Facing a pensioned financial future of social insecurity and Medi(could)Care(less) is a growing reality for today's pre-retirees and early retirees - even for those that don't fit the profile of overindulgent boomer consumers and have been doing their best to save and invest. Increasingly, they face the double whammy of "gently persuaded" early retirement or not-so-gentle off-the-payroll offshoring of their jobs - both of which leave them without the health insurance they intended to rely on until becoming eligible for Medicare.
Fortunately, pre-Medicare individuals without good employer health insurance do stand a reasonable chance of avoiding financial catastrophe. Read on as we explore this emerging problem and its possible solutions. (For related reading, see Medicare: Defining The Lines.)
From-Work Transitions Work Best
From a cost/benefit perspective, mid-life individuals can't do better than a group policy from at least a mid-size employer that provides a wide choice of providers - even given the growing trend for employers to pass an increasing amount of the premium costs to employees. This is why those leaving their jobs, voluntarily or otherwise, should take advantage of federal law. The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers with at least 20 employees to offer identical continuing coverage for 18 months to the former employee by paying the full premium the insurer charges the employer, plus up to 2% of administrative costs.
Of course, COBRA eligibility is subject to a tangle of federal rules (see full rules on the Department of Labor website) and coverage-cost increases that may shock those whose employers paid most or all of the premiums. Therefore, employees should consider these options:
- Severance Package: Employees who are forced to leave or retire early should negotiate for a severance or retirement-sweetener package that includes continued health-insurance coverage for a period that matches severance-pay duration. This will defer higher insurance costs while pushing out the COBRA termination date.
- Unsevered Alternative: Swallow your pride instead of higher medical costs by anticipating possible job loss and attempting to maintain insurance with a lower-paid internal company opportunity. However, balance the health-insurance savings against a potential reduction in pension that will result from lower earnings serving as the calculation base. Meanwhile, whether you land an internal demotion or not, investigate moonlighting part-time opportunities with a lower-paying employer that offers health insurance. If your job is cut out, this will ensure that you'll land on your feet - and have one foot in the door for a full-time position with benefits.
- Retiree Health Coverage: Although employers who still have (obligations under) pension plans typically don't start payments until age 65, 94% of those who also offer group retiree health insurance start it at whatever age the employee retires. However, retiree subscribers pay the bulk of premiums, which rise more than 15% annually. Therefore, a retiring mid-50s employee who starts paying half ($250) of a typical monthly $500 premium could end up paying an entire $1,000 monthly premium by the time he or she reaches 60. Worse yet, the company could drop coverage altogether.
- Preemptive or Post-COBRA Individual Health Insurance: Some such retirees with poor or no coverage who don't plan on further work - and mid-life individuals in shaky job situations with poor prospects for similar employment - should consider guaranteed-renewal individual policies. If they're otherwise fortunate enough to be in excellent current health with no history of costly medical problems, they'll still likely pay more despite qualifying for the best rates. However, they'll be guaranteed continued coverage that otherwise would exclude a pre-existing condition that they might develop if they instead took COBRA coverage and then switched to individual coverage. That said, some insurers do offer reasonable deals for converting their COBRA-lapsing customers to individual coverage.
The Lowdown on High-Cost Free Agency
Obtaining affordable health insurance is even more challenging for millions of Americans older than 50. Those who've retired early from companies that don't offer retiree health insurance (more than 90% of employees in companies of fewer than 1,000 employees; almost 60% of larger companies), have left small companies that don't offer COBRA, or are otherwise without insurance and have less-than-perfect health histories. Despite the drawbacks, there are still several options for these individuals:
- Higher Premiums, Lower Benefits, Narrower Choice: Those who've had "rich" employee coverage will almost certainly pay much more to get the same coverage in an individual policy - if they can even find a comparable one. Furthermore, in states that mandate "affordable" individual insurance availability to even the sickest people, choices are very limited and rates for even the ultra-healthy are much higher. However, states that make access tougher for the sickest usually offer more choices - including some states whose managed-care or limited-provider-choice offerings are priced favorably compared to the best employer coverage. (Georgetown University's state-specific guides to health insurance and the National Committee For Quality Assurance (NCQA) provider-quality report cards provide more information on specific marketplaces.)
- High-Risk-Pool Soakings: In 16 states, those who are or have been sick struggle to get individual health insurance at any price. The 34 others have some form of guaranteed "high-risk-pool" capped-cost coverage (guide to details) that is nonetheless expensive enough to drown many potential customers in debt, and limited enough to pile large out-of-pocket costs on those who can afford the premiums.
- High-Deductible Savings: Those who can't consistently afford comprehensive coverage - perhaps due to unemployment or underemployment after a layoff - might still escape the bankruptcy bogey by getting catastrophic health insurance that covers only hospitalizations, major procedures, or unusually high annual expenses. Such high-deductible (often $5,000 or $10,000) policies have much lower premiums, because the typical enrollees never have covered claims. Lifetime payouts are typically capped at $1 million. Furthermore, coverage is either unavailable to those with serious pre-existing conditions or specifically excludes those conditions.
- High and Dry? Try HIPAA: The Health Insurance Portability and Accountability Act (HIPAA) can rescue refugees who can't get retiree or COBRA continuation coverage from small employers. It guarantees them, and those with lapsing COBRA, access to individual health insurance, or a new employer's group coverage, with few pre-existing-condition exclusions. Rules and details are complex and further complicated by additional individual-state regulations. Furthermore, finding coverage can be tricky.
- High-Hope, Overhyped Association and Temporary Plans: For many years, employees of very small companies, self-employed individuals, or contractors without benefits had a lifeline through professional associations offering them group health insurance. But insurance companies have dropped most of these plans because they became unprofitable after a concentration of sicker policyholders was left when younger, healthier subscribers began seeking out cheaper individual insurance.
Seizing opportunity in desperation, many financially weak, unlicensed, unscrupulous or even potentially criminal companies have formed to restore such coverage through Multiple Employer Welfare Arrangements (MEWA) or other contrived business structures, which claim to offer great coverage at low rates - often leaving claimants high and dry. Also use utmost caution if considering short-term temporary health coverage intended as a stop-gap measure. Its affordability from some providers comes at the cost of extremely limited coverage and claim rejections on the flimsy grounds of minor errors or omissions in applications that they assert would have precluded you from acceptance.
Premium Uncle-Sam Subsidies
Fortunately, Uncle Sam offers some programs and favorable tax-related treats to help treat midlife medical insurance deficit:
- Tapping Retirement-Plan Funds: Normally, you pay tax-penalty surcharges for IRA or 401(k) distributions before age 59.5. However, you can take no-penalty IRA distributions if unemployed after reaching age 55 - or at any age for "hardship withdrawals" - to pay excessive unpaid medical expenses and the full amount of medical-insurance premiums while unemployed. The rules for medical-expense early use of 401(k)s are far more restrictive, so if you lose your job and have medically based financial needs, roll your 401(k) into an IRA to exploit the looser rules. All these methods, while penalty free, require normal taxation of distributions. (For more insight, see Tough Times … Should You Disturb Your Qualified Plan's Assets?)
- High-Deductible HSA-Compatible Plans: High-deductible health plans (HDHP) are most commonly designed to enable subscriber eligibility for tax-advantaged health savings accounts (HSA), but are open to anyone who qualifies for coverage. Minimum 2007 deductibles were $1,100 (individual)/$2,200 (family), with out-of-pocket maximums of $5,500 (individual)/$11,000 family. This excludes typical first-dollar preventive-care coverage. Thus, HDHPs are hardly as bare-bones as non-HSA catastrophic plans; therefore, premiums have typically been only 25-35% lower. Compare them carefully to traditional plans when considering that disappointing discount in conjunction with potential pre-existing-condition coverage exclusions, very high out-of-pocket potential costs, limitations on charges counting against the deductible, higher subject-to-deductible costs for women, and minimal HSA tax benefits for those not in high tax brackets. (To learn more, read Fighting The High Costs Of Healthcare.)
- Uncovered-Medical-Cost Deductions: On your income tax filing's Schedule A, you can deduct the total of your after-tax-dollar health-insurance premiums and uncovered medical costs that exceed 7.5% of your adjusted gross income. However, you might get a bigger tax benefit by an income reduction (Form 1040, line 31) for the portion of your premiums that don't exceed your net profit from self employment, less retirement-plan contributions and half of self-employment tax.
- Flexible-Plan Freebies: If you get laid off before the end of a year and are enrolled in your employer's pre-tax-contribution flexible healthcare spending account, you're entitled to reimbursement of all expenses you incurred that year up to the annual allocation. For example, if you allocated $4,800 and were laid off March 31, you'd only have paid in $1,200 but you can be reimbursed for all $4,800 for eligible expenses not covered by your health insurance. Therefore, if you anticipate an early year layoff, get a little payback by getting needed medical treatment as soon as possible!
- Early Medicare Coverage: Although you normally can't begin Medicare until age 65 - even if you take early Social Security - you can start it at any age after you've been receiving Social Security disability payments for at least 24 months. (To learn more, read Introduction To Social Security.)
AARP, Do I Love Thee?
Most boomers snicker when they get their first Association for the Advancement of Retired Persons (AARP) mailing when they turn 50, but the mega-nonprofit's April 2007 announcement of imminent pre-Medicare coverage offerings might be the most significant health-insurance news in years. Make sure you stay tuned in to any changes. In the meantime, be sure to explore all of your options to insure that your healthcare needs will be met for years to come.