The American Rescue Plan Act of 2021 is a sweeping piece of legislation signed into law on March 11. The most highly publicized provision of the act is a third round of economic stimulus. Every eligible American will receive $1,400 for economic relief amidst the Covid-19 pandemic, if you haven’t received it already.
The act also substantially changes health insurance premiums and subsidies for Marketplace plans. This has gotten far less press. It may have a bigger effect on many readers of this blog who need to bridge the gap from employer provided health insurance to Medicare.
Overview of ACA Changes Under American Rescue Plan
Nearly everyone who purchases health insurance under the Affordable Care Act (ACA) Marketplace plans will benefit by the changes enacted as part of the American Rescue Plan Act of 2021. In summary:
- Early retirees with an income 100%-150% Federal Poverty Limit (FPL), who already paid little for health insurance premiums, will now pay $0 premiums for Silver Level plans.
- Those with incomes from 150%-400% FPL will see substantial reductions in health insurance premium costs.
- Those with incomes that exceed 400% FPL will no longer be subject to the ACA “subsidy cliff.” Health insurance premiums costs will be capped at 8.5% of income.
- Older early retirees approaching Medicare age will benefit the most because costs rise as we age.
That’s good news across the board for early retirees who need to purchase medical insurance through Marketplace exchanges to bridge the gap from employer provided coverage to Medicare. Let’s look at the details and discuss early retirement planning implications.
Decreased ACA Health Insurance Premiums Under the American Rescue Plan
The changes in the maximum percentage of household income paid for Silver Health Plan insurance premiums under the Original ACA and American Rescue Plan Act of 2021 are summarized in the table below.
|Income as % FPL||Original ACA||Changes to ACA Through 2025|
|Up to 150%||2.07 - 4.14%||0%|
|150-200%||4.14% – 6.52%||0% - 2%|
|200-250%||6.52% – 8.33%||2.0% – 4.0%|
|250-300%||8.33% – 9.83%||4.0% - 6.0%|
|300-400%||9.83%||6.0% - 8.5%|
|>400%||No Cap, Subsidies Eliminated||8.5%|
In a previous post, I explored Navigating ACA Tax Credits to Purchase Affordable Health Insurance In Early Retirement. It’s helpful to review a few scenarios I ran under the original ACA. I’ll then compare the scenarios under the new law.
Before and After Premiums — Low Income Early Retirees, <150% FPL
In my previous article, I shared how early retirees can control taxable income through some combination of frugal living and/or generating income that doesn’t count towards MAGI. They could purchase quality health insurance through ACA exchanges at very favorable rates. This is accomplished by receiving large premium tax credits due to having low incomes. Premium tax credits are equal to the total cost of the premium minus the individual’s or household’s required contribution.
In my prior example, I showed that a household with an income at 138% of the FPL was required to pay only 3.42% of their income towards health insurance premiums. In that scenario, the household would have paid $82/month ($982/year) for health insurance premiums. They would have received $1,320/month ($15,836/year) in premium subsidies.
Under the new law, things get even better for people in this scenario. They now would pay $0 towards health insurance premiums. Subsidies would cover 100% of the cost.
Before and After Premiums — Very Early Retirees, 150-400% FPL
When I wrote the previous article in November 2018, I entered our household scenario. We have two adults in our early 40’s, one young child, and estimated MAGI of $60,000. That income put us at 289% of the FPL for a household of three in 2018. We would pay 9.52% of our household income for medical insurance premiums under the original ACA.
In 2021, unsubsidized health insurance premiums would cost $14,358 for our family of 3. I increased our household income to $62,750 to adjust for slightly higher 2021 FPL to get us to the equivalent 289% FPL. Under the old law, we would pay $498/month ($5,974/year) in premiums. We would qualify for a subsidy that would cover the remainder of our premiums, amounting to $696/month ($8,384/year).
I ran our scenario under the new law with the Kaiser Health Insurance Calculator. For an apples to apples comparison I kept income 289% of the slightly higher 2021 FPL amount. Under the new law, we would pay 5.56% of our income towards premiums. Our premiums would cost $291/month ($3,489/year). We would receive a subsidy of $906/month ($10,869/year) to cover the remainder of the cost.
This change would save us about $207/month ($2,485/year). We would pay about 40% less for health insurance premiums under the new law.
Before and After Premiums — 60 Year-Old Early-Retirees, 150-400% FPL
Age is one of the few factors that impact premium costs with ACA plans. The older you are, the more expensive your premiums. As a comparison to our family, I created a scenario of an early retired couple in their early 60’s.
Unsubsidized health insurance premiums for a 60 year old couple (assuming kids are grown and off the parent’s insurance) would cost $22,975 in 2021. For a household of two, the same 289% FPL would be $50,344. This income number is lower than the above scenario because FPL is adjusted based on household size.
At 289% FPL, they would pay 9.52% of income under the old law. Their share of the premiums would cost $399/month ($4,793/year). Their premium subsidy would be $1,515/month ($18,182/year).
Under the new law they would pay 5.56% of income. Their share of premiums under the new law would fall to $233/month ($2,799/year). Their premiums subsidy will now be $1,681/month ($20,176/year)
The changes in the American Rescue Plan would save this couple in their early 60’s $166/month ($1,994/year). They would also pay about 40% less for health insurance premiums than they would under the original ACA.
Elimination of the ACA Subsidy Cliff Under the American Rescue Plan
The second, and potentially far more important change The American Rescue Plan Act of 2021 makes to the ACA is eliminating the “Subsidy Cliff.” Under the original law, if your MAGI exceeds 400% of the FPL, you lose premium subsidies completely.
Earning a single dollar of additional income at the 400% FPL threshold could result in paying thousands of dollars in additional health insurance premiums. Your subsidies would drop to zero.
With the change in the new law, the maximum anyone will pay for health insurance premiums is 8.5% of their income. If your income exceeds 400% of FPL, you won’t lose thousands of dollars in premium subsidies. Instead, you will pay $8.50 more per year in health insurance premiums for every $100 of extra income you earn.
Eventually, the highest earners will lose subsidies completely. They will have to pay the full cost of health insurance premiums. However, it is a gradual sliding scale down to zero subsidy.
Numbers better demonstrate the impact this new law will have on early retirees whose income just exceeds the 400% FPL threshold. Let’s dive in…
Premiums at the Subsidy Cliff — Very Early Retirees
In my earlier post on ACA subsidies, I showed how a $100 difference in annual earnings at the 400% of FPL threshold would impact us. We would be sent over the ACA subsidy cliff. In that scenario, earning an additional $100 caused premium subsidies to drop off “the cliff” from $683/month ($8,194/year) to $0 under the original version of the ACA.
A similar scenario under the new law produces a much less dramatic result. An income of $86,700 puts us at 399% FPL in 2021. At this level of income, our premiums would cost $613/month ($7,352/year). Our subsidy would be $652/month ($7,825/year). Subsidies would cover a little over half of our total $15,177 premiums cost.
Under the original ACA, we would have paid 9.83% of income towards our premiums. The new law saves us almost $1,000 in this scenario.
Bumping income up to $87,000 puts us at 401% FPL. At this level of income, our premium cost rises a few dollars to $616/month ($7,395/year) while our premium subsidy drops a few dollars to $649/month ($7,782/year). Under the old law we would pay the full unsubsidized cost of $15,177. This is about double what we would owe under the new law!
Under the American Rescue Plan, a small difference in income equates to a small increase in health insurance premiums and decrease in premium credits. This makes planning more predictable and less punitive if you make a small mistake around the 400% FPL cutoff point.
Premiums at the Subsidy Cliff — 60 Year-Old Retirees
Medical insurance premiums increase as we age. This new law is most impactful for early retirees approaching Medicare eligibility who are over the 400% FPL cliff. Let’s look at one last example.
Returning to a couple of 60 year olds, their unsubsidized insurance premium would be approximately $1,880/month ($22,563/year).
Entering an income of $68,800 for this household of two puts them at 399% FPL. The American Rescue Act caps the amount a household pays for health insurance premiums at 8.5% of income. Under the original ACA they would have paid 9.83% of income.
This couple would pay premiums of $486/month ($5,834/year) under the new law with subsidies of $1,394/month ($16,729/year). Lowering the cap that a person at this income must pay decreases the premium by about $1,000/year compared to the old law.
Increasing income to $69,100 pushes this couple to 401% FPL. Their premiums at this level of income under the new law will cost $489/month ($5,874/year). Their premium subsidy is $1,391/month ($16,689/year). Under the original ACA, they would have lost this entire subsidy by exceeding the “subsidy cliff” by a few dollars.
The new law produces a staggering saving of about $17,000 for this couple!
The American Rescue Plan Act of 2021 clearly benefits early retirees buying Marketplace health insurance plans. Still, there’s a major problem for early retirement planning.
The American Rescue Plan Act of 2021 explicitly states that the changes to ACA subsidies are applicable only in the 2021 and 2022 tax years. What happens beyond that? No one knows for sure.
If you haven’t made a decision for this year, or would like to change your plan, there is a Special Enrollment Period through May 15, 2021.
For households like ours who plan year to year, learning of this retroactive change three months into the year is not helpful for 2021. We’ve already decided last December that Kim will continue to work enough so that we are getting our insurance through her employer through at least this December.
We still have twenty plus years until we’re both eligible for Medicare. We have at least a decade when we’re also responsible for our child’s health insurance. Without clarification on what happens to this law long-term, we could theoretically pay anywhere from $0 to $15,000 for annual health care premiums. Those numbers don’t account for additional expenses if we actually need to receive medical care. They also don’t account for the facts that health care costs tend to inflate faster than the general inflation rate and premiums will get more expensive as we age.
Health insurance is still the big wild card in early retirement planning. We may not have enough saved to sustain an early retirement. Alternatively, we may have already saved too much. It’s a massive challenge to plan for something as important to your retirement success or failure as medical insurance. The rules can change at any time.
What to Do?
For early retirees who are within a few years of Medicare eligibility, the American Rescue Plan is a game changer. It can potentially save you tens of thousands of dollars in anticipated health insurance premiums over the next two years. This can bridge the gap to more predictable retirement healthcare expenses.
Long-term planning (defined as beyond 2022) of medical insurance for early retirement still requires assessing which way the political winds are blowing. This is always dangerous. We shouldn’t place too much stock in any plan that requires our predictions to be correct.
In 2016, presidential candidate Trump ran on the promise to “repeal and replace” the ACA. President Trump, with Republicans controlling both the House and Senate, failed to do so. So it seems that some version of the ACA will be around for the foreseeable future.
Under a new Biden administration with a Democratic House and Senate, there is a clear will to expand the ACA or create new government health insurance options. The politics and economics are complicated.
This new legislation is in effect for only two years. There will be a midterm election then. The political winds may shift again. The future remains unclear.
Our household will continue to remain flexible. I’m of the opinion that we are not truly financially independent until our investments can produce enough income to pay our full unsubsidized health care costs. Being financially independent while being dependent on unpredictable government subsidies for something so important seems like an oxymoron.
This may mean we work longer and earn more than we ultimately need. But in the face of such uncertainty, that risk seems like a better alternative to not having enough.
Chime In — Respectfully!
I am always impressed by the level of knowledge and creativity shared by readers of this blog and look forward to reading your ideas, insights, and solutions in the comments. I understand political risk is part of the challenge when planning for health insurance in early retirement. As much as I would like to, we can’t discuss health care in the United States without mentioning the political component.
That said, we are at a time of extreme political polarization. Name calling and ideological rants are not helpful to anyone trying to develop a plan to transition to retirement sooner. Please refrain from posting such comments here. There are thousands of other places on the internet for those seeking that.
I reserve the right to delete or edit comments that don’t comply with this request. Thank you.
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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to firstname.lastname@example.org. Financial planning inquiries can be sent to email@example.com]
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