Author Topic: COBRA vs ACA with subsidies. Analysis paralysis.  (Read 2377 times)

Sid Arthur

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COBRA vs ACA with subsidies. Analysis paralysis.
« on: November 02, 2019, 06:58:17 PM »
Apologies for yet another post on ACA subsidies but I wanted to give some specific details of my situation, it got rather long so I didn't want to hijack an existing thread.

I will be retiring next month and will have health insurance through my employer through the end of the year. I will be eligible for COBRA so I need to decide whether to take COBRA or sign up for the ACA. If I sign up for the ACA I need to decide what MAGI to aim for in 2020 so that I can work out what the subsidies would be. Iíve been trying to decide this for months but Iím stuck on trying to take into account all the factors.

A bit of background. I live in the Bay Area in California. Iím 59 and my wife is 51. My wife plans to work for a few more years and has both self-employment income and part-time employee income. We file taxes as married filing jointly. Most of my wifeís income can be taken out of our MAGI by a) paying most of her self-employment income into a Solo 401k and b) paying into an HSA from her employee income.

So the first thing is to compare my choices for medical coverage. I am currently on a high deductible PPO plan through my employer. I plan to continue using an HSA so I will just look at HDHP options from the ACA. These are the costs with no subsidies:

Per monthPer year
COBRA (incl. Dental and Vision)$1,117.25$14,206.20
COBRA (medical only)$1,183.85$13,407.00
Blue shield Bronze HSA PPO$1,837.03$22,044.36
Western Health Bronze HSA HMO$1,349.56$16,194.72
Kaiser Bronze HSA HMO$1,320.18$15,842.16

So, if I ignore subsidies it is a no-brainer - go with COBRA.
 
Also, my existing coverage has a deductible of $3000 while all the ACA options have a deductible of over $13,000. My existing coverage seems better all around.
 
One other thing to note on COBRA is that it lasts 18 months but it looks like we could extend it to 36 months (3 years) using Cal-COBRA in California. Not sure if Iím missing anything that would exclude that for us.
 
Subsidies

California has supplemented the ACA subsidies which means there is no ďACA cliffĒ at a MAGI of $67,640 and subsidies continue (gradually reducing) up to $101,460. I went on coveredca.com and put in some sample income levels to check the subsidies:
 
MAGI      Subsidy (per month)
$40K      $1638.15   (plus lower out of pocket costs)
$60K      $1318.18   (this is for PPO plan - slightly higher subsidies for HMOs)
$80K      $889.25
$100K      $398.55
 
There are so many variables, so Iím going to assume for now that I would go with the PPO plan on the ACA. At the $100K income level COBRA would still be cheaper. At the $80K income level it is still very close. So letís look at the $60K levelÖ
 
Annual cost for the ACA PPO at that level is $6226.20 vs. $13,407.00 for COBRA medical only. So I would save $7180.80 per year going with ACA and subsidies.
 
Capital Gains

But what am I missing out on by keeping my MAGI below $60K in 2020? The main things seem to be possible LTCG harvesting (at 0% rate) and roth conversions.
 
I have several stock positions in taxable accounts that I would like to change anyway (like sell my Megacorp stock and put the funds in VTI). So I want to do some trades both to take advantage of 0% LTCG and to switch funds. The total unrealized LTCG in my taxable savings is $183k. Of this $113k is in positions that I want to change.
 
So letís focus on LTCG.
 
Using 2019 tax brackets the 0% capital gains applies to taxable income up to $78,750. That is on top of the standard deduction of $24,400.
 
Letís assume that the taxable income from my wifeís earnings (after HSA and Solo-401k deductions) will be $12,000.
 
If we aim for a MAGI of $60K (for ACA deductions) that leaves $48K we can use for LTCG (all at 0%). But if we donít take subsidies we can get $91,150 of LTCG at 0% (24,400 + 78,750 - 12,000).
 
So there is some benefit to not taking the subsidy here but it is hard to quantify. We are saving paying $15% tax on $43,150 which would be $6472. We also have to freedom to take more LTCG in 2020 and pay the 15% tax - whereas if taking the ACA subsidies we canít trade those stocks at all.
 
So, above, I said I would save $7180.80 per year going with ACA at a $60k MAGI. But I would also lose $6472 and some freedom. So the ACA saves me 7180.80 - 6472 = $708 if I ignore the freedom to trade at 15% tax.
 
Similarly if we kept our MAGI at $40K total we would be saving 15% of a larger $63,150 LTCG difference which is $9472.50 but the subsidy is higher saving me $11020.44 on the premiums for a total savings of $1548.
 
That is one way of calculating it and just two possible scenarios. But I feel like to know the ďrightĒ answer I have to calculate out all the scenarios/factors for every year between now and when Iím 70 or so.
 
Other factors to take into account:
  • Roth conversions
  • Are both ACA and COBRA premiums something that we can write some of off against my wifeís self employment income? How does that affect the calculations?
  • If I just take 18 months of COBRA then 2021 is half COBRA and half ACA. Do I take subsidies that year?
  • If I take subsidies every year I will build up a lot of unrealized capital gains. Eventually I wonít be able to fund my withdrawals because I have to sell some of my taxable holdings to live on.
  • The HMO options are cheaper so they change the calculations a lot.
  • Taking COBRA seems simpler and less stressful (and better coverage) but I fear that Iím spending money that I donít need to.

Any thoughts on how to decide?

seattlecyclone

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Re: COBRA vs ACA with subsidies. Analysis paralysis.
« Reply #1 on: November 03, 2019, 09:46:00 AM »
Consider that there's no such thing as 0% capital gains when state taxes and ACA subsidy phaseouts are considered. I made a blog post showing what marginal rates on capital gains income look like in the federal ACA phase-out range. This doesn't take the California-specific state taxes and extended ACA phase-out range into account. Regardless, these phase-outs act as a high enough marginal rate all on their own that you may get a better deal by waiting until you age out of the ACA to "harvest" any gains you don't need to live on in the moment.

Sid Arthur

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Re: COBRA vs ACA with subsidies. Analysis paralysis.
« Reply #2 on: November 03, 2019, 01:24:00 PM »
I find the concept of the ACA subsidies as a parallel tax hard to get my head around. As I understand it the concept is that, as my MAGI increases, my subsidy goes down, so this is like a tax.

But that seems dependent on which plan I go with. In my case, if I were to go with the Kaiser Bronze HSA HMO option then the subsidy is identical whether my MAGI is $40K vs. $68K since at any of those amounts it brings it down to them minimum premium of $2 per month. If is only after the MAGI goes above $68k that the premium goes up.

So it seems that in the range where the subsidy would be more than the premium your ACA marginal tax rate would be flat.

Am I missing something?

One other factor that is bothering me is the ability sell stock with unrealized LTGC for risk minimization rather than income generation. This may be an unusual case but applies to me. I have held a large investment in VHT for about 8 years. It has done well in that time but I'm concerned that in the future it seems riskier to hold than VTI. So I would like to move that to VTI but that would cause around $85k of LTCG to be realized.

seattlecyclone

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Re: COBRA vs ACA with subsidies. Analysis paralysis.
« Reply #3 on: November 03, 2019, 01:44:16 PM »
I find the concept of the ACA subsidies as a parallel tax hard to get my head around. As I understand it the concept is that, as my MAGI increases, my subsidy goes down, so this is like a tax.

Yes, that's exactly right. For example in your numbers above you post that your subsidy would go down by $428.93 per month ($5,147.16 per year) as your income increases from $60k to $80k. That amounts to 25.7% of the income increase. It has the same impact on your pocketbook as a 25.7% tax on that income would, and so I think it's reasonable to think about it the same way.

Quote
But that seems dependent on which plan I go with. In my case, if I were to go with the Kaiser Bronze HSA HMO option then the subsidy is identical whether my MAGI is $40K vs. $68K since at any of those amounts it brings it down to them minimum premium of $2 per month. If is only after the MAGI goes above $68k that the premium goes up.

So it seems that in the range where the subsidy would be more than the premium your ACA marginal tax rate would be flat.

Am I missing something?

Yes, you're right that the subsidy can't exceed your premiums. Once your income drops below the point where your chosen health insurance would be free, the marginal rate imposed by subsidy phase-out would drop to zero. Of course at that point you might want to consider whether a nominally more expensive plan looks like a better deal now that it has a higher subsidy than the cheaper plan. If this does look like a better option, then your marginal rate isn't zero anymore.

Quote
One other factor that is bothering me is the ability sell stock with unrealized LTGC for risk minimization rather than income generation. This may be an unusual case but applies to me. I have held a large investment in VHT for about 8 years. It has done well in that time but I'm concerned that in the future it seems riskier to hold than VTI. So I would like to move that to VTI but that would cause around $85k of LTCG to be realized.

This is a very valid concern. You seem to have trade-offs to consider, and the way you choose to balance the competing concerns is not really straightforward. It depends a lot on your own priorities and risk tolerances. Good luck!

Paul der Krake

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Re: COBRA vs ACA with subsidies. Analysis paralysis.
« Reply #4 on: November 03, 2019, 01:59:48 PM »
Why not slowly unwind your undesirable positions? There's nothing forcing to sell it all in 2020.

seattlecyclone

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Re: COBRA vs ACA with subsidies. Analysis paralysis.
« Reply #5 on: November 03, 2019, 02:14:53 PM »
Why not slowly unwind your undesirable positions? There's nothing forcing to sell it all in 2020.

Indeed, this is probably the approach I would take, selling only VHT to pay the bills until it's gone. However if you recently saw the light on total market index investing and are really worried that being overweight in the health care sector will come to bite you sooner rather than later you might find the price of rebalancing to be worthwhile.

Paul der Krake

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Re: COBRA vs ACA with subsidies. Analysis paralysis.
« Reply #6 on: November 03, 2019, 06:05:57 PM »
Something else I forgot to mention that may tip the balance towards COBRA: you can pay your COBRA premiums using your HSA monies.

There are tons of variables to consider to make this worthwhile, but in your scenario it's an easy way to free up ~13k/year out from that bucket.

OurFirstFire

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Re: COBRA vs ACA with subsidies. Analysis paralysis.
« Reply #7 on: November 03, 2019, 09:40:25 PM »
Another factor to consider: ACA premiums are deductable against self-employed income.  COBRA (AFAIK) is not.

OurFirstFire

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Re: COBRA vs ACA with subsidies. Analysis paralysis.
« Reply #8 on: November 03, 2019, 09:46:17 PM »
Another factor to consider: ACA premiums are deductable against self-employed income.  COBRA (AFAIK) is not.

Disregard, you already mentioned this and it looks like COBRA is deductable if you meet the conditions.

SwordGuy

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Re: COBRA vs ACA with subsidies. Analysis paralysis.
« Reply #9 on: November 03, 2019, 10:31:21 PM »
I just went thru the ACA sign-up process.  That subsidy is an awesome thing for those who qualify.    I fell off the subsidy cliff, which means we make too much money (and in the wrong manner) being FIRED to qualify for it.   (And playing games to drop our MAGI won't work out. )

 

Greystache

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Re: COBRA vs ACA with subsidies. Analysis paralysis.
« Reply #10 on: November 04, 2019, 08:22:52 AM »
If you choose an ACA bronze plan with an HSA, are you planning to contribute to the HSA? If you and our wife contribute the maximum to the HSA, you can reduce your MAGI by that amount (I think that is about $7.5K in your situation). I could not tell if your numbers included an HSA contribution or not.  My wife and I have been maxing out our HSA contributions for five years now and have amassed a pretty good chunk of tax free money in our HSA account. In our case, maxing out the HSA was more cost effective than a Roth conversion. The only down side is there are limitations on what we can spend the HSA money on, but we feel that we will always have medical expenses in the future.

Sid Arthur

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Re: COBRA vs ACA with subsidies. Analysis paralysis.
« Reply #11 on: November 05, 2019, 09:51:40 AM »
Consider that there's no such thing as 0% capital gains when state taxes and ACA subsidy phaseouts are considered.

Thanks for that reminder. It looks like CA taxes all capital gains as regular income. So I would end up paying tax in the 2, 4, and 6 percent brackets on any LTCG that I realize.

Why not slowly unwind your undesirable positions? There's nothing forcing to sell it all in 2020.
Yes that seems like a good approach. If I try to avoid any LTCG federal tax then I would have to spread it over several years either way. Perhaps over 2 years for the COBRA option and 3 years for ACA subsidy option.

Something else I forgot to mention that may tip the balance towards COBRA: you can pay your COBRA premiums using your HSA monies.

There are tons of variables to consider to make this worthwhile, but in your scenario it's an easy way to free up ~13k/year out from that bucket.
Thanks for that tip, I had not realized that. While I suspect that I will have enough medical bills over the years ahead to be able to withdraw everything I can pay into the HSA it would give some peace of mind to have 13k in premium payments that I could withdraw any time.

If you choose an ACA bronze plan with an HSA, are you planning to contribute to the HSA? If you and our wife contribute the maximum to the HSA, you can reduce your MAGI by that amount (I think that is about $7.5K in your situation). I could not tell if your numbers included an HSA contribution or not.  My wife and I have been maxing out our HSA contributions for five years now and have amassed a pretty good chunk of tax free money in our HSA account. In our case, maxing out the HSA was more cost effective than a Roth conversion. The only down side is there are limitations on what we can spend the HSA money on, but we feel that we will always have medical expenses in the future.
Yes we plan to contribute the max to an HSA each year. While my wife continues to work we would do that from her payroll income to get the additional benefit of avoiding FICA on that amount.


One other thing that I was missing earlier was that I could take COBRA for just the first 12 months. I was thinking that I had to stick with it for 18 months because I could not get ACA subsidies while I was eligible to continue COBRA. But reading up some more it looks like I could switch to ACA with subsidies in open enrollment at the end of 2020.

I'm still mulling over the decision. It's complicated. I think partly because I'm trying to balance several things including:
  • The overall out of pocket cost for the year (including premiums, LTCG taxes etc)
  • The quality of the health care insurance
  • The tricky "pay taxes now or years later" question
  • The "freedom" feeling. i.e. with ACA subsidies I feel I lose some freedom because I'm committed to keeping MAGI low.
  • The risk of staying in less diversified stock investments.
« Last Edit: November 05, 2019, 09:54:33 AM by Sid Arthur »