By Tami Noll Russo, CPA, CFP, CLU | Noll Financial Services

In my practice, I see how projected health care costs are the No. 1 factor that influences a decision to retire. With 2017 came an average increase of 25 percent in health care premiums. Also, in Pennsylvania the number of health care issuers dropped from 13 in 2016 to 8 in 2017. Even if your employer’s retirement plan includes group health care, understanding the projected costs are vital. The Trump administration and the Republican-led Congress are expected to make changes to the Affordable Care Act (ACA), so it’s likely health care costs will remain the deciding factor when it comes to retirement for most Americans.

The ACA Subsidy Cliff

Health insurance premiums under the ACA health insurance exchange have been affordable (at 9.7 percent or less of income) if your income (modified adjusted gross income) falls at or below 400 percent of the federal poverty level ($47,520 for one person or $64,080 for a family of two in 2017). The lower cost is due to health care subsidies, otherwise known as Premium Assistance Tax Credits. However, if your bank interest happens to put you just $1 over the 400 percent threshold, you will not get a subsidy. This “financial cliff” would result in about $8,100 for the year in lost subsidies. So, instead of a nonsmoking 60-year-old paying about $380 per month for health care premiums (showing income of $47,520) in central Pennsylvania, not making the cut-off would increase the monthly premium to $1,055 per month.

For clients who participate in the ACA and whose income is around the 400 percent of the federal poverty level, budgeting and income planning become paramount. Remember, the 400 percent level and corresponding subsidies have nothing to do with net worth. Thus, if you are projecting a budget shortfall you may be wise to withdrawal money from non-taxable savings instead of taking an IRA withdrawal or starting Social Security early. Wouldn’t it be terrible to decide to pay the penalty to take your Social Security at age 62 and then have most of that income offset by a huge increase in health care costs? Instead, offset the budget shortfall with nontaxable withdrawals from savings. Planning to take taxable income for one year or the other could also make a big difference in health care premiums.

Planning Is Key

Making informed, nonemotional decisions is much easier with the help of an independent CPA or other knowledgeable financial professional. The key, as in most cases, is advance planning. If your income happens to go over the 400 percent threshold, you will lose the subsidy and the corresponding amount will be due when you file your federal income tax return.

When Well Above the Subsidy Limit

Let’s assume you aren’t yet 65 and have earned pensions that place your guaranteed income at $60,000 per year. There won’t be an ACA subsidy for you. What choices do you have for health insurance and what will they cost? My first question to you would be, “Can you continue your employer-sponsored group health insurance through COBRA?” If so, that generally gives you 18 months of coverage at 100 percent of the group premiums (with no employer subsidy). What if 18 months isn’t long enough? Sadly, you are back to the marketplace or off-marketplace ACA-compliant plans. If you are in your 60s, you will pay more than $1,000 per month in premiums and have large deductibles. If you choose to go without health care and to “self-insure,” you will likely pay a penalty of up to 2.5 percent of your income. In this example, the penalty would total $1,500 ($60,000 x 2.5 percent). For 2016, the maximum penalty is calculated based on the annual national average premium for a bronze level health plan available through the marketplace and is $2,676 per year ($223 per month) for an individual and $13,380 per year ($1,115 per month) for a family with five or more members.

Alternatives

Some people have found what I would call risk-based pools for the possible sharing of health care costs. These pools are generally formed by some sort of faith-based/religious group. Although you get the box checked on your tax return for having qualifying health insurance, you technically are a self-payer in the eyes of all health care providers. After negotiating any cash discounts for claims, you submit health care claims to your “risk pool” and hope they are covered. Please note, I have no direct experience with any individuals using a risk pool.

So, can you afford to retire? The most frugal of us will refuse to pay $1,000-plus per month for health insurance, regardless of income and net worth, and will continue to work. Sadly, not everyone has the luxury of choice. Maybe the working spouse dies. Maybe you get laid off. Maybe your employer goes out of business. Mitigate these risks by purchasing adequate life insurance, maintaining a safety fund, and eliminating consumer debt. Most importantly, be knowledgeable and seek help from a CPA when needed.

Tami Noll Russo, CPA, CFP, CLU, is a consultant with Noll Financial Services in Middletown, Pa. She is a PICPA member who serves on the CPA Image Enhancement Committee, is chair of South Central Chapter’s Personal Financial Planning Committee, and is a Trustee of the Scholarship Fund. She is also past president of the South Central Chapter.