What counts as "income" for PPACA subsidies?

[freebeer]

Apparently there is a substantial "cliff" for subsidies provided for starting next year as part of PPACA (Obamacare) health insurance exchanges. Below 400% of the poverty rate (~$46K for individual, ~$94K for family of 4) premiums of "silver" level plans are capped at 9.5% of income. The subsidies (or not) could be very material for someone planning retirement spending, particularly for early retirees that aren't yet Medicare eligible. Here is one purported calculator: http://healthreform.kff.org/subsidycalculator.aspx . It shows that for a family of 4 with 53-year-old head of household the cliff increases their insurance premium from $8,901 to over twice that at the un-subsidized $18,475. Crossing the cliff takes a single person aged 53 from $4,372 to $7,826 in premium.

My question is: what counts as "income" for calculating eligibility for these subsidies? Presumably withdrawals from ordinary 401Ks or IRAs would do, but withdrawals from Roth plans not? How about dividends from tax-exempt muni bonds? Cap gains offset by cap losses? This must be concisely stated somewhere in terms of the various IRS definitions of income but I couldn't google up anything specific.

I could imagine that depending on the answers that a fair bit of "gaming" to end up with an income below the cliff could end up being commonplace to save $3.5K to $9K.

(no political or sky-is-falling comments please - I'm asking a straightforward question about the law as it stands, and don't want to get this thread locked. Thanks in advance.)

[furwut]

I'm interested in this too. My impression from very little reading is that the threshold testing applies to taxable income. So yes, early retires with income flexibility could "game" it to gain some premium support.

[kaneohe]

This might be a better question than you imagined:
see p.6 here http://www.ncsl.org/documents/health/defincacamedicdprov.pdf

I don't need to know so I'll let you figure it out.

[freebeer]

This might be a better question than you imagined:
see p.6 here http://www.ncsl.org/documents/health/defincacamedicdprov.pdf

I don't need to know so I'll let you figure it out.

Thanks for the link, so to help answer my own question with this information, I think the answer is "Modified Adjusted Gross Income" ("MAGI") which is defined as follows in the referenced paper:

Specifically, gross income is total income minus certain exclusions (e.g., public assistance payments, employer contributions to health insurance payments). From gross income, adjusted gross income (AGI) is calculated to reflect a number of deductions, including trade and business deductions, losses from sale of property, and alimony payments. MAGI is defined as AGI plus certain foreign earned income and tax-exempt interest.

So this implies that muni bond interest is included, so no gaming things that way. Non-taxable portion of annuity payments would not be included so that would seem to favor SPIAs and other vehicles that throw off majority of early-year returns as return of principal. This would seem to be yet another plus for Roth conversion since you could take an income tax hit in year 1 and then gain subsidies in years 2..N. I believe only net of capital gains counts into gross income definition so that would imply if you have or can create lots of cap loss offsets you could realize current year capital gains without generating net income for subsidy calculation purposes.

But if anyone else has studied this and has additional/different thoughts please chime in, thanks.

[snowman]

freebeer,

Correct answer is MAGI. However, there are still details that may affect you but are not finalized yet. For example, if you are self-employed, and do not have access to employer sponsored plan (the group that is supposed to reap the biggest financial benefits of the law), you will be able to buy coverage on your state health exchange website. The issue is that only certain type(s) of plans will be eligible to receive subsidies, and it may not be the best option for you and your family. Also, HOW you can receive the subsidy up front has not been finalized by the IRS (you can always receive corresponding refund, if eligible, when you file your taxes the following year for the previous tax year). Finally, it APPEARS that penalty for not buying the coverage is too low, and so more people than expected may opt out of the system, which will put additional financial pressure on it, causing it to change some rules/thresholds. (Some critics of the law predict low penalties will cause it to die).

In a nutshell, I think it's great that you are starting to plan for a potential tax benefit, but there are just too many unknowns at this point to make any specific financial moves. Hence the reason there are only 2 calculators on the web as far as I am aware of.

[freebeer]

freebeer,

Correct answer is MAGI. However, there are still details that may affect you but are not finalized yet. For example, if you are self-employed, and do not have access to employer sponsored plan (the group that is supposed to reap the biggest financial benefits of the law), you will be able to buy coverage on your state health exchange website. The issue is that only certain type(s) of plans will be eligible to receive subsidies, and it may not be the best option for you and your family. Also, HOW you can receive the subsidy up front has not been finalized by the IRS (you can always receive corresponding refund, if eligible, when you file your taxes the following year for the previous tax year). Finally, it APPEARS that penalty for not buying the coverage is too low, and so more people than expected may opt out of the system, which will put additional financial pressure on it, causing it to change some rules/thresholds. (Some critics of the law predict low penalties will cause it to die).

In a nutshell, I think it's great that you are starting to plan for a potential tax benefit, but there are just too many unknowns at this point to make any specific financial moves. Hence the reason there are only 2 calculators on the web as far as I am aware of.

Thanks for the comments snowman. But, financial moves are always made in the face of a not fully known future. It seems to me that, your issues aside, strategizing a glide path for 2014 and beyond income to fall just under the subsidy cliff threshold (if possible) rather than say a default of just above that threshold would not be amiss.

BTW re: your final point - whether or not using term "Obamacare" is deemed political on this forum, discussing potential future changes to taxes and other laws on this forum definitely seems to have been ruled political by the mods. I think we are allowed only to hypothesize based on a steady-state assumption relative to same. This does seem a bit silly to me but it's not my site and it does make for more focused discussions.

[Yipee-Ki-O]

Regardless of the name, I'm personally pretty excited that come October of this year I can choose among health insurance plans which should be vastly superior to my present individual coverage and its $5,000 deductible. In playing around with the Kaiser Foundation calculator, the cutoff point for a tax credit for a single person seems to be an adjusted gross income of between 46k and 47k. While I don't want to cross the line into political comments, personally I don't see much difference between my eligibility for a tax credit for the purchase of an individual health insurance policy than the tax credit someone who receives group coverage enjoys since they are not taxed on their employer's contribution to their group health insurance premium

[freebeer]

Regardless of the name, I'm personally pretty excited that come October of this year I can choose among health insurance plans which should be vastly superior to my present individual coverage and its $5,000 deductible...

Yeah, in WA State current individual coverage options are terrible compared to group (employer) plans.

... I don't see much difference between my eligibility for a tax credit for the purchase of an individual health insurance policy than the tax credit someone who receives group coverage enjoys since they are not taxed on their employer's contribution to their group health insurance premium

Right. Although it seems the individual tax credity subsidy under ACA will be substantially larger - for a family of 4 it's 50% of the premium and a) few employers cover 100% of a family and b) no one is at 50% marginal income tax rate.

[magellan]

Regardless of the name, I'm personally pretty excited that come October of this year I can choose among health insurance plans which should be vastly superior to my present individual coverage and its $5,000 deductible.

I also have an individual $5k deductible policy, but I'm not as sure that my choices will be better in October. I'm generally supportive of the new law because the old insurance system was so badly broken. Under the old rules, insured people who got sick were very vulnerable to being gamed out of the system by insurance companies. Also, a large chunk of the population didn't have insurance, which left them vulnerable to substandard care and to financial ruin. It also caused major cost shifting onto the folks that did have insurance. PPACA has a good shot at fixing a lot of this. I think that's a really good thing and I'm very hopeful that it succeeds.

OTOH, we shouldn't expect miracles from the Rev 1.0 version of something so complicated. It's nearly certain that there will be some nasty unexpected consequences as the kinks get worked out. For most people that already have employer coverage, the impacts from PPACA will hardly be noticeable, but for folks like us with individual policies, the change and the uncertainty are huge.

Based on the current state of rule-making for the exchanges, I probably won't be able to replace my $5k deductible plan under the new system. Deductibles are likely to be capped at around $2500. All things equal, that'll translate into a big premium increase for me even if nothing else changed.

Healthy young people will almost certainly see large premium increases, because all plans will be required to include maternity coverage and because the premium spread between the youngest policyholders and the oldest is capped, which will result in younger policy holders subsidizing older folks. That's good for me, but bad for younger folks just getting started out. Also, in the majority of states that previously allowed medical underwriting, people without preexisting conditions will likely see big premium increases, since healthy people will pay the same premiums as people with serious medical issues. Again, I personally support this change, but it will come at a cost.

For now I'm watching and waiting. People with existing grandfathered policies can keep them for as long as the insurance company offers them. Of course, this means giving up subsidies from the exchanges. Still, if I can, I may stay put for the first year or two and let things settle out. Once you give up enrollment in a grandfathered plan, you can never go back. The subsidies from the exchanges are enticing, and as an early retiree I could probably do some income gaming to qualify every other year. Still, right now I'm thinking it's best to watch and wait.

Jim

[Alex Frakt]

several off topic responses removed

[rec7]

I would like to ask a question if we remain on our own insurance will the government give us something to do that? My income is under 10k.

[Alan S.]

The link posted earlier indicates that the subsidies are limited to those purchasing coverage throught the state exchanges. However, I would not view this as necessarily final as there are still many Regulations that must be released and others that could be modified before implementation. Even after 2014, the PPACA is going to be modified to make it more workable and equitable, so stay tuned to potential changes.

[magellan]

I would like to ask a question if we remain on our own insurance will the government give us something to do that? My income is under 10k.

Until the exchanges are operating and the subsidy rules are finalized, it's tough to answer with certainty.

But here's the big thing in your situation. My understanding is that the exchange subsidies are only available to people who are not eligible for medicaid. I think the income cutoffs for medicaid eligibility are state specific.

So the way it looks now, the exchange subsidies will only be available to folks earning above the medicaid income cutoff and below the 400% Federal poverty level (FPL) upper income cutoff.

Jim

[snowman]

We are on the same boat, a family of 4 buying family coverage on the open market because both me and my wife are self-employed. Having worked in the industry for many years, I can honestly say the system is broken and is in desperate need of repair. I often tell people that are currently getting employer sponsored coverage that they have no idea how bad it really is until they are forced to buy the policy on the open market. Needless to say, we too are anxiously awaiting October 1, 2013.

Here is the link to IRS website describing ACA's tax provisions (last updated February 5, 2013):

http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions

If you scroll down to "Health Insurance Premium Tax Credit" section, you can select to view the final "Rules and Regulations" document regarding the tax credit:

http://www.gpo.gov/fdsys/pkg/FR-2012-05-23/pdf/2012-12421.pdf

My assumption is that only lower income individuals and families will choose up front tax credits. It gets complicated when you need to return the credit because your MAGI went up, your circumstances have changed, or you did not pay your insurance premium for 3 months, etc. It will be much easier to claim the credit on the back end, especially if you have some flexibility with MAGI (which most self-employed people, as well as early retirees, do).

I will also point out that while the silver plan (second from the bottom - bronze, silver, gold, platinum) is the one often cited as the "subsidized plan", it's actually a "benchmark plan" determining the level of tax credit. What this means is that you can apply the tax credit towards gold or platinum level plan, if you choose to do so, but obviously the premium (and benefits) associated with such plan will be higher. However, you cannot take the tax credit and apply it towards the plan that costs less than the amount of credit you are eligible for (more than likely bronze level plan).

A good article with some examples can be found here:

http://money.usnews.com/money/blogs/the ... -will-work

Another good place to check new info periodically is your state's health exchange website, if your state is creating one. They generally have pretty good FAQ section. Below are the links for WA and CO, as an example:

http://wahbexchange.org/about-the-excha ... questions/
http://www.getcoveredco.org/FAQs

Finally, if you are covered by employer-sponsored plan, congratulations. None of this really applies to you, unless your employer-sponsored plan is defined as unaffordable, or fails to provide minimum value, as defined under the law. In that case, you will be eligible to receive tax credits too. I just wonder how TT will deal with that...

[FinanceGeek]

I think the one of biggest problems with the ACA is the large discontinuity of the subsidy system. Earn one more dollar above 400% of FPL and you can go from paying 9.5% of income to "sky's the limit". As insurance premiums rise I'm sure this will have to be reformed.

Overall this reform is fantastic news for ER types, esp those with pre-existing conditions who can keep their MAGI in check.

[magellan]

I will also point out that while the silver plan (second from the bottom - bronze, silver, gold, platinum) is the one often cited as the "subsidized plan", it's actually a "benchmark plan" determining the level of tax credit. What this means is that you can apply the tax credit towards gold or platinum level plan, if you choose to do so, but obviously the premium (and benefits) associated with such plan will be higher. However, you cannot take the tax credit and apply it towards the plan that costs less than the amount of credit you are eligible for (more than likely bronze level plan).

Lots of good info in that post. Thanks. One clarification though. My understanding is that if you're eligible for a credit but choose to go with a less expensive bronze plan, you can still apply the credit toward that plan. You just can't get anything back for any part of the credit you don't use. Is that correct?

Thanks,

Jim

[snowman]

magellan,
yes, that is correct. I believe you will find this whole document (not just page 9) very useful:

http://publications.milliman.com/public ... andate.pdf

[Cut-Throat]

I am not talking about the amounts of the subsidies but the actual 'delivery' method of the subsidies.

Some of the subsidies will be quite large in term of a larger family that is well under the poverty level. I have heard that these subsidies will be given as a 'tax credit' on the following years tax form. In this was the case, a family might have to come up with $10 Grand to pay the insurance company, while waiting a year for the tax credit. I can not imagine that the people in this situation would have the money. So, I am guessing that there is another method of the delivery of this subsidy.

Does anyone here know how this subsidy will be delivered ?

[Alan S.]

Copied from an earlier posted link:

Income Eligibility for Premium Credits
Beginning in 2014, qualifying individuals will be able to receive “premium assistance credits”
toward the purchase of exchange coverage. The credit is an advanceable, refundable tax credit,
meaning taxpayers need not wait until the end of the tax year to benefit from the credit (advance
payments will actually go directly to the insurer14) and may claim the full credit amount even if
they have little or no federal income tax liability.

Shades of the former "advanced EIC payments" that were eliminated in 2010, except you can't spend money that goes direct to the exchange participants.

[orlandoman]

What year's income counts?

PPACA takes effect 1/1/2014 ... what year's income is it going to be based on? If 2014, how will it work, since W2's & taxes will not have to be filed till April 2014?

Never seen any mention of what year & how?

Thanks!

[snowman]

The mechanics of credits (if eligible) are outlined in one of the links above. Credits are applied towards premiums paid in the same tax year. You may choose to claim tax credits for premiums paid in 2014 when you file your taxes in April 2015. Lower income individuals and families may choose to receive the credit up front based on their MAGI in 2013 - US Treasury pays the Insurer the amount of credit, and insurer charges you the difference. The rules and options will be explained on your state exchange website when it opens in October 2013.

[freebeer]

As I've read further on this it appears that contributions to 401k (both employee's, within limits, and employer's match if any) are not included in the MAGI calculation (as these don't count as part of gross wages), but contributions to regular IRAs are. Is this correct?? It's confusing because there are different definitions of MAGI for different purposes.

If this is true then it would seem there should be a land rush into 401Ks... as this deduction from gross income could make the difference in qualifying for a significant subsidy vs. being over the cliff and getting nothing. I realize the definition of MAGI already treated 401Ks and IRAs differently, but I didn't think there was a major substantive impact as a result until PPACA.

[snowman]

freebeer,

I am not sure I understand your concern, so feel free to reply if I am missing something here.

The definition of MAGI is pretty stable - you take your AGI, and than you add back certain items like foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs. For most people, it's IRAs and educational cost deductions they will be adding back.

If you are getting 401k match from your employer, you are very likely covered by qualified plan already, which means you are not going to be state exchange customer, therefore you will not get any subsidy. For self-employed individuals, traditional IRA contributions are mostly a non-event, since they can contribute to solo 401k with huge deductible space - over $100K annually if both spouses are self-employed. So there will be no "rush" from TIRA to 401k.

The number of individuals playing with MAGI in order to qualify for subsidies is estimated to be rather small. Remember, about 50% of people receive their insurance through qualified plan from their employer, so nothing changes for them. Same goes for Medicare and Medicaid recipients - neither of these groups is at the cliff of subsidies. Now you are getting down to a pool of individually insured and uninsured people - that's the bulk of future state exchange's customers. When you take out population under 30 that will be allowed to purchase catastrophic plan (likely the cheapest plan available to that group), you will be left with roughly 3 million people ages 30-64 with household income of 400%-600% FPL. That's it - a very small number in the big picture, and many people in this group will either not be able to reduce their MAGI, or may not want to do it.

The one unknown are potential early retirees (generally ages 55-64), who for the very first time will have an option to quit the workforce and be guaranteed to purchase health insurance on the open market. It may very well cost them more than getting employer-sponsored plan, but they cannot be denied coverage. If you control your early retirement income well, you may even come ahead. However, nobody expects flood of early retirees to state exchanges. They would be giving up much more than employer-sponsored health plan - salary earnings (probably highest in their career), 401k matches, stock options, pensions, and other perks. But there will definitely be people in that group who will benefit greatly by being able to retire earlier than planned.

[freebeer]

snowman,

I don't have a "concern" per se I'm just trying to understand fully the situation under the new law. If 401K contributions (not just employer match but also employee contributions) are not part of MAGI for PPACA subsidy calculation purposes then it would seem very possible to "fine tune" 401K contributions to qualify for a pretty substantial subsidy (i.e. to avoid going over the income "cliff"). This includes catch-up contributions if eligible that might otherwise not be made. And despite Bogleheads conventional wisdom that a traditional IRA may be a better choice than 401K after employer match for someone in this situation then 401K contributions would be wildly better choice than IRA if only the former reduces MAGI.

I'm presently an employee of a very small organization that does offer a company health insurance plan but does have a 401k so this isn't just an academic concern on my part... I agree that a lot of folks with 401Ks will also have employer health plans and thus not be so concerned about subsidized exchanges.

[FinanceGeek]

If one has large unrealized gains, is it feasible to borrow money against the value of brokerage accounts, from a 401k, etc. to meet living expenses while retaining subsidy eligibility? This would seem more attractive than selling appreciated securities which would trigger a large tax hit and loss of subsidies.

[freebeer]

If one has large unrealized gains, is it feasible to borrow money against the value of brokerage accounts, from a 401k, etc. to meet living expenses while retaining subsidy eligibility? This would seem more attractive than selling appreciated securities which would trigger a large tax hit and loss of subsidies.

Right! Or, just in general regardless of unrealized gains... even if all your $ were in a 401K: if you are over 59 (so can take distributions w/out penalty) but under 70 (so no RMDs yet) you could seemingly borrow from 401K for some living expenses in even years (enough to qualify for subsidy) and pay back via extra distributions in odd years (if potential increase in marginal income tax rate is substantially less than the subsidy). This assumes a 401K w/ flexible loan rules (VG 401K for example). Weird to consider paying back a 401K loan via a 401K distribution but I find anything that says that isn't kosher.

[FinanceGeek]

My limited knowledge of margin accounts is that they let you borrow money to buy additional securities that you could not otherwise afford given your cash balance. But can you take a margin loan to avoid having to sell appreciated securities and then withdraw the borrowed cash from your account for (say) living expenses?

Borrowing from a 401k would seem to be an especially attractive method, since the interest you pay goes back into your own account. HELOC loans may be attractive too.

To the extent 9.5% of 400% of FPL greatly exceeds the cost of an insurance policy, the subsidy system is going to be played like a stradivarius.

[magellan]

To the extent 9.5% of 400% of FPL greatly exceeds the cost of an insurance policy, the subsidy system is going to be played like a stradivarius.

I agree there will be some income gaming. However, the actual tax math for this is pretty complicated with several moving parts. The 400% FPL cutoff is around $62k for a family of 2 (much higher in Alaska and Hawaii). Meanwhile, there's a marginal tax rate shift from 15% to 25% for couples at an AGI of around $73k. The cliff between the 0% and 15% dividend and capital gains rate falls into the mix as well.

It's so complicated that you'll probably have to do two years of tax returns, both with and without income bunching, to compute the federal and state tax impact. Deduction bunching in the high income years could help, but it's possible that gains from qualifying for a credit every other year will be reduced by higher taxes on the "bunched" income in the off years. It sure presents a neat optimization problem to solve!

Jim

[snowman]

OK, I see what you are saying. Yes, you can reduce your MAGI by $5K ($6K if over the age of 55) if you currently contribute to TIRA instead of contributing to your 401k.

However, I don't quite get this statement:

"I'm presently an employee of a very small organization that does offer a company health insurance plan but does have a 401k so this isn't just an academic concern on my part... I agree that a lot of folks with 401Ks will also have employer health plans and thus not be so concerned about subsidized exchanges."

Did you mean to say that your employer does NOT offer health insurance?

[freebeer]

OK, I see what you are saying. Yes, you can reduce your MAGI by $5K ($6K if over the age of 55) if you currently contribute to TIRA instead of contributing to your 401k.

However, I don't quite get this statement:

"I'm presently an employee of a very small organization that does offer a company health insurance plan but does have a 401k so this isn't just an academic concern on my part... I agree that a lot of folks with 401Ks will also have employer health plans and thus not be so concerned about subsidized exchanges."

Did you mean to say that your employer does NOT offer health insurance?

Snowman, I don't get your statement that I can only reduce MAGI by $5K/$6K by shifting contributions from TIRA to 401K... I thought 401K limits were $17,500/$23,000 (2013).

Yes, my employer does NOT offer health insurance but does provide health insurance reimbursement (although individual plans presently available in my state are expensive & c**p so it's not a particularly good deal for either party). I'm the sole U.S. based employee so it's kind of a special situation.

[snowman]

I was reacting to this sentence, freebeer:

"And despite Bogleheads conventional wisdom that a traditional IRA may be a better choice than 401K after employer match for someone in this situation then 401K contributions would be wildly better choice than IRA if only the former reduces MAGI."

Yes, you are correct - if you now contribute to TIRA and are not maxing out in your 401k, than switching that contribution from TIRA to 401k is going to lower your MAGI. For example, if your 401k space is $17.5K, and you currently contribute only $10K, and than $5K to TIRA, than you are absolutely going to be better off - for MAGI calculation purposes - to put that $5K into 401k, instead of TIRA. I also took your earlier comment about "land rush into 401ks" as "switching from TIRA contributions to 401k contributions" - that's why I said you only have $5K/$6K to play with (assuming you are not maxing out in your 401k already). Maybe I misunderstood that comment, because you may have described a situation where an employee currently chooses to contribute only $5K annually in total, in which case - yes, they can lower their MAGI substantially, should they choose to increase their 401k contribution from $5K to $17.5K.

I also see that you truly are in a special situation, and I don't know how your employer will choose to comply with the new law, it's quite an interesting case. You are doing the right thing by exploring your options come 2014.

[freebeer]

...you truly are in a special situation, and I don't know how your employer will choose to comply with the new law, it's quite an interesting case. You are doing the right thing by exploring your options come 2014.

There are 4.6M firms with 9 or fewer employees which make up close to 10% of the U.S. annual payroll. ( http://www.census.gov/econ/smallbus.html ). I'm sure quite a number of them have a basic 401K but no health plan now that solo 401Ks are now easy to set up, whereas establishing a health plan for a one-employee business has been a PITA at least in WA State. So I think my situation isn't all that special.

I think the path forward for us will be easy: I will see what kind of health plan I can get from the state-run exchange and also check out what new offerings there are for sole-employee businesses, and then choose whatever's most cost-effective. I won't be under the cliff at this point - that's more a question for a post-job future. The main quirk is that my employment contract specifies a fixed reimbursement cap and if I were to come in at a lower $ amount I do not receive the difference in cash (or else the whole thing would be taxable income). So there's not really any personal incentive to save $ but only to get the best insurance for the family that I can at or above the reiumbursement amount (although if choosing between 2 identical plans obviously it makes sense to choose the cheapest and save the company $).

[snowman]

I was just responding to this comment of yours:

"I'm the sole U.S. based employee so it's kind of a special situation."

[freebeer]

I was just responding to this comment of yours:

"I'm the sole U.S. based employee so it's kind of a special situation."

Yeah I guess I'm just not that special after all...