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Obamacare subsidy cliff thought experiment
Old 10-20-2013, 03:07 PM   #1
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Obamacare subsidy cliff thought experiment

I was able to finally log into the NY State healthcare exchange and made it far enough to actually see prices (it feels like I made it to some certain level in a video game.) As I looked over the prices and the plans I might consider when I FIRE several years from now I did think of what would happen if in a certain year which I structured my investments so I would quality for Obamacare subsidies but somehow had a MAGI which was a few thousands too high. Because the nature of the Obamacare subsidy cliff it this scenario is where one is better off with a lower MAGI.

Again, just to explain this. For a family of 3 400% of FPL is $78100. The Silver plan I like on the exchange would be $1274 a month or $15288 a year. If such a family managed to get their MAGI to be exactly at $78100 then they will get Obamacare subsidies of ($15288 - $78100 * (9.5%)) = $7867. This means that as long as the MAGI of said family is ($78100+$7867) = $85986 or below, they are better off having a MAGI of $78100 once they consider the factor of Obamacare subsidies.

The thought experiment is what should someone in such a situation do. Say said family is sitting around in September of 2014 and their MAGI is headed toward $78100 plus say $4000 or $82100. This means they are $4000 above the threshold to get Obamacare subsidies and will be better off lowing their MAGI by $4000. How do they do this? Well, selling losers and capture losses would for sure lower MAGI. But say such holdings are not available or said family does not want to part such a holding. One way out, my initial thought, is to lose money, namely $4000, on purpose. But I thought this was too defeatist. I did come up with a strategy quickly after that. The solution is to buy $4000 worth of way out of money options that expire at end of December 2014. I would buy such an option with the feature that if it did become in the money the payoff would be 3 to 4. In other words, if the option expires out of the money you get the goal of losing $4000 and then getting a check from the government $7867 to make up for the loss of $4000 and more for a profit of $3767. If by good fortune the options finishes in the money then this investment would yield a profit of $8000 to $12000 (using the payoff assumptions of 3 to 4). One would have to pay taxes on this profit of course but even after that the net gain would exceed $3767.

In other words, the Obamacare subsidies cliff gave someone with MAGI just over 400% of FPL a free option. I have always been very negative on buying options as an investment strategy and I never bought one in my investment career. But I found a real legitimate use case for options.
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Old 10-20-2013, 03:40 PM   #2
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Pretty clever. Almost like getting free money to put down at the roulette table.

Keep in mind that you can only take $3000 more in losses than you've already taken in cap gains, so if all of your income to this point was interest and dividends with no cap gains, you'd come up $1000 "short".
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Old 10-20-2013, 03:41 PM   #3
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Pretty clever. Almost like getting free money to put down at the roulette table.

Keep in mind that you can only take $3000 more in losses than you've already taken in cap gains, so if all of your income to this point was interest and dividends with no cap gains, you'd come up $1000 "short".
Yeah. You are right about that although I always I figured my MAGI would contain a significant portion of capital gains. But I agree, if it was not for that then this trick only works up to $3000.
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Old 10-20-2013, 07:35 PM   #4
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Or near year end, drop that Silver and pick up a Bronze that qualifies for HSA. 2013 limit is $6,450 for a family. $1,000 more if you are 55 or over. Fully fund late in the year so you get the "above the line deduction." You have to stay in the plan for a year. You would drop down to your desired OMAGI with no risk.

Let me repeat, that you have to stay in the HSA for a year.

Does this work for you?
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Old 10-20-2013, 07:40 PM   #5
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Or near year end, drop that Silver and pick up a Bronze that qualifies for HSA. 2013 limit is $6,450 for a family. $1,000 more if you are 55 or over. Fully fund late in the year so you get the "above the line deduction." You have to stay in the plan for a year. You would drop down to your desired OMAGI with no risk.

Let me repeat, that you have to stay in the HSA for a year.

Does this work for you?
Thanks for the info. Never thought of that angle. I would like as many angles as possible for when I have to deal with this a few years from now.
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Old 10-20-2013, 07:43 PM   #6
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One other note. It doesn't matter which plan you choose, the subsidy is calculated from the 2nd lowest silver plan available to you.
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Old 10-21-2013, 11:50 PM   #7
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One other note. It doesn't matter which plan you choose, the subsidy is calculated from the 2nd lowest silver plan available to you.
But it's more likely to find a Bronze plan qualifying for HSA than a Silver plan.

Another way to bring MAGI down: Contributing to traditional IRA instead of Roth is deductible at ~$80k income level for married filing jointly even if both taxpayers are covered by a retirement plan at work.
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Old 10-22-2013, 06:03 AM   #8
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Just get a bronze plan and use all that money you're trying to "lose" to self-insure.
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Old 10-22-2013, 08:16 AM   #9
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One other note. It doesn't matter which plan you choose, the subsidy is calculated from the 2nd lowest silver plan available to you.
But it's more likely to find a Bronze plan qualifying for HSA than a Silver plan.
That's irrelevant to the subsidy calculation. The subsidy is calculated from the 2nd lowest silver, and then can be applied to any plan you choose.

If the qualify for the subsidy such that the amount you would pay is $5000, and the second lowest silver plan is $6000, you get a $1000 subsidy. If you actually choose a plan that costs $4000, you pay $3000. If you choose a plan that costs $12,000, you pay $11,000.

I wonder how many people are thinking that they will pay $5000 (the calculated "amount you pay" in this example) no matter which plan they choose.
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Old 10-22-2013, 10:05 AM   #10
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One important factor in choosing to apply the subsidy to a Bronze vs Silver Plan, as I see it, is the potential cost-sharing subsidies, that are only available in a Silver Plan. They don't help those at the higher range of the cliff, but if you're at the lower end, their impact is dramatic. I'm seeing plans from Coventry with $0 deductibles and $1000 OOP max. Or, plans from BCBS with $250 deductibles and $500 OOP max, by keeping MAGI just below 150% FPL. Not doable if your assets/income aren't that malleable, but if they are, it's worth looking at.
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Old 10-22-2013, 05:26 PM   #11
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Obamacare subsidies cliff gave someone with MAGI just over 400% of FPL a free option.
It's cool posts like this that keep me coming back for more on this board. Not that I'm likely to execute on something like this, but it's that exposure to ideas like this is just great fun.
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Old 10-22-2013, 06:36 PM   #12
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It's cool posts like this that keep me coming back for more on this board. Not that I'm likely to execute on something like this, but it's that exposure to ideas like this is just great fun.
Fun? I hope that's tongue in cheek. It's stuff like this that makes my head hurt when I realize there is yet one more thing I may, in the future, have to "game" so as not to get caught on or near some cliff. Already, AMT, RMDs, Medicare, SS taxability, and perhaps less so, tax brackets in general. These and many other (and probably, soon, more) "cliffs" that old people like me may need to hire a professional to build a fence across. YMMV
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Old 10-24-2013, 10:17 PM   #13
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Fun? I hope that's tongue in cheek. It's stuff like this that makes my head hurt when I realize there is yet one more thing I may, in the future, have to "game" so as not to get caught on or near some cliff. Already, AMT, RMDs, Medicare, SS taxability, and perhaps less so, tax brackets in general. These and many other (and probably, soon, more) "cliffs" that old people like me may need to hire a professional to build a fence across. YMMV
It is not just the cliffs that we need to worry about in tax-planning. It's like playing an old video game -- Pacman or Mario. You go after all the treasures and if you miss you get eaten.

If you have earned income, you have the luxury of adjusting down your MAGI after year-end up to the filing date by contributing to IRA. But if your income consists of only passive income you are out of luck. With all the bank/brokerage statements coming only by February to know the exact $ amount playing close to the edge is treacherous.

I really liked kmt1972's free option play suggestion. But that action needs to be taken in Sept. or Oct.

The only thing you can do after-the-fact, i.e. after year-end, is to contribute to HSA, and that you can do only if your previous years plan for HSA compatible.

If there is any Plan-B (you can take after-the-fact to get rid of it!) to reduce the excess MAGI after year-end, I am really interested.

Because ACA subsidies work similar to tax credits, losing $6K to $7K of actual real money is tough to bear -- even if you make $100K, which is about where this would hit for a family of 4. The sad part is, because this is based on MAGI above the line number, gaming the number make the deductions go waste. You may have to throw away $20K of deductions to qualify for the subsidy. That is really hard to take.

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Old 10-24-2013, 10:31 PM   #14
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In other words, the Obamacare subsidies cliff gave someone with MAGI just over 400% of FPL a free option. I have always been very negative on buying options as an investment strategy and I never bought one in my investment career. But I found a real legitimate use case for options.
Very good. I'm wondering if there are other highly-leveraged opportunities like this.
One good one, but only applicable to a few people: If you have had gambling winnings earlier in the year that now put you over the subsidy threshold, you could head right back to the casino and make a free bet. Gambling losses can only offset gambling winnings, and the bet would have to be highly leveraged to make this work (per your example using options), but it might be useful for somebody.
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