Health insurance considerations when planning for early retirement, or involuntary retirement due to health issues, downsizing, or family situations, can seem daunting. The following discussion will highlight the different paths you can take to secure health insurance before becoming eligible for Medicare.
The introduction of the Affordable Care Act (ACA) has made getting health insurance coverage more feasible for those contemplating retirement before the age of 65. The ACA is particularly beneficial for those facing financial limitations or health conditions—factors that previously would have created barriers for early retirees looking for health insurance before the ACA era.
Moreover, the American Rescue Plan (ARP) has enhanced the affordability provisions of the ACA, with effects lasting until the end of 2022. An extension of these provisions till 2025 is currently under consideration by the Congress via the Inflation Reduction Act of 2022.
Exploring Your Health Coverage Choices Pre-Medicare
A large portion of Americans, especially those under the age of 65, derive their health insurance from their employer. Upon reaching the age of 65, the vast majority of Americans become eligible for Medicare.
Many individuals shift directly from employer-sponsored health insurance to Medicare, often with the possibility of continued supplemental coverage from their employer, whether still actively working or retired.
However, retiring before reaching Medicare eligibility presents several options for health insurance in the period between retirement and Medicare eligibility. These options include the state health insurance marketplace, continuation of benefits through COBRA or state continuation, inclusion in your spouse's health plan, or Medicaid.
Due to the ACA, every state now has a health insurance marketplace or exchange that allows the purchase of private health insurance plans. These plans guarantee coverage, meaning you can enroll irrespective of your medical history, and any pre-existing conditions will be covered as soon as your plan is active.
Enrollment periods are typically annual or special enrollment periods triggered by a qualifying event. Loss of employer-sponsored health insurance qualifies, allowing you to switch to a marketplace plan when you leave your job and your health insurance terminates.
The ACA also introduces income-based premium subsidies or premium tax credits available via your state's marketplace or exchange. The American Rescue Plan has expanded these subsidies, making them larger and more widely accessible for the years 2021 and 2022.
In the marketplace, you will encounter various plan options, with levels including Bronze, Silver, Gold, and potentially Platinum. Should your income not exceed 250% of the poverty level, available Silver plans will come with in-built cost-sharing reductions.
Subsidy eligibility is based on your annual income, not just the income of the months you're enrolled in a marketplace plan. For early retirees, this is particularly relevant as the removal of the "subsidy cliff" at least until the end of 2022 has made coverage more affordable, irrespective of high income earned earlier in the year.
Guidance for Buying Life Insurance
HealthCare.gov is an excellent resource if you are considering early retirement and want to explore your options. Your state-specific exchange will be accessible if your state runs its own exchange. Make sure you are attentive to the provider networks and drug formularies specific to the plan you are considering, especially if you are currently under medical treatment.
The availability of COBRA coverage or state continuation coverage may be worth considering based on factors such as your proximity to Medicare eligibility, your out-of-pocket expenses so far in the year, eligibility for marketplace/exchange subsidies, and your ability to maintain your current medical providers if you switch plans.
If your spouse has a health insurance plan through their employer that offers coverage for spouses, you could be eligible to join their plan when your coverage ends. The termination of your coverage will trigger a special enrollment period, just like with a marketplace plan.
If your income significantly decreases after retirement, you might become eligible for Medicaid. If your monthly income is below 1/12th of the annual income cap for Medicaid eligibility, you could qualify for Medicaid irrespective of your earlier income in the year.
In conclusion, you have multiple options for health insurance if you choose to retire before the age of 65. Depending on your personal circumstances, these options can include the state health insurance marketplace, COBRA or state continuation, inclusion in your spouse's health plan, or Medicaid.
Though securing health insurance has historically been a challenge for early retirees, especially those with severe pre-existing conditions, the ACA has made it more accessible. Although staying in your job until Medicare eligibility may be the best choice for some, there are affordable health insurance options available if you decide to retire earlier.
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