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.
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.