasons why people don’t retire earlier are: 1) Lack of money and 2) Uncertainty regarding health care access and costs. As an early retiree in 2012 with a full 30 years to go before being eligible for Medicare benefits, I was worried about health care until I did some research on cheap health care alternatives. Now that I’ve spent a good amount of time studying what healthcare.gov has to offer, I’m not worried but thrilled for the potentially millions of other people who don’t have health care or who have no desire to work into their 60s.
I’ve also discovered that even millionaires will be eligible for health care subsidies. More equality is a welcome relief from the constant class warfare rhetoric and discriminatory policies we hear from Capital Hill.
OBAMACARE SUBSIDY AMOUNTS BY INCOME
When it comes to paying income taxes and receiving health care subsidies, it’s generally better to be middle to lower middle class. The philosophy on Financial Samurai is to be wealthy but blend in with the crowd. Staying in the shadows is even more important as an early retiree because we are no longer contributing as much to society, yet we don’t look as old as we should which may anger some people. We already paid our dues in the form of taxes, hence why we retired. One tip for early retirees is to never tell anybody you’ve retired. Instead, tell them you are unemployed, a consultant, or an entrepreneur to deflect envy and potentially garner sympathy.
The below are four charts I painstakingly put together by inputting income levels in the Kaiser Family Foundation Subsidy Calculator. A Silver Plan is used in the example where the insurer will pay for 70% of the medical expense. Premium expense is capped at 9.5% of income, and out of pocket expense excluding premium expense ranges from $6,350 for a single individual up to $12,700 for a family of four. You are welcome to play around with the calculator to fit your situation.
SUBSIDY BY INCOME FOR FAMILY OF FOUR
SUBSIDY BY INCOME FOR FAMILY OF THREE
SUBSIDY BY INCOME FOR MARRIED COUPLE NO CHILDREN
SUBSIDY BY INCOME FOR SINGLE INDIVIDUAL
ANALYSIS OF INCOME LIMITS FOR SUBSIDIES
* Poverty levels: Income under $23,550 to be exact for a family of four (two adults, two children), $20,000 for a family of three, and $11,490 for an individual are considered poverty levels in the United States. The calculator spits out $0 subsidies, which is a glitch, implying such applicants pay $0 to next to nothing for annual health care premiums.
* Phaseout levels: Income of $94,200 or higher for a family of four, $78,000 for a family of three, $62,000 for a married couple with no kids, and $45,960 for single individuals will no longer receive government health care subsidies. The basic math is 4X the poverty level as determined by the government. Despite the phaseout, the good thing is that it looks like the max % of income one has to pay annually in premiums gets fixed at 9.5% of gross salary no matter what you make.
* Other levels of coverage: The premium and subsidy amounts above are based on a Silver plan. You have the option to apply the subsidy toward the purchase of other levels of coverage, such as a Gold plan (which would be more comprehensive) or a Bronze plan (which would be less comprehensive).
* Out of pocket costs: The out of pocket costs excluding premium costs are capped, depending on your situation. For example, a family of four making $50,000 cannot exceed $10,400 for the silver plan for example. The out of pocket increases to a maximum of $12,700 for a family of four making $94,000. The out of pocket costs for an individual making $30,000 cannot exceed $6,350. It’s good to see these out of pocket costs limited, however, they still seem quite high. A family making $50,000 a year should bring home roughly $35,000-$40,000 after taxes. To spend 30% of their after tax income on health care is a large percentage. Hence it is always important for people to continue saving no mater what their income level. The point is at least we know our backstop cost and can plan accordingly.
ACTION PLAN TO TAKE ADVANTAGE OF HEALTH CARE SUBSIDIES
It’s obviously better to make so much money where you have no problem affording unsubsidized health care. However, let me share some ways in which everybody can better benefit from government subsidies and not just the middle income to lower income population.
* Maximize your pre-tax retirement contributions. The current 401(k) max contribution is $17,500 for 2014. Both spouses can therefore contribute $35,000, thereby lowering their modified adjusted gross income (MAGI) in order to gain more government health care subsidies. The same idea goes for contributing $5,500 each to your IRA for $11,000 total. As you can see from the chart, if you can reduce your MAGI by $45,000 then you will receive roughly $4,000 more a year in health care subsidy! (Read How Much Should I Have In My 401(k) By Age?)
* Start an S-Corp or LLC. Starting a business is a way to reduce your taxable income by deducting all business related expenses. Everyone should check with an accountant first about deductions before going ahead because each business is different. There is a lot of overlap in terms of business expenses and general lifestyle expenses. For example, if you are a Scuba Diving Instructor, how are you going to put together your course and write about your experiences online about scuba diving in the Maldives without going to the Maldives? There’s no law saying you can’t enjoy yourself on business.
* Become a rental property owner. All expenses related to operating your rental property are tax deductible. Add on the non cash expense of depreciation and you’ll easily be able to reduce your rental income and pay less taxes. If you have a rental property in Bora Bora, you can deduct your transportation costs to get there. Not bad at all. (Read How To Pay Little To No Taxes For The Rest Of Your Life)
* Own income producing assets and be debt free. Let’s say you own $1 million dollars worth of property outright that generates operating income of $45,000 a year (4.5% net rental yield). You have no other income, but you have no debt so life isn’t too hard supporting your family of four. Your family qualifies for $5,640 a year in health care subsidies and you only have to pay $2,650 a year. Another example is amassing a $3 million dollar stock portfolio yielding $90,000 a year in dividends with a $25,000 a year deduction in primary mortgage interest. Your MAGI is $65,000 meaning that you and your family of four still qualify for $2,600 a year in health care subsidy as multi-millionaires.
* Check with private exchanges online. Like every good deal shopper, you shouldn’t just rely on one source. I checked with eHealthInsurance.com for very similar plans for a family of four and for an individual and here’s what I came up with: $950 a month for a family of four with a $5,000 max deductible and $210 a month for a 35 year old individual in good health with a max deductible of $2,000. There are many options tailored to each individual case. For those of you who have much higher incomes than $94,000 for a family of four and more than $30,000 per individual and can’t adjust your MAGI down any further, going the private exchange looks like the better option.
Bottom line: It is much better to have a high net worth and low adjusted gross income instead of a high adjusted gross income and low net worth to take advantage of government subsidies. I’m sure the government realizes this as well, which is their way of encouraging individuals to save and invest for their future. By accumulating a healthy amount of assets, the government will also reward you with subsidies. (Read The Average Net Worth For The Above Average Person and What Should My Net Worth Be By Income?)
HELPING EACH OTHER LIVE
As you can see from the charts above, income plays the key role in how much subsidy an individual or a family gets. Together, we are helping subsidize lower income groups to gain health care access that they deserve. Helping others is what being a good citizen is all about.
Those with pre-existing conditions and who are considered of lower health can no longer be denied health care or discriminated against. Yes, Obamacare creates somewhat of a moral hazard when it comes to exercising and eating healthy. However, just as the rich help subsidize the poor through a progressive tax system, the healthy will subsidize the less healthy through the Affordable Care Act. In order to prevent Americans from forsaking their health too much it’s likely that large preventative health care campaigns will be launched to teach Americans about healthier living.
The largest point of contention will likely be how the government determines what income levels are poverty levels and what income levels are considered too much to receive subsidies. It’s difficult to live on less than $20,000 a year as an individual in San Francisco for example, yet the poverty level is $12,000 and below. Healthcare.gov does address cost differentials to some extend by state. It’s too bad a family of four can no longer receive subsidies if they make $94,000 while living in expensive Manhattan where a three bedroom apartment can easily cost over $5,000 a month in rent.
I don’t think there will be push back if large asset owners with low incomes can also receive subsidies. We aren’t going to punish a 55 year old widow who can’t find a job that pays more than $35,000 a year but who owns a nice house that was purchased 30 years ago worth $2 million are we? Of course not.
The greatest benefit from the Affordable Care Act is that if you or your family are experiencing hard times, you will be highly subsidized until income improves. Having at least disaster insurances is tantamount. For those who are considering quitting their jobs to do something new, or others who’ve decided to get out of the rate race early, you’ve now got one less thing to worry about.
Recommendation: I encourage everyone to shop around for private health insurance, especially given the debacle with The Affordable Care Act. The internet has really helped lower the cost of insuring yourself and your family. eHealthInsurance has some of the lowest rates and best coverage given they have the largest network. They are based right here in the Bay Area, and I have met a number of their representatives. Check with eHealthInsurance.com to save money and ensure your financial health.