Wednesday, December 06, 2017

Steering clear of the subsidy cliff in the ACA marketplace

It's plain this year that the individual market for health insurance is unaffordable for many of the unsubsidized, particularly those in their late fifties or early sixties. The subsidy cliff has reached a fatal height for many.

This week Kaiser Health News reporter Rachel Bluth spotlighted a stark example: A 62 year-old woman in Chattanooga, Tennessee who earned $80,000 working for a consultancy deliberately cut her hours, reducing her income by a third to get herself and her husband below the subsidy line ($64,080 for a two-person household in 2017). The total household income was $92,000.  The woman, Anne Cornwell, cut her income by $24,000 -- and her insurance bill by $27,000.

This drastic solution set me thinking about ways to keep on the right side of the subsidy cliff, i.e., 400% of the Federal Poverty Level. In 2018, that's a  Modified Adjusted Gross Income (MAGI)  of $48,240 for an individual, $64,960 for a couple, and $98,400 for a family of four.

Many but not all resources for reducing MAGI are available only to the self-employed. They include the following.

1. Individual 401k. Ms. Cornwell, the article reports, "made $80,000 a year as a project manager for a small consulting firm that doesn’t offer health insurance." My immediate reaction was that an employee of a consultancy that doesn't offer health insurance -- or, it emerges later, a 401k -- should be able to get herself paid as a contractor -- i.e., get self-employed status.  If she did, she'd be able to deduct as much income as she forfeited (or more if she so chose).  Here are the contribution rules for a solo 401k for a self-employed person:
For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000 [$24,500 in 2018]. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $59,000.
Were she self-employed, Ms. Cornwell would have been able to contribute up to $40,500 to an individual 401k.

2. Health Savings Account. HSAs are tax-sheltered savings accounts that must be paired with a so-called High Deductible Health Plans (HDHP). An HDHP must have a minimum deductible of $1300 for an individual and $2600 for a family -- rather quaint thresholds at a time when the average silver plan has a deductible approaching $4000 and the average gold plan deductible is over $1000. HDHPs have lower out-of-pocket spending limits that the maximum allowed for ACA-compliant plans. But unlike in many non-HDHP plans, no services except free preventive ones can be offered outside the deductible.

The money saved in HSAs is not only tax-free; it's also an "above-the-line" tax deduction that reduces MAGI -- and thus can help an individual market shopper get on the right side of the subsidy cliff.  HSA savings can only be used for qualified medical expenses until retirement, at which point it can be rolled over into a retirement account. The contribution limit in 2018 is $3450 for an individual and $6900 for a family plan.

HSAs are available in most ACA markets.  In 2018,, the federal ACA exchange used by 38 states  has at least one HSA eligible product in 2528 out 2722 counties, according to Duke healthcare scholar David Anderson.

3. Roth IRA or non-retirement savings. This one is for the relatively affluent. Let's say you're in your early 60s, like Ms. Cornwell, and you want to retire early without taking early Social Security or drawing on your main retirement income source -- say, a 401k. Withdrawals from a Roth IRA are not taxable income (in Roth IRAs, contributions are not tax deductible when made, but withdrawals after age 59 1/2 can be made tax free). Neither are principal withdrawals from a traditional non-retirement savings account  So if you're, say, 63, and you've managed to stash $100,000 in either traditional savings or a Roth IRA, you can spend down on either account with no impact on your MAGI. (You could do the same with a non-retirement brokerage account, but you'd pay taxes on capital gains and dividends. In a traditional savings account, interest is taxable)  That's a hold-your-breath-until-you-hit-Medicare strategy for those with enough resources to save in two channels (say, 401k and Roth IRA).

4. Self-employed health insurance deduction. If you're self-employed and buying insurance for yourself and/or your family on the individual market, you can deduct the full cost of the insurance*, as long as your self-employment income exceeds the cost of insurance after various other deductions.This too is an above-the-line deduction that reduces MAGI.

5 Qualified Business Expenses. If you're self-employed and fill out a Schedule C, Profit or Loss from Business, consider being more liberal in spending to grow your business or improve your capabilities than you might normally be inclined to be. It may do your business good! As an introverted LLC, I recall reading (and pretty much ignoring) extroverts' advice that's usually good business sense: "Never eat lunch alone."-- "Is there a conference that addresses your core business issues? Get on a plane and go!" Personally I usually wouldn't -- but if going would save me $10,000 in insurance premiums (or $20,000, if my wife also needed coverage) that stark fact might boot me into greater gregariousness.

It's a sign of serious market dysfunction that people have to go to these lengths because a dollar more or less income can make a $27,000 difference in insurance costs. But after eight years of escalating Republican sabotage, feeding on ACA design flaws for which Republicans refused to allow correction, that's where we're at.

* Update: Louise Norris points out to me that things get a little circular when the deduction increases the subsidy, thereby reducing the cost of insurance and reducing...the deduction. Louise points to the appropriate IRS instructions for squaring this circle here.


  1. thanks for the very practical suggestion. I live with the ugliness of the unsubsidized every day at my agency, and here are some more observations:

    1. The State of MN addressed this problem last year, and gave all unsubsidized borrowers a 25% discount. This happened in part because we had a budget surplus and no new taxes were needed. Also, the MN legislators are mostly farmers and businessmen and not covered by the state employee health plan. They were suffering themselves.

    In Washington it has been a disgusting spectacle of safe legislators ignoring the suffering of others. The Dems had no bills even addressing the unsubsidized until about 8 months ago, and Hilary mentioned them rather rarely. The Repug-nicans have almost gleefully watched the suffering of the unsubsidized, seeing that it made good publicity against the ACA. The Repubs have been almost Leninist in their cynicism, i.e. letting an ally suffer to help the 'greater cause.'

    Close to 90% of Americans are in fact subsidized on health insurance, when you count federal programs plus tax-free employer funds. The 10% who are not subsidized continue to struggle, and they themselves wonder why.

  2. Republicans have made the cynical conclusion that they get more votes by letting the unsubsidized people suffer, versus ending their suffering by allowing tax credits at all income levels.
    About 90-95% of Americans get either a government subsidy or a direct government grant for their health insurance. The unsubsidized are kind of the last bastion of free enterprise, and look how well that is turning out.

    The state of MN in 2017 at least responded to the problem, giving unsubsidized buyers a 25% discount on their premiums. One big reason this happened is that the MN legislators are part timers and not covered by the state employee health plan. They had to endure the high premiums themselves.

    This is one reason why Charles Grassley was correct to propose that Congressmen be covered by the ACA. Even a broken clock is right twice a day.