08 Oct What happens with Obamacare subsidies when you start Medicare?

Q. I will be 65 this December and my wife will turn 65 in September 2022. We hope to hold off on taking Social Security until our full retirement age and we live off a small pension. We have Obamacare with combined subsidies that pay about half the premiums. I will probably start Medicare with a $0 premium Medicare Advantage policy and my wife will likely start with a $400 monthly premium Medigap policy in 2022. In the month we transition, we lose the ACA subsidies, but what happens for the partial years? Should we file taxes separately then?
— Planning

A. Thanks for your question.

It’s a complicated topic. Let’s start at the beginning.

Your premium credit under the Affordable Care Act (ACA) is based on your income compared to the Federal Poverty Level (FPL), issued every year by the Department of Health and Human Services, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York and an adjunct professor of personal finance at Montclair State University.

The FPL amount varies depending on the size of your family, he said.

“For example, for 2020 the FPL in most states for an individual is $12,760, while it is $17,240 for a family of two,” he said. “If your income is between 100% and 400% of the FPL, you will be eligible for the premium credit.”

This credit lowers your health insurance premium only if it is purchased on your state’s marketplace, Panambur said.

To be eligible for the premium credit, you should not be eligible for any other health insurance coverage such as offered by your employer, Medicaid or Medicare, he said.

The actual subsidies are tied to the cost of the second-least expensive Silver plan in your area — the benchmark plan.

Panambur said the ACA specifies what your premium responsibility is as a percentage of your income. Anything over that, up to the cost of the benchmark plan is offered to you as a premium credit, he said.

“For example, if your income is between 100 and 133% of the FPL, you will be responsible for 2.06% of your income towards the health insurance premium,” he said. “The cost of the benchmark plan more than your responsibility is your premium credit.”

When you turn 65, you will have to apply for Medicare if you are eligible for it.

“You have a seven-month period enrollment period — three months before the month you turn 65 to three months after the month,” he said. “Once your Medicare Part A coverage starts, you will no longer get premium credit through the ACA. If you continue to keep your marketplace health plan, you will have to pay the full cost.”

Panambur said the ACA premium credit is based on your income for the entire year and is automatically applied to your health insurance premium each month until you or your spouse is eligible for the credit.

“So, in your case, if your income makes you eligible for the premium credit, you will get the credit for part of the year before your Medicare coverage kicks in,” he said. “Your wife would get premium credit for the entire year. This assumes both of you purchased your health insurance on the marketplace.”

When you apply for health insurance on the marketplace, your premium credit is based on an estimated income for the year ahead, he said At the end of the year, depending on your income, you will receive a refundable tax credit — if your income turns out to be less than what was used to calculate the premium credit — or you will owe taxes if your income turns out to be higher, Panambur said.

Income for this calculation is your Adjusted Gross Income (AGI) as per your tax return, plus certain items not subject to tax such tax-exempt foreign income, tax-exempt interest and any tax-exempt Social Security benefits, he said.

The way the premium credits are calculated — based on specific dollar amounts with income even a dollar more leading to no tax credit — and the interplay of ACA, Medicaid and Medicare lends itself to good planning possibilities especially if you have flexibility around your income as with retirees and self-employed individuals, he said.

“The advantage of filing taxes separately will have to be considered in a holistic manner to see how much you would save in taxes overall,” he said. “Otherwise your higher tax burden elsewhere could more than offset what you save on your health insurance premiums.”

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This story was originally published on Oct. 8, 2020.

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