Health Care subsidies

[kramer]

Presumably, if someone is going to buy a policy for the 2014 year, there would be open enrollment at the end of 2013. So 2012 income would go into the subsidy calculation?

Or is it done after the fact on your taxes, in 2015, when you file your 2014 income taxes, and you would get a refund. Presumably, you were paying an estimated premium during 2014 that might have been based on your 2012 income and the subsidy would be corrected one way or another on your taxes.

The distinction is important for those of us able to control our annual income.

Also, is there any kind of net worth test? For instance, in the lower income ranges, it says to enroll in Medicaid. Well, in the state of California, for instance, Medicaid allows a maximum net worth in taxable accounts of $2,000 for individuals and $3,000 for families. Otherwise, you are ineligible.

Kramer

[Gone4Good]

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Originally Posted by ERD50 Here's an even more striking example, down in the more 'average working man' pay scale : 59 YO single - $46,021 Income = $4,372 premium ($7834 Government tax credit) Now, our 59 YO worker miscalculates his OT, or gets an unexpected bonus of a SINGLE DOLLAR, and.... $46,022 Income = $12,206 premium ($ZERO Government tax credit) That SINGLE DOLLAR cost him $7,834 in take home pay! He is going to be mad, mad, mad. Imagine, getting a $7,834 haircut because you made an extra dollar! Employees are going to be asking for, no demanding, caps on their salary! This is just Bat-Sh!t crazy! -ERD50

Sure it's stupid, but your 59 year old pays the full premium for six years and then goes on Medicare where he pays something ridiculously small. The size of the "cliff" largely reflects how expensive the policy is, which is largely determined by age. The closer you are to Medicare, the bigger the cliff. But the closer you are to permanent relief, too.

Of course under the current system the 59 year old has to pay $12K regardless of whether he makes $46,021 or $46,022 or $30,000. That's assuming he can get an individual policy at all.

[ERD50]

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Originally Posted by Gone4Good Sure it's stupid, but your 59 year old pays the full premium for six years and then goes on Medicare where he pays something ridiculously small. The size of the "cliff" largely reflects how expensive the policy is, which is largely determined by age. The closer you are to Medicare, the bigger the cliff. But the closer you are to permanent relief, too. Of course under the current system the 59 year old has to pay $12K regardless of whether he makes $46,021 or $46,022 or $30,000. That's assuming he can get an individual policy at all.

No, the 'cliff' is not explained by any of that. The maximum cost can be explained by what you say. But there is no rationale for a single dollar in earnings to increase a tax bill by $7,834.

And, he goes on Medicare in six years regardless of this bill - how can that be a factor (it's not)?

A 'progressive' slope is defend-able, but not one with a slope greater than 1:1. That's just crazy, and I think I'll write my Reps in Congress that voted for this (the ones that are still there) to explain it (I doubt they even realize it).

-ERD50

[M Paquette]

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Originally Posted by haha Well, the government is the planner here......

Yah. In my budgeting and planning, I am assuming no subsidies. Since we're looking at a government program that's both a hot potato and subject to the funding whims of Congress, relying on a future promise of compensation strikes me as being imprudent.

They might decide to spend on something really important like the High Energy Laser Future Combat Systems Project (so we can fight al-Qaeda - no, really, its being pitched as a post-StarWars anti-terrorist platform now), or maybe build another 10 or 11 targets aircraft carriers. (Yes, these are both in the 2011 budget proposals.)

[Gone4Good]

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Originally Posted by ERD50 No, the 'cliff' is not explained by any of that.

It is in actual dollar terms. The cliff is smaller for a younger person on an absolute dollar basis. And absolute dollars is what I buy groceries with, not proportional ones.

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Originally Posted by ERD50 I think I'll write my Reps in Congress that voted for this (the ones that are still there) to explain it (I doubt they even realize it). -ERD50

That's a good thing to do, and a fair complaint. But what I think you'll find is that this isn't the result of an oversight, but the result of an attempt at giving the greatest subsidy possible to a given constituent subject to a spending constraint. A more gradual phase-out without committing more dollars would necessarily mean cutting subsidies to folks near the top of the 4x poverty threshold and either using the dollars saved to extend them to folks who make more or less. If they're given to those who make less, then we steepen the slope of the phase out, so we're really talking about relocating subsides from people who make less to folks who make more.

The other thing you'll find, is that the folks who wrote the bill are less concerned about the impact of incentives then are the folks who decided they weren't going to participate in the process to craft a better bill. The final bill reflects those choices.

[FinanceDude]

This whole bill is a complete disaster.

[Gone4Good]

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Originally Posted by FinanceDude This whole bill is a complete disaster.

As is the status quo.

[samclem]

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Originally Posted by Gone4Good But what I think you'll find is that this isn't the result of an oversight, but the result of an attempt at giving the greatest subsidy possible to a given constituent subject to a spending constraint. A more gradual phase-out without committing more dollars would necessarily mean cutting subsidies to folks near the top of the 4x poverty threshold and either using the dollars saved to extend them to folks who make more or less. If they're given to those who make less, then we steepen the slope of the phase out, so we're really talking about relocating subsides from people who make less to folks who make more.

While I agree that it's unlikely nobody noticed this, I think in this case Congress looks better if we just say it was an oversight. Let's give the drafters of this thing the benefit of the doubt. They were busy, the bill was really long, it was important to make the numbers look right, they probably didn't have enough "help" and they were under tremendous time constraints to get it finished so it could be voted on by Christmas Eve, a traditional day for voting on important legislation.

[FinanceDude]

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Originally Posted by Gone4Good As is the status quo.

Agreed, but to ram it through without actually fixing the inherent problems is egregious...........it was done for political reasons, and had nothing to do with fixing health care, that type of legislation causes problems..........

[clifp]

My plan assuming the subsidies remain intact, and they use some form of AGI to calculate subsidies is to use a form of ping pong income. One year I'll qualify for the subsidies by taking all of my capital loss, increasing charitable deductions, I'll then purchase a 'gold' plan and during the year take advantage of free/lower cost test etc. The next year I won't be able to qualify for subsidies so I'll only get the bronze health plan and probably only see the doctor if I am ill.

Look at the bright side of the legislation, given the financial acumen on the forum we should have some terrific discussion of the best ways to game the system.

[Gone4Good]

Does anyone know what definition of income is used to calculate subsidies? I recall looking in the legislation but not actually finding it.

[Gone4Good]

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Originally Posted by clifp Look at the bright side of the legislation, given the financial acumen on the forum we should have some terrific discussion of the best ways to game the system.

. . . .like a potential subsidy for moving to Hawaii (which has a higher dollar poverty threshold than the Lower 48).

[samclem]

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Originally Posted by clifp My plan assuming the subsidies remain intact, and they use some form of AGI to calculate subsidies is to use a form of ping pong income.

That's a good angle. Sorta like bundling deductions, claiming the standard deduction every other year.

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Originally Posted by clifp Look at the bright side of the legislation, given the financial acumen on the forum we should have some terrific discussion of the best ways to game the system.

Yes, but we'll be amateurs. I see a whole new industry springing up: "Health Benefit Optimization." Just like a tax advisor, you go to this guy to help you work the system. Fill out a survey of present/anticipated medical needs, bring in your tax forms and, for a price, he'll show you how to get the most medical care for the smallest out-of-pocket cost. Alternating year strategy, various health plan choices, gain/loss from staying with an employer plan vs going to the exchanges, keep an "adult-child" on your plan or have 'em go to the exchanges and get the subsidy, etc. Like the tax code, there's big money involved, the government's rules are complex with lots of interdependencies and break-points, and the game will change frequently enough to guarantee repeat customers. Yet more jobs "created" by the new law, a win-win!

[samclem]

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Originally Posted by Gone4Good Does anyone know what definition of income is used to calculate subsidies? I recall looking in the legislation but not actually finding it.

I'm still looking. A footnote in one of the CBO reports said " Subsidies would be based on enrollees' household income, as defined in the bill. "

This page at the Retire Early Homepage has some tips, I haven't confirmed any of it:

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Tax, income, and health insurance planning for 2014 There are several things you can do to minimize your taxable income in retirement and increase the value of any health insurance subsidy you may be eligible for. 1) Limit tax-exempt income -- since tax-exempt income is included in the Modified Adjusted Gross Income calculation for the health insurance subsidy, it's best to minimize it. 2) Prefer dividends over taxable interest income -- as long as dividends are taxed at a lower rate than interest income, you should favor dividends. 3) Minimize capital gains, maximize tax-free returns of capital -- if you did any tax-loss harvesting in the market meltdown during the waning days of the Bush Administration, you should be sitting on some unrealized capital losses. By matching the sale of some winners and losers, you may be able to make a sizeable withdrawal from your portfolio without incurring any tax liabilty. 4) Delay taking Social Security benefits -- as an early retiree ages and enters the 59-64 age bracket, health insurance premiums reach their peak. It may make sense to delay Social Security benefits until age 65 when you qualify for Medicare so that you maximize the value of your health insurance subsidy before then. 5) Tap your Roth IRA -- you may be able to make tax-free withdrawals from a Roth IRA, though most financial planners advise against it to keep the tax-free compounding of investment returns intact. You should probably exhaust the first four items on this list before considering a Roth IRA withdrawal.

[kramer]

Thanks for the additional information. There definitely appears to be a lack of specifics out there.

I am also wondering which years are counted. For instance, due to 0% captial gains and qualified dividends tax vacation 2008-2012, I have been maxing my investment income to top of 15% bracket each year. I plan to do that soon this 2011 tax year. But I wanted to make sure that this year would not be counted as income toward qualification.

Essentially, the subsidies phase-out amount to an additional, huge marginal tax. This is a big incentive not to work or claim income or simply to work less.

[lets-retire]

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Originally Posted by FinanceDude Agreed, but to ram it through without actually fixing the inherent problems is egregious...........it was done for political reasons, and had nothing to do with fixing health care, that type of legislation causes problems..........

I seem to recall this being a major complaint on this board about the health insurance law.

[samclem]

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Originally Posted by Gone4Good Does anyone know what definition of income is used to calculate subsidies? I recall looking in the legislation but not actually finding it.

From a 28 April 2010 CRS Report (Footnote 14):

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14 MAGI and household income will be used for determining the amount of premium credit assistance for the purchase of a qualified health benefits plan under state exchanges, described in Section 1401 of PPACA. For more information on MAGI and household income see CRS Report R40942, Private Health Insurance Provisions in PPACA (P.L. 111- 148) , by Hinda Chaikind et al.

From the CRS Report R40942 (footnote 13):

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13 Household income is defined as the modified gross income of the taxpayer, plus the aggregate modified gross income of all other individuals for whom the taxpayer is allowed a deduction for personal exemptions for the taxable year.

Still, I think there might be more to it than outlined above. I gave up after diving into the sections, in-law cross-references, and between law cross references. I'm going to wait for a trustworthy answer to pop up on a reliable web site. For those who want to dive into the legislation and try to find what "household income" means:

Here's a link to the final version of PPACA (H.R. 3590) Here's how they define some things:

Quote:

‘‘(1) FAMILY SIZE.—The family size involved with respect to any taxpayer shall be equal to the number of individuals for whom the taxpayer is allowed a deduction under section 151 (relating to allowance of deduction for personal exemptions) for the taxable year. ‘‘(2) HOUSEHOLD INCOME.— ‘‘(A) HOUSEHOLD INCOME.—The term ‘household income’ means, with respect to any taxpayer, an amount equal to the sum of— ‘‘(i) the modified gross income of the taxpayer, plus ‘‘(ii) the aggregate modified gross incomes of all other individuals who— ‘‘(I) were taken into account in determining the taxpayer’s family size under paragraph (1), and ‘‘(II) were required to file a return of tax imposed by section 1 for the taxable year. ‘‘(B) MODIFIED GROSS INCOME.—The term ‘modified gross income’ means gross income— ‘‘(i) decreased by the amount of any deduction allowable under paragraph (1), (3), (4), or (10) of section 62(a), ‘‘(ii) increased by the amount of interest received or accrued during the taxable year which is exempt from tax imposed by this chapter, and ‘‘(iii) determined without regard to sections 911, 931, and 933.]

Here's a link to the reconciliation bill (H.R. 4872) that followed the main law.

[Gone4Good]

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Originally Posted by samclem Here's a link to the reconciliation bill (H.R. 4872) that followed the main law.

Thanks. Now I remember why I still didn't have an answer to the question after looking at the legislation . . .

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The term ‘modified adjusted gross income’ means adjusted gross income increased by—

But adjusted gross income isn't defined. A good guess is that it is AGI as listed on your tax form, plus tax exempt interest. But then contributions to HSAs, IRAs, Individual 401(k)s, all reduce MAGI. That could be a huge swing factor in determining weather you qualify for subsidies. Especially the Individual 401(k), which can be quite large.

[ziggy29]

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Originally Posted by lets-retire I seem to recall this being a major complaint on this board about the health insurance law.

First and foremost, IMO, there is *very* little in the new law that addresses cost containment. And that is the 800 pound gorilla in the room which, if addressed, would make all the other related issues much easier to fix.

No "reform" will make the system sustainable, accessible and somewhat affordable if health care costs keep rising 3-4 times the rate of inflation and wage growth.

[lets-retire]

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Originally Posted by ziggy29 First and foremost, IMO, there is *very* little in the new law that addresses cost containment. And that is the 800 pound gorilla in the room which, if addressed, would make all the other related issues much easier to fix. No "reform" will make the system sustainable, accessible and somewhat affordable if health care costs keep rising 3-4 times the rate of inflation and wage growth.

I agree.

I also like to use the old adage: "You can have something fast, cheap, or good, but not all three." The health insurance law was sold as being able to provide all three.