Qualifying for Health Insurance Tax Subsidies in Retirement

One of the challenges of an early retirement includes the need to budget for increased health insurance expenses prior to the onset of Medicare at age 65. During our working years, health insurance is typically provided at no cost by our employer or at a significantly reduced cost with employer assistance, but those who retire prior to age 65 and without any retiree insurance typically rely on the government health insurance exchange to purchase coverage.

Unfortunately, the average cost of this coverage far exceeds what retirees have typically been used to paying and can be expected to rise each year going forward. This means a failure to appropriately account and plan for health insurance costs in retirement can derail a plan and create unpleasant surprises. However, with the right advisor and financial plan, you can budget appropriately and potentially offset that cost by taking advantage of a premium tax credit, or subsidy, offered as part of the Affordable Care Act (ACA), also referred to as “Obamacare”.

Determining Your Eligibility for the Affordable Care Act Premium Tax Credit

Unlike other government programs, the ACA’s eligibility requirements for premium tax credits are based on your income, not wealth or assets. That is, a person with a $5 million portfolio is treated no differently than a person with a $100,000 portfolio. 

If eligible, the formula to determine the amount of your subsidy is a function of your age, your income, and the health insurance costs in your county. Amounts vary widely based on geographic location, but the general theme is the lower your income, the greater the subsidies.

The definition of income used in this formula is your modified adjusted gross income (MAGI). To qualify for a premium tax credit in 2024, your MAGI cannot exceed certain levels (which we discuss in detail below). 

Examples of income sources that are fully INCLUDED toward your MAGI calculation:

• Wages (if still working in retirement)
• Self-employment income
• Pension income
• Dividends and interest (including municipal bond interest)
• Capital gains realized in your taxable accounts
• Withdrawals from retirement plans (like traditional IRAs, 401(k), 403(b), and 457 plans)
• Annuity withdrawals (depending on the tax treatment and cost basis)

Examples of income sources that are fully EXCLUDED from your MAGI calculation:

• Withdrawals from cash accounts and CDs (that aren’t traditional IRAs)
• Withdrawals from Roth 401(k)s and Roth IRAs
• Capital losses realized in your taxable investment accounts

Before the American Rescue Plan was implemented in 2021, your MAGI had to be between 100% and 400% of the federal poverty level to be eligible for the subsidy. As an example, in 2024 you’d qualify with an income range of:

• $15,060 to $60,240 for a single individual (or $20,783 to $54,360 if you’re in a state that has expanded Medicaid)
• $20,440 to $81,760 for a couple (or $28,207 to $81,760 if you’re in a state that has expanded Medicaid)

The Impacts of COVID-19 on Your Eligibility

In response to the COVID-19 pandemic, the American Rescue Plan implemented in 2021 introduced a provision that permits individuals and families to be eligible for a subsidy if the expense of a benchmark plan, which is defined as the second-most affordable Silver plan accessible in their area, surpasses 8.5% of their income. (Obamacare uses a classification system of Platinum, Gold, Silver, and Bronze tiers to categorize plans based on costs and benefits.) This rule was further extended through 2025 by the Inflation Reduction Act of 2022. This extension ensures that individuals have continued access to financial assistance for health insurance premiums, offering relief to those whose income exceeds the MAGI ranges listed above. 

So, if as an individual your income was $75,000 per year, you typically wouldn’t qualify for a subsidy given your income is greater than 400% of the federal poverty level. But, with the 8.5% rule in effect, if the second-least expensive Silver plan available to you costs at least $6,375 per year or more, you’d be eligible for a premium subsidy because the cost would equal 8.5%, if not more, of your income.

It's worth noting that subsidies, whether acquired through the federal poverty level or the 8.5% rule, can be applied to any plan, be it Platinum, Gold, Silver, or Bronze.

How a Financial Plan Can Help Lower Your Health Insurance Costs

When it comes to planning for health insurance costs, a retiree must develop a structured plan to generate the necessary funds for living expenses while NOT generating income that exceeds the allotted amount to qualify for a subsidy. In the case of the ACA, if your income is too high—even by $1—you potentially get nothing. That’s a big risk and emphasizes the need for careful planning.

A financial plan can help you manage your reported income (and thus, your MAGI) in retirement by considering the following:

• Does it make sense to continue working if the additional income precludes me from earning health insurance subsidies?
• Is my portfolio tax-efficient? Holding the wrong types of assets in the wrong accounts, realizing unnecessary taxable gains, and failing to offset capital gains with capital losses are all examples of inefficiencies that can push your plan off track.
• Do I have the right income distribution plan? Everyone has a retirement budget but not everyone has a plan for which account they will draw the necessary funds from and when. A few changes to your distribution plan can make a significant difference when it comes to qualifying for these subsidies. Beware of typical rules of thumb, such as drawing funds from your taxable accounts first before tapping into retirement plan funds. Everyone’s situation is unique.

To tie all of this together and  illustrate the relationship between age, marital status, and income on your eligibility for the premium tax credit, let’s look at a sample married couple:

• The husband is age 62. The wife is age 60.
• They live in Arlington County, VA (22201).
• They have no dependents, aren’t smokers, and aren’t currently eligible for health insurance through Medicaid, Medicare, or an employer.

Using the health insurance cost calculator on the government health insurance exchange website, the table below shows whether the couple would receive a subsidy, and in what amount, at various income levels.

Please note: when visiting healthcare.gov and entering your ZIP code, you might be routed to your state-specific website for health insurance.