Q. My wife and I make a decent amount of money, but our 2014 medical insurance premium renewal is going to break us! I own my business with no employees, and my wife works part time at a preschool. We are in pretty good health for our ages (me 62, wife 55), dont smoke and dont take any prescription drugs. We just got our renewal, and the premium is going from less than $600/month to more than $1,000/month. Our agent suggested that my wife quit her job so that we qualify for a tax credit subsidy. One of my wifes co-workers was given the same advice and plans to resign at the end of the year. My wife doesnt make a lot of money, around $10,000, but it helps pay the bills, and she enjoys her work. Does it make sense for her to quit?
A. Rich Burns, vice president of sales and marketing at AAI Benefits Group, Chapel Hill, related a similar story about a couple with whom he was working. They are 59 and 57 years old with a combined annual income of $60,000, which makes them eligible for a $733.80 per month subsidy. The wife was offered a $3,000 raise; if she takes it, their subsidy goes to $0. A taxable raise of $3,000 hardly makes up for an additional $8,805 in medical premiums! Does she turn down the raise, and if so, what message does that send to her employer, and how will that affect her career?
Consequences of ACA
One of the possible consequences of the Affordable Care Act is the adverse impact on the middle-class working person/family, especially those without group coverage.
If you are healthy and dont qualify for a tax-credit subsidy, chances are your new premiums will increase substantially once you are purchasing a policy under the ACA in 2014 and in future years unless some changes are made. You can shop around for coverage, but any policy issued with an effective date on or after Jan 1, will have to be ACA-compliant, providing coverage mandated by the act. If you are just above the income limits to qualify for a subsidy, among other things, you may want to consider working fewer hours, quitting a low-paying job, turning down a raise, maximizing pretax contributions to retirement plans and IRAs, selling dividend-paying stocks and tax-exempt bonds, delaying Social Security if under age 65, and even if you thought it made sense, forgoing a Roth IRA conversion.
Before taking any action, a consultation with a financial or tax professional is advised.
The amount of subsidy for which you are eligible is based on your modified adjusted gross income. If it is between 138 percent and 400 percent of poverty level, you are eligible for a subsidy. If your MAGI is under 138 percent of the poverty level, you will qualify for Medicaid. For a couple filing jointly, if MAGI is $62,040 or above, you will not qualify for a subsidy. For single filers, the subsidy is not available if MAGI is $45,960 or above.
To determine MAGI for purposes of the ACA, you begin with your adjusted gross income, which is on line 4 of 1040EZ, line 21 on 1040A and line 37 on form 1040. This is going to include any earnings, taxable interest, dividends, capital gains, unemployment compensation, pensions, taxable annuity payments, IRA distributions, taxable Social Security benefits, rental real estate income, business income and other income. To your AGI, you need to add the following: nontaxable Social Security benefits, tax-exempt interest and foreign earned income and housing expenses for Americans living abroad.
Cost of health coverage under the ACA through the exchanges will vary depending on the ages, number of people in your household and where you live. You didnt provide your premium, but the Kaiser website on the ACA estimates that the cost for the Silver Plan for a typical couple age 55 and 62 is $12,937; the premium is less for other plans. If your MAGI is $62,000, you will qualify for a tax credit subsidy of approximately $7,047, and you would pay an annual premium of $5,890. Assuming your wifes earnings make your MAGI rise above 400 percent of the poverty level ($62,040), you will not qualify for a subsidy. You are now paying $7,047 more for health coverage than you would if she did not earn her $10,000. The $10,000 earned is also subject to FICA (Social Security and Medicare), federal and perhaps state income tax. With FICA (7.65 percent), a 15 percent federal, and 7 percent state income tax rate, her take-home income is reduced to $7,035 and after paying the unsubsidized premium, you are in the hole $12.
A personal note
On a personal note, my own monthly premium was set to increase from $174 to $505 effective Jan. 1. I would have maternity coverage, but at my age and with six grandchildren, that really isnt a need! Burns suggested I get a new policy beginning Dec. 1, 2013, and once approved, cancel my current policy. Since my coverage would begin before Jan. 1, I wont have to have an ACA-compliant policy until my renewal. At that time, I will have to buy a compliant policy, but this buys me a year at a much lower rate.
If you hold a current policy and your existing insurer will not allow you to apply for a new policy effective Dec. 1, 2013, you may need to contact another insurance company to get a policy in force by Dec. 1. Never cancel coverage until you are approved in writing for a new policy and only cancel as of the effective date of the new policy.
Im glad that people that could not get coverage before can now get coverage through the exchanges, but there has to be some relief for those that dont qualify for a subsidy other than to encourage them to reduce their income.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624