Some Fantastic News on Health Insurance Costs

Back in October, after the passing of Supreme Court Justice Ruth Bader Ginsburg, I wondered if healthcare was about to get a lot more expensive. Now, health insurance is about to be far more affordable for those of us at lower income levels.

The American Rescue Plan Act (ARPA) is a $1.9 trillion stimulus package, signed into law on March 11, 2021. And this thing is massive! Tell them Large Marge sent ya! Mainstream media has expectedly latched on to the $1,400 stimulus checks and the very generous extended child tax credit. However, the news bulging my eyeballs is the boost coming to the Affordable Care Act (also lovingly known as Obamacare).

Part 1: ARPA Changes to Health Insurance Costs

Let’s preface this good news on health insurance by stating that these changes are currently only temporary, for 2021 and 2022. However, taking something away once it is granted is tough politics. Perhaps these changes have staying power.

Removal of the Subsidy Cliff for Health Insurance

We’ve already discussed the subsidy cliff here and here. Here’s the cliff notes:

• ACA health insurance is unsubsidized above 400% FPL, aka the Subsidy Cliff.
• For a two-person household, the federal poverty level is $17,420 in 2021.
• 400% of the FPL is $69,680.
• Prior to the ARPA changes, recording a modified adjusted gross income (MAGI) of even $69,680 + $1 would require us to pay full-price for health insurance coverage, or $12,201 per year (17.5% of MAGI) in Utah. F that noise!

Now, the Subsidy Cliff is filled with rocks and ancient pine trees like a tacky hillside boulder problem landing. Premiums are capped at 8.5% of MAGI at 400% FPL and above.

That’s huge.

Increased Subsidies/Reduced Premiums for Health Insurance

This stimulus bill also provides a drastic increase in healthcare subsidies (reduced premiums) at income levels below the 400% FPL. This trend is highlighted in the chart below, comparing Silver and Bronze plans for a 2-person household where both individuals are in their mid-30s (us).

As Jeremy at Go Curry Cracker pointed out in his recent excellent post on the American Rescue Plan, folks at the lowest income levels—about 150% FPL and below—will particularly benefit from these changes. At these income levels, a family of two making $30,000 can now enroll in a Silver plan for $24 per month. While a Bronze plan is free, the higher deductibles of a Bronze plan could bankrupt someone in need of sudden and serious unexpected care without savings to foot the bill.

When does all this start?

The new rates are effective immediately.

The new subsidies are retroactive to January 1, 2021, and the changes are now in effect since President Biden put pen to papyrus last Thursday. Anyone currently enrolled in an ACA plan will see changes immediately. However, it’s not yet clear how federal payments will be made for the retroactive changes.

Full disclosure: we tried to make changes on Friday March 12, the day after the bill went into law. We were unsuccessful in making changes online, but perhaps those kinks will be ironed out by the time this article is posted.

When do these changes end?

The expansion of subsidies will remain in effect through 2022. Democrats have already expressed a desire to make these changes permanent, but Republicans are unlikely to oblige given their decade+ (unpopular) crusade against “Obamacare.” But once the kitty is out of the bag, it might be hard to get that feisty SOB back in the burlap sack.

Part 2: Untangling the Complicated Web of Income, Taxes, and Health Insurance Premiums

How does the ARPA affect our health insurance and income decisions for 2021?

Until now, I’ve been kicking myself for enrolling in a 2021 Silver plan back in late 2020. I thought I would have some specialty visits for an autoimmune disfunction (good or terrible for finger cracks, all depends) this year. On a Bronze plan, our premiums would have cost a hefty $0, but I (perhaps incorrectly) assumed that the Bronze level carried garbage coverage.

The downside is that our pre-ARPA Silver plan costs $255 per month, at an estimated 7.68% of income. That’s a lot more than $0. We used an estimated 2021 income of $40,000 to determine our rate.

How is income determined when living off investments?

Why did we choose $40,000 you ask? Great question that requires a really long answer.

Well, we know our life costs somewhere between $30,000 – $50,000, as I discussed in this recent interview. We actually have a cash reserve to pay ourselves for all of 2021, so we could theoretically incur $0 in income and we’d be automatically enrolled in Medicaid—whether we want it or not.

However, this (and every) year we’d like to do some Roth Conversions and Capital Gains Harvesting to lower our lifetime tax burden. Now that health insurance costs are being lowered at higher income levels, we’d like to do even more conversions and harvests without getting hosed on higher insurance premiums. On this Harvest Moon.

The Roth Conversion: It’s Income

We yearn to convert our Traditional IRA to a Roth IRA little by little. The Traditional IRAs hold the funds from our previous 401(k) accounts, which we converted after leaving our employers. This process, known as the Roth Conversion Ladder, will allow us to move previously untaxed money to a new and shiny bucket (the Roth IRA) where it and any further gains won’t be taxed upon withdrawal. By doing so, we also hedge against the dreaded Required Minimum Distributions on retirement accounts, which kick in at age 72. If there’s no money left in the traditional IRA, we can’t be required to take (taxable) distributions, now can we? No, we can’t.

Any funds “converted” from a Traditional to a Roth IRA are considered 100% taxable income.

The first step is to convert at least the amount of the standard deduction. For a married couple filing jointly in 2021, that’s $25,100. The IRS uses a samurai sword to immediately eliminate (deduct) the standard deduction from our taxable income. So, this is a freebie. Money moved, no taxes due. Ever. Dope.

Should we do more Roth Conversions?

The next choice we need to make is whether to convert more, which could incur a minor tax burden payable in spring of 2022 (for which we must consider and budget), but never again.

First off, why would we convert more? Well, we can’t assume today’s tax code is predictable of future tax codes. What if we convert less and optimize our taxes today, only to have the tax code change in an unfavorable way in 5, 10, or 40 years? We don’t want to be caught with our pants down in a brisk early spring wind incurring an unplanned tax burden.

Nah, dawg.

We’d rather pay a tax bill in the 10-12% tax bracket today (predictable) than face an unknown future tax burden (unpredictable, and probably higher).

A digression on potential for changing tax codes

Speaking of changing tax codes, including this new fatty stimulus package, the government has spent nearly $5 TRILLION dollars in stimulus and tax relief in the last year for this pesky bug.

So yeah, enjoy your checks and have a lollipop or two. But remember, nobody (ever) gets a free lunch. How do we get out of this hole? Well, taxes of course. I won’t be surprised to see the tax code morph to something resembling the European model in the following decades—i.e., much higher taxes, potentially including wealth taxes—to make up for this deficit.

Our tentative healthcare and income plan

We’re on the fence about keeping our Silver plan at a reduced rate, or calling a mulligan and swapping completely for a Bronze plan. Here’s what I suppose we’re going to do.

Our Healthcare Coverage

Switch from a Silver to a Bronze plan. The monthly premium will be at or near $0, but much of our medical care will be paid out of pocket if/when we need it. The deductibles on most Bronze plans are in the range of $13,000+. Preventative care is covered, but we will use cash to pay for specialty visits until the deductible is covered. We are totally fine with this arrangement and barring any more events like this one, we shouldn’t need any expensive care.

Income model to determine health insurance premiums

Expect to incur $60,000 in taxable income in 2021. We must report this information when registering for an ACA plan. That’s not the cost of our life, but here’s what we plan to do and why:

Baseline Roth Conversion:

• convert $25,100, the amount of the standard deduction.
• Taxes due = $0.
• Goal: Move funds from taxable Traditional IRA to non-taxable Roth IRA. We will do this every year until the Traditional IRA well runs dry.

Dividends:

• Our investments spit off a bunch of qualified dividends, ~$15,000 per year.
• Qualified dividends are not taxed as ordinary income, but as capital gains income (more favorable tax structure).
• Taxes due = minimal, on low amount of ordinary dividends (see tax bracket chart above).
• Disable automatic reinvestment of dividends now that we’re paying taxes either way. If you are in wealth aggregation mode, by all means reinvest dividends. We’re not.

More Roth Conversions:

• $0 – $20,000
• We’re on the fence here about converting another $10,000 – $20,000, as a long-term hedge against future tax code changes (see discussion above)
• Taxes due: ~$2,000

Capital Gains Harvesting:

• $0 – $20,000
• This is another advanced strategy that aims to reset your cost basis (the amount you paid for a stock), thereby resetting your capital gains exposure.
• We essentially go in and select some of our oldest shares, sell them—incurring a long-term capital gain—and immediately buy them back. We remain invested, but we’ve reset the clock on our long-term capital gains exposure, again minimizing taxes. This is worth a longer post, which will soon (maybe) come.
• Even though this doesn’t put money in our pocket immediately, we save money in the long term by avoiding ever-increasing capital gains taxes on older shares.
• Taxes due: $0. This is considered income, but taxed at 0% LTCG rates.

Expected Taxes Due in Spring 2022:

Ordinary Income (Roth Conversions + interest + ordinary dividends) = ~$35,000

Capital Gains Income (Cap Gains Harvesting) = ~$10,000

Qualified Dividend Income (Cap Gains) = ~$15,000

Total Income = $60,000

Ordinary Income = ~$35,000

Long-Term Capital Gains Income = ~$25,000

Expected Taxes Due: ~$2,000

This is variable and dependent upon final income sources (taxable vs non-taxable income). We need to be aware of this and budget for 2022. Note, I’m assuming this is a total for state and federal taxes.

The full $60,000 will be used to determine our health insurance premiums, but we will only be taxed on just over half of that total.

For now, we wait.

We will go ahead and make the switch on health insurance plans, but Roth Conversions, Cap Gains Harvesting, and other strategies won’t happen until year-end 2021. At that point, we’ll have a clearer understanding of our dividend income, and any other unforeseen sources of income.

All of this stuff is tightly interconnected. If we turn one optimization knob (i.e. lowering taxes), we might be screwing up another one (i.e. health insurance costs). This is our best stab at optimizing them all. And this new stimulus law sure helps. Thanks Sam!

Should we do even more Roth Conversions and fill the 12% income tax bucket? I think the Frugal Professor would say yes. Is there anything else I’m misunderstanding? This is still very much a live-and-learn process for us.

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This news makes me feel like dancing. Let’s put on our funny French helmets and toe out a jig. Did you see that these guys retired too?

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