If you want to retire before age 65 or find yourself forced to retire due to health issues, downsizing, or family circumstances, what will you do for health insurance until you’re eligible for Medicare?
The Affordable Care Act (ACA) has made health insurance coverage when retiring before age 65 a much less challenging situation. This is especially true for people with medical conditions or limited finances—both of which could be obstacles for early retirees seeking coverage in the pre-ACA era.
Roughly half of Americans—and most Americans under the age of 65—get their health insurance from an employer.1 At age 65, nearly all Americans become eligible for Medicare.
It’s common for people to make the transition from employer-sponsored health coverage directly to Medicare. Depending on the circumstances, they may continue to receive supplemental coverage from their employer, either as an active employer or a retiree.
If you retire before you are eligible for Medicare, there may be several possible options for health coverage for the time between your retirement and eligibility for Medicare. This article explores the state health insurance marketplace, continuation of benefits through COBRA or state continuation, using your spouse’s health plan, and Medicaid.
State Health Insurance Marketplace
As a result of the Affordable Care Act, every state has a health insurance marketplace/exchange where private individual/family health plans can be purchased. These plans are all guaranteed-issue. This means you can enroll regardless of medical history.
Enrollment is limited to an annual open enrollment period or a special enrollment period triggered by a qualifying event. The loss of your employer-sponsored health plan is a qualifying event, so you’ll be able to switch to a plan in the marketplace when you leave your job and your health plan ends.
The Affordable Care Act provides income-based premium tax credits (premium subsidies). These offset a large chunk of the premiums for most people who enroll in health plans through the marketplace.
For 2021 and 2022, the American Rescue Plan has made those subsidies larger and more widely available. The subsidies cover a larger percentage of total premiums. The income cap for subsidy eligibility (normally 400% of the poverty level) has been eliminated.
If you shop in the marketplace, you’ll see a variety of available plans. In some areas of the country, just a single insurer offers plans—although that’s much less common than it used to be.2 Even in those areas, however, there will be several different plans available.
You’ll generally see plans at the Bronze, Silver, and Gold levels, and in some areas, Platinum plans will also be available. If your income doesn’t exceed 250% of the poverty level, the available Silver plans will include built-in cost-sharing reductions. In 2021, 250% of the poverty level for a single person in the Continental United States amounts to $32,200; for a couple, it’s $43,550.3
If you’re retiring, your income is likely fluctuating quite a bit. Since the financial assistance available in the marketplace depends on your income, it’s useful to understand how income is calculated for subsidy eligibility. It’s a form of modified adjusted gross income (MAGI) specific to the ACA and differs from normal MAGI.
Eligibility for subsidies is based on your income for the whole year—not just your income for the months you’re enrolling in a marketplace plan.
If your income from your job is fairly high and you’re retiring mid-year, you’ll need to account for the income you earned earlier in the year (in addition to any income you’re expecting for the remainder of the year) when you apply for subsidies in the marketplace.
The elimination of the “subsidy cliff” in 2021 and 2022 is particularly important for early retirees. They may have otherwise found that their income from the months before their retirement pushed them above the eligibility limits for premium subsidies.
And since health insurance premiums are generally much higher for older enrollees, that may have meant that self-purchased coverage was simply unaffordable. But that’s no longer the case in 2021 and 2022. Also, there’s a growing push for Congress to make the American Rescue Plan’s health insurance provisions permanent.
Where to Look
If you’re considering early retirement and want to see the options available to you, go to HealthCare.gov. If your state runs its own exchange, you’ll be redirected there. You can browse the available plans based on your age, zip code, tobacco status, and income to see your options.
If you’re currently receiving any medical treatment, be sure you pay close attention to the applicable provider networks and drug formularies. Don’t assume they’ll be the same as the plan you have at work, even if the same health insurance company offers them.
COBRA or State Continuation
If Consolidated Omnibus Budget Reconciliation Act (COBRA) or state continuation coverage is available to you, it might be a good alternative. This will depend on several factors, including:
- How long it will be until you’re eligible for Medicare
- How much you’ve already spent on out-of-pocket costs for the year
- Whether you’re eligible for subsidies in the marketplace/exchange
- Whether you’d be able to keep your existing medical providers if you switch plans
The American Rescue Plan provides a 100% subsidy for COBRA or state continuation coverage through September 2021. But it only applies if you involuntarily lost your job or had your hours reduced. So while there isn’t a COBRA subsidy if you’re choosing to retire, you would be eligible for the subsidy if you’re being laid off.4
If you’re not eligible for the COBRA subsidy (and after September 2021, if you are), you’ll have to pay full price for your coverage. This can be quite expensive, especially if you’re accustomed to your employer paying a significant portion of the cost.
But if you’ve already met your out-of-pocket cap for the year or are in the midst of complicated medical treatment and don’t want to worry about switching health plans, COBRA or state continuation can be very useful in the months after leaving your job.
If you only have a short time until you’ll be 65, you may find that you’re able to continue your employer-sponsored plan until that point using COBRA or state continuation. Or you might find that it works well during the year you retire, with a transition the following year to a marketplace plan based on your new retired-life income.
If you are eligible for the American Rescue Plan’s COBRA/state continuation subsidy in 2021, note that you would qualify for a special enrollment period to switch to a marketplace plan after the subsidy ends in September 2021, if that’s your preference.5
Your Spouse’s Health Plan
If your spouse is still working and has access to a health insurance plan that offers spousal coverage, you’ll be able to enroll in that plan when your own coverage terminates. Your loss of coverage will trigger a special enrollment period for your spouse’s plan, just as it does for a marketplace plan.
Even if both you and your spouse were covered under your plan, you’ll both be able to transition to your spouse’s employer’s plan—assuming coverage is available—when your existing plan terminates.
Note that if you’re eligible to enroll in your spouse’s plan, you’re likely not eligible for a premium subsidy for a marketplace plan. As long as your spouse’s coverage is considered affordable for just the employee, the cost to add a spouse is not taken into consideration.
Although the American Rescue Plan made marketplace premium subsidies larger and more widely available, it did not fix this “family glitch.”
If your income drops to a fairly low level after you retire, you may find that you’re eligible for Medicaid. In most states, Medicaid is available to adults under age 65 if their income doesn’t exceed 138% of the poverty level. For a single person in 2021, that amounts to $17,774 in annual income; for a couple, it’s $24,040.
But Medicaid eligibility is determined based on monthly income (as opposed to marketplace premium subsidies, which are based on annual income). So if your monthly income doesn’t exceed 1/12th of the annual income cap for Medicaid eligibility, you may be eligible for that coverage regardless of how much you earned earlier in the year.
If you’re eligible for Medicaid and planning to use it until you turn 65, be sure you’re aware of your state’s rules regarding Medicaid estate recovery. Some states will recover costs associated with medical care for Medicaid enrollees over the age of 55; some states limit this to only costs associated with long-term custodial care.
Also, be aware that Medicaid eligibility is much different for people who are 65 or older. At that point, eligibility is based on income and assets rather than just income. Some people find that the transition from Medicaid to Medicare results in significantly higher premiums and medical bills, so this is something to understand well in advance.
If you retire before age 65, you have several options for health insurance until you reach eligibility for Medicare. Which options you are eligible for and are best for you depend on your individual circumstances. You may enroll in the state health insurance marketplace, continue your employment-related benefits through COBRA or state continuation, enroll in your spouse’s health plan, or apply for Medicaid.
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