Healthcare in Early Retirement
If I plan to leave my job and do consulting on the side for a while, how does that work with the healthcare exchange. We have kids who are in high school and college, so we'd need to supply it for them for at least 4 more years, possibly longer. This year, I will make too much to be eligible for any credits and if I stay in my job, the same will be true. Does that mean that I'll just have to accept that the year after leaving my job, I'll probably have to pay full price for health insurance and the following year I'll be eligible for credits?
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There are two parts to the ACA cost containment formula: the federal subsidies and the percent of income cap. Originally the subsidy cliff was set at 400% of the federal poverty level for one’s family size, at and above which one wouldn’t receive any subsidy. My understanding is that for 2025 the subsidies qualifications had been relaxed and that people with higher incomes still qualified for some subsidies (i.e. gradual reduction, not a cliff). Also, for 2025 the insurance could cost no more than 8.5% of one’s income, so as one earned more one could predict costs and there would be no magic higher number that one must avoid exceeding.
Laws signed under the current administration will change the health insurance situation for 2026. My understanding is that for 2026 the 400% of poverty cliff returns and that the cap on percentage of income will increase from 8.5% to a significantly higher number. So, whether by consulting, investment, or converting 401K to Roth, income in 2026 will result in higher health insurance costs.
I’m also worried about this, as it would be the 2nd year I’m on ACA, so I would love to see people that are more knowledgeable about these changes.
Thank you for your response. This helps quite a bit. I'm assuming that 2026 expenses will be based on your income in 2025?
The 2026 subsidy and its reduction to your 2026 marketplace insurance premiums is based on your 2026 income. You can guess your income for 2026 in Nov2025 when you sign-up for your policy. If you guess accurately or structure your 2026 income to match what you stated then it should have a neutral effect on your taxes when you do your 2026 return in 2027. If you made more than you estimated that you would make then you'll probably pay more in taxes, possibly a lot more if you were receiving the subsidy to reduce your premium but then earned above the cliff. If you over estimated your income for insurance purposes then you might get a decent amount back (assuming you were paying your quarterly taxe withholdings based on actual income).
This year I've not done any contact or consulting work and have had relatively little interest and dividend income. I might otherwise be close to the no-ACA-but-Medicaid-instead threshold, but I'll sit with a tax advisor in Nov or Dec to decide how much I'll move from 401K to a Roth to generate income for ACA and be optimum for Federal Taxes and ACA subsidies. Future years if I decide to earn money as a contractor, I'll have less flexibility and will therefore expect to pay more for ACA insurance (if it still exists after the mid-terms).