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Sep 30, 2020

Retiring Early, Part II: The Affordable Care Act

Social Security

In part 1 of this series, we discussed one of the biggest financial challenges to retiring early – affording healthcare before Medicare eligibility – and how continuing employer coverage through COBRA could be a solution. Under most circumstances, COBRA will allow you to keep your employer’s health plan for another 18 months, but at an additional cost. Now that you are retired, you will be responsible for 102% of the cost of your health plan – the employee cost you’re accustomed to plus the employer subsidy plus a 2% administrative fee. And if the cost weren’t a deterrent, the limits to the length of coverage might be, depending on how young you are when you begin retirement.

In short, you might want to consider other potential solutions until you are eligible for Medicare.

The Patient Protection and Affordable Care Act

Unfortunately, your choices outside of COBRA are extremely limited. One option is to enroll in the Patient Protection and Affordable Care Act, more commonly known as the Affordable Care Act or ACA. While typically the ACA enrollment window opens in November and closes in mid-December, retirement is considered a “qualifying life event” that entitles you to buy a policy once you stop working, no matter the month.

A key benefit to coverage through the ACA is that as of January 1, 2014, health insurance companies could no longer refuse coverage or increase your premiums because you have a “pre-existing condition.” What qualifies as a pre-existing condition ranges from asthma to diabetes to cancer, but it is generally considered to be any health problem you had before the beginning of your health coverage. The fact that health insurers can no longer deny coverage or increase costs due to a pre-existing condition is easily the most popular feature of the ACA and will undoubtedly be beneficial as you shop for health insurance.


How much a health plan costs under the ACA will depend on several factors, including your income, zip code, family size, age and type of plan you select. The ACA provides four health plan options: bronze, silver, gold and platinum. Each category offers the same ten essential health benefits but will differ on such factors as the percentage of medical costs the health plan pays, the monthly premium and copays.

By itself, coverage under the ACA can be expensive – potentially more expensive than continued coverage under COBRA, depending on where you live. However, if you meet certain income and family size requirements, you might be entitled to a subsidy to help offset the plan’s monthly premium. The premium subsidies work on a sliding scale that’s based on your modified adjusted gross income (MAGI). In part 1 of this series, we recommended offsetting healthcare costs by heavily investing in a Health Savings Account, if available. That’s especially true for those enrolling in the Affordable Care Act: Under the ACA, contributions to a Health Savings Account can reduce your MAGI and help you qualify for subsidies that lower the monthly cost of your insurance plan. (Note that you will not be eligible for premium subsidies once you qualify for Medicare Part A at age 65.)

The ACA’s Murky Future

While enrolling in a plan through the ACA might be a viable option to maintain health insurance prior to Medicare eligibility, it’s not without risk. The entirety of the ACA could be held unconstitutional in 2021 as a result of an upcoming ruling in California v. Texas.

The Department of Justice and a coalition of 18 states – led by Texas – are currently before the Supreme Court arguing over the doctrine of “severability.” In short, the 2017 Tax Cuts and Jobs Act changed the penalty for failing to comply with the insurance mandate to $0. The argument before the court is that if the mandate is no longer a “tax,” it is no longer constitutional – and because the mandate is so intertwined with the rest of the Affordable Care Act, the entirety of the law would therefore be unconstitutional as well. The Supreme Court will begin to hear oral arguments in the case on November 10, 2020 – one week after the presidential election.

What is the risk of you retiring early, enrolling in the ACA and seeing the Supreme Court determine the ACA is now unconstitutional? It is impossible to predict. But this is also something you should keep in mind as you weigh your healthcare options pre-Medicare. Baird Retirement Management has been helping individuals and families plan out early retirement for decades, and we would be happy to sit down with you and discuss your options.


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