A frequent goal we hear from clients is the desire to retire before the traditional age of 65. Even if they’ve saved enough, they often hesitate to take the plunge because they aren’t sure what to do about healthcare. What happens when I lose my employer’s coverage? What if I can’t get my own coverage? What options are out there? Are the alternatives expensive? Here’s how we approach the issue of healthcare for early retirees and their families.
Considering whether to retire before reaching the age of 65 can be an exciting prospect, but it should be done with careful consideration, particularly when it comes to managing healthcare costs and coverage. With Medicare eligibility still a few years away, you’ll need to explore alternatives to ensure you’re adequately covered. Here are some common early retirement healthcare options, and ways we work with clients to address their specific scenario.
First, let’s take a look at some of the options for the pre-65 retiree crowd.
Coverage through a Spouse
The simplest and most common way early retirees can address the healthcare conundrum is by getting on (or staying on) the health plan of their spouse. Retirement is considered a qualifying life event (QLE) that allows the retired spouse to be added to the working spouse’s plan outside the annual open enrollment period. Once retired, there is a window (30-60 days) for the retired spouse to be added during a Special Enrollment Period (SEP). The retired spouse may have to provide proof the QLE occurred, e.g. a letter from their former employer, but each company and HR department is different, so if this is your situation be sure you know the process at your spouse’s employer ahead of time.
The financial burden of adding a new member to the plan will vary widely. Some generous health plans may impose little to no cost to add a spouse, but more than likely there will be a jump in the monthly premium cost. However, this cost should be weighed against the cost of other options and whether a spouse’s plan offers the services and options the early retiree needs.
It’s important to note that domestic partners have varying ability to get coverage through their partner if not legally married. For example, many private healthcare plans offer insurance benefits to domestic partners, but the Federal Employees Health Benefits (FEHB) program, for example, does not offer coverage to domestic partners, whether they are registered or not. If you’re in this situation, you’ll want to research in advance what coverage is or is not available to you through your partner’s employer.
COBRA Coverage
Despite the acronym this coverage has nothing to do with reptiles and everything to do with continuing the healthcare coverage you had while you were employed. COBRA coverage comes from legislation in 1986 called the “Consolidated Omnibus Budget Reconciliation Act”, and allows you to continue your group health insurance coverage after leaving a job under certain conditions, including voluntary retirement.
If you qualify, congratulations! However, you’ll want to understand the cost before signing up. COBRA coverage will charge you the full premium, some (or all) of which may have been previously covered by your employer. This may be several hundred dollars more than you were responsible for previously, so be sure it fits into your budget before signing up.
This coverage only lasts for 18 months in most cases, so if you retire before age 63.5 it’s likely you’d have an additional gap to fill before Medicare begins at 65. You also only have 60 days to elect COBRA coverage, once you become eligible, before losing your opportunity to sign up, so be sure to set some reminders if you don’t make a decision right away.
COBRA coverage may be a good fit if you like the coverage you had prior to early retirement AND if you can afford the big jump in premiums that’s likely to occur. If your prior employer’s health plan didn’t meet your needs or the increased cost would strain your budget, you’ll probably want to consider another option.
Affordable Care Act (ACA) Exchange
If coverage through a spouse, partner, or COBRA isn’t an option, early retirees can turn to the ACA exchange to pursue coverage. Generally, U.S. citizens or legal residents who are not incarcerated and who do not have access to affordable health insurance through their employer or a government program like Medicaid or Medicare are eligible. Every state runs their own healthcare exchange, so the options will vary by state, location within that state, and other factors.
Open enrollment for ACA plans is in November-December, but retirement triggers the beginning of a Special Enrollment Window (SEW), which usually lasts 60 days. During that time, you’ll need to do the following:
1. Prepare Documentation: You may need documentation proving the loss of coverage, such as a letter from your former employer indicating your last day of coverage on their plan.
2. Apply on the Marketplace: Go to Healthcare.gov or your state’s marketplace website to start an application. Indicate that you are applying due to a loss of coverage, which is triggered by your retirement.
3. Choose a Plan: Review the available plans, considering premium cost, deductibles, and networks of doctors. Find the plan that best meets your unique needs.
4. Complete Enrollment: Enroll in your chosen plan within the SEP window to ensure continuous coverage.
Track your SEP window closely, missing the 60-day window could mean having to wait until the next open enrollment or another qualifying event (like having a baby or getting married).
One other note about ACA coverage that can be attractive is the potential for subsidies. These subsidies typically take the form of premium tax credits, which either lower the monthly premium for your ACA plan, or are repaid to you when you file your tax return if not taken during the year. The goal of these credits is to ensure you aren’t spending more than a certain percentage of your income on healthcare. When you apply for a plan on Healthcare.gov or your state’s marketplace, the application will automatically assess your eligibility for these subsidies based on your income and household information.
There is often a fair amount of tax and income planning that goes into maximizing the potential subsidies, especially since bringing in more income than initially forecast can mean having to pay back excess credit come tax time. Ideally, an early retiree is working with a comprehensive financial planner and/or a tax professional to plan ahead. If navigating the ACA exchange is daunting, consider working with an experienced health insurance broker or a trained Navigator who can provide free, unbiased assistance in navigating and applying for ACA coverage.
In summary, early retirement presents a unique set of challenges when it comes to healthcare coverage, with several viable options to explore before Medicare eligibility. Whether choosing to get—or stay—on a spouse’s plan, utilizing COBRA for a temporary solution, or enrolling in an ACA exchange plan, it’s crucial to evaluate each option carefully based on cost, coverage needs, and personal circumstances. By understanding these alternatives and seeking professional guidance from a comprehensive financial planner when needed, early retirees can help with a smooth transition into retirement.
The opinions contained herein are that of the author and not necessarily that of Private Client Services LLC. This presentation is designed to provide educational and/or general information and is not intended for specific legal, accounting, investment, income tax or other professional advice.
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