Making an extra $10 could cost you $24,000 more for health insurance

Milwaukee Journal Sentinel

In a health care system teeming with fine print, here’s an oddity that middle-class people who buy insurance on their own, rather than through an employer, need to know: You might want to take a pay cut next year.

Consider the situation of a 63-year-old married couple with a projected household income of $70,000 next year. The lowest-cost health plan they can buy in Milwaukee County will cost them $24,034.80.

If that couple’s income falls to $60,000, however, the same health plan would cost them $24.

That’s not a typo. It’s the total premium for the year.

The difference: At $60,000, they’ll qualify for a federal subsidy. At $70,000, they won’t.

“The disparity between the cost of health insurance for people eligible for the subsidy and middle-class people who are not is huge,” said Larry Levitt, a policy expert at the Kaiser Family Foundation.

It stems in large part from the Trump administration’s decision to end certain payments to health insurers and steps that Wisconsin and other states have taken in response.

“The uncertainty by the Trump administration’s action has destabilized the market and led to big premium increases,” Levitt said.

As a result, people who are close to the threshold for receiving the subsidies may want to give thought to steps they can take — there are several — to report less income on their tax returns for 2018.

The subsidies end at 400% of the federal poverty threshold — $48,240 for one person, $64,960 for two and $98,400 for a family of four.

Being eligible for the federal subsidy — whether you’re $10 or $10,000 over the cutoff — can translate into thousands of dollars in savings when buying health insurance. And for some people, talking to a tax accountant could be as important as talking to an insurance agent or broker this year.

In past years, the difference was much smaller. It could be significant for people who are older. But for most people, the subsidy was relatively small if their income was near the cutoff.

“That cliff is now much, much steeper,” Levitt said.

A 63-year-old couple is an extreme example, but not entirely unusual. Take the example of a 40-year-old couple with two children, ages 10 and 8, and a household income of $100,000.

The least expensive plan in Milwaukee County would cost them $16,633 next year — and the plan has a $12,500 deductible.

If their income were $98,000, the same plan would cost them $4,231 — or $12,402 less.

The gaps, which vary by health plan and county, are much smaller for people who are younger.

The subsidies are based on modified adjusted gross income: generally wages, interest income, dividends, capital gains and other income, less certain adjustments. People can take steps to lower their modified adjusted gross income.

For instance, people can contribute $5,500 to an individual retirement account, and anyone 50 and over can contribute an additional $1,000. So a married couple 50 and older can contribute $13,000 a year to an IRA.

People who are self-employed can set aside much more through a simplified employee pension, or SEP, plan: 25% of their net earnings, up to $55,000 next year, according to the IRS website.

Also, people can buy a health plan with a health savings account — and deduct the money put into the HSA from their modified adjusted gross income.

A married couple can contribute $6,900 and an individual can contribute $3,450 to an HSA next year. Plus, individuals and married couples who are 55 and older can contribute an additional $1,000.

That money can be used for health expenses, including dental care and eyeglasses, at any point in future years.

“You can keep it in there forever,” said David Schlichting, a visiting assistant professor of accounting at Marquette University.

A 63-year-old couple, in other words, could lower their income by $20,900 by putting the full amounts allowed in an IRA and a health savings account.

“And it’s still your own money,” Schlichting said.

Someone who is single and under 50 could set aside a total of $8,950, while a couple under 50 could set aside a total of $17,900.

There’s an additional benefit.

“It not only saves you money on your health insurance, it is going to save you on your taxes,” Schlichting said.

These steps would benefit only people who are relatively close to the cutoff. And people still need money to live on. But early retirees who are counting the years until they are eligible for Medicare may have some other options.

Money pulled from a traditional IRA or 401(k) plan is taxed as income. But money pulled from a Roth IRA doesn’t count when calculating modified adjusted gross income.

“That would not go on your tax return,” Schlichting said.

And on investments made outside of retirement accounts, only the gains are taxed, and those gains can be offset by losses.

For example, someone with a $20,000 gain on a $50,000 investment would report $20,000 in income but have $70,000 to live on.

An early retiree also could draw on savings for living expenses and report little income.

The subsidies for the Affordable Care Act have always been based on income, not net worth.

Most of the roughly 20 million people who have gained health insurance through the law work in low-paying jobs that don’t provide health benefits.

This year differs from past years, though, because of the discrepancy in the cost of health insurance for people eligible for federal subsidies and those who are not.

Much of the difference stems from the Trump administration’s decision to not fund the additional coverage for people with low incomes to offset deductibles and out-of-pocket expenses.

Health insurers are required by law to provide the additional coverage, even though they aren't being reimbursed for the cost.

To lessen the harm, Wisconsin and most other states allowed insurers to allocate those costs to plans in the mid-level silver tier on the marketplaces set up by the ACA.

The federal subsidy is pegged to a plan in that tier, but people can use that money to buy any health plan sold on the marketplaces. This is why people and families can save so much money on health plans sold in the lower-cost bronze tier, which have higher deductibles.

Still, insurers have priced all their plans higher this year because of the turmoil in the market, a move that has particularly hurt people who aren’t eligible for subsidies.

That’s why paying attention to the cutoff for the subsidies has become unusually important this year.

“For middle-class people buying insurance on their own, the price is becoming out of reach,” Levitt said. “And we are not really having a reasoned debate about how to deal with the rising cost of insurance for middle-class people.”