Voluntarily walking away from a productive career presents early retirees with a number of weighty considerations. One of the first: health insurance. Individuals who retire prior to age 65, when Medicare eligibility begins, need to find alternate options to cover medical, hospitalization and prescription drug costs. And that is no small issue.
Health insurance premiums can chew up a considerable chunk of post-retirement income. Consequently, retirees under the age of 65 must examine all reasonable outlets for coverage, balancing cost with benefits, provider networks and plan design.
1. Group Retiree Coverage
With respect to health insurance, the optimal situation that a retiree can encounter is continuation of coverage offered by the employer with whom the individual was last employed. While rare, many private employers and government entities offer health insurance options to early retirees. Essentially, the retired individual remains grouped with the actively employed population. Common practice includes an offer of coverage to individual retirees for a fixed time period or until the former employee becomes Medicare-eligible.
The cost of insurance stands out as the primary advantage. Many public and private sector employers heavily subsidize premium payments or premium equivalent rates to attract and retain key employees. As part of a negotiated or collectively bargained retirement package, pre-65 retiree coverage typically continues the same contribution levels to which the employee was accustomed. Thus, group retiree health insurance may contractually remain close to affordable pre-retirement levels or, in some instances, present no cost at all.
A married, pre-65 retiree is frequently afforded the option to remain on a working spouse’s employer-sponsored health plan. While spousal coverage is not federally mandated, most private companies retain spousal options with reasonably priced contribution levels. An early retiree who is added as a dependent on an employed spouse’s policy may enjoy the same inexpensive cost-share provisions extended during that individual’s wage-earning years.
2. Federal Exchanges
In 2010, the Affordable Care Act (ACA) created the health insurance marketplace. This provides health insurance options that deliver a threshold of minimum value and affordability levels tied to income. In return, the federal government mandates that all U.S. citizens carry health insurance. The 2018 enrollment period for the healthcare exchanges is shorter than last year, running only from Nov. 1, 2017, through Dec. 15, 2017. However, retirement and the subsequent loss of coverage represent a "qualifying life event" that triggers a special enrollment period. A retiree can sign up for coverage through designated enrollees or the government’s website 60 days prior to – or 60 days after – the effective date of retirement.
Despite recent premium increases, exchange options are still a more affordable means of coverage than obtaining an individually rated policy that was previously subject to pre-existing conditions and limited lifetime maximums. A 55-year-old non-tobacco-using male earning $50,000 per year in retirement and living in Philadelphia, Pa., might expect to pay about $444 per month for the lowest-cost “Bronze” policy through Independence Blue Cross. Member cost share includes a $6,850 deductible and a $50 primary care physician’s (PCP) office visit co-pay. An income of $50,000 precludes the retiree from receiving federal tax subsidies afforded to lower-income individuals.
“Now that we have Obamacare and it looks like it’s not going away, everyone has access to buy health insurance with no health questions asked. The exchanges have plans, and also have tax credits to help pay for a plan. For example: You retire at age 59, roll over your pensions and 401(k)s and do not take any distributions from any taxable accounts so that your taxable income is below $17,000 per year (as a single person). If your state accepted the Medicaid expansion, you qualify for free health insurance!” says Chris Cooper, CFP®, ChFC, EA, MSFS, Chris Cooper & Company, San Diego, Calif. “After that, if your income is less than $27,000, you qualify for premium assistance under the ACA in the form of tax credits to reduce your premium outlays, and reduced co-pays and deductibles that are close to zero! And if you can keep your income under $47,000, you still have tax credits, just not as much, to help pay for premiums. Just do this tax plan until you are 65 and eligible for Medicare!”
Generally, the least preferable health insurance option for a retiree is a benefit offering resulting from the Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA mandates that employers offer coverage identical to the benefit plans in which a terminated employee was enrolled prior to separation of service. While coverage remains the same, employers rarely subsidize COBRA premiums, which can equal the full premium paid by the employer to the insurance carrier. Self-funded employers are allowed to charge an actuarially established premium equivalent rate, plus a 2% administrative fee. Along with being prohibitively expensive, COBRA provisions only last 18 months in most cases. The short-term solution necessitates that an early retiree more than a year and a half from age 65 seek other coverage once COBRA benefits are exhausted.
The Bottom Line
If some kind of group retiree health insurance option is not available to you should you leave the workforce before age 65, signing up for insurance through the ACA exchanges is probably your best bet for low-cost coverage. “The Affordable Care Act should be the first option for healthcare when retiring,” says David S. Hunter, CFP®, Horizons Wealth Management, Inc., Asheville, N.C. “The reduced income from not working will provide the best chance to get subsidies.”