What might the AHCA mean for Early Retirement?

The new administration has unveiled the American Health Care Act (AHCA. Really? Was it that hard to come up with a name that abbreviated to something significantly different than ACA? Make America Well Again? Second Time’s A Charm?). AHCA is a proposal for an Obamacare replacement. It has a long road ahead of it before it actually becomes law. There are going to be bloody battles. Fair warning: the final version may end up looking very little like the version we have before us today.

In this article I look at the proposal through the lens of the early retiree. I try to answer the following questions

  • How would AHCA affect you in the accumulation phase? and
  • How would AHCA affect you if you were already early retired or planning to be in the near future?

This article aspires to be a dissection of the facts as we know them. It is not an opinion piece (though that would have been so much more fun to write). I will do my best not to cheer or rant, but simply to present the math. I am also not going to focus on the possible long term effects of AHCA. Why not? Even if AHCA does manage to jump through all the hoops and navigate all the roadblocks and become law, there is no telling if it will survive the next administration.

Ok, enough with the caveats and disclaimers. Let us dissect the bill.

I want to read the bill myself

Be my guest. You can download it

The ‘bill’ from the first site is 123 pages long, the second one is only 66 pages long. The second one is a subset of the first, and the first has 57 extra pages. Why? I have no freaking idea. Either way, make sure you have a lot of caffeine handy.

What remains the same with AHCA?

I’ll start with a quick rundown of pieces of Obamacare that will survive the AHCA hatchet.

  1. Children can stay on their parents’ insurance policies till age 26.
  2. People must be covered even if they have gnarly, expensive pre-existing conditions, and insurers cannot charge more based on the history of your health.
  3. AHCA also bars insurers from setting lifetime limits on how much they will pay for someone.

I know I said there will be no cheering, but I’ll pause for a minute to allow you to clap or squeal with delight in the privacy of your own home. These are all good things, and I’m glad that AHCA proposes to keep them around.

AHCA changes that affect the accumulation phase of FIRE

Remember that HSA account that you know and love? You know, the one that allows you to tuck away up to $6750 (as a family, $3400 as an individual) in pre-tax money every year, exempt from FICA taxes? The one that then grows tax-free and eventually allows for tax-free distributions (for qualified medical expenses)? I think AHCA proposes giving the HSA some serious juice. To quote:

“4 SEC. _16. MAXIMUM CONTRIBUTION LIMIT TO HEALTH SAVINGS ACCOUNT INCREASED TO AMOUNT OF DEDUCTIBLE AND OUT-OF-POCKET LIMITATION.

SELF-ONLY COVERAGE.—Section 223(b)(2)(A) of the Internal Revenue Code of 1986 is amended by striking ‘‘$2,250’’ and inserting ‘‘the amount in effect under subsection (c)(2)(A)(ii)(I).

FAMILY COVERAGE.—Section 223(b)(2)(B) of such Code is amended by striking ‘‘$4,500’’ and inserting ‘‘the amount in effect under subsection (c)(2)(A)(ii)(II)’’.

It would have killed them to write that in plain English.

Let’s see if we can do better. We’ll start by looking at subsection (c)(2)(A)(ii) of 223(b)(2)(A) of the Internal Revenue Code:

(2)High deductible health plan
(A)In general The term “high deductible health plan” means a health plan—
(ii)the sum of the annual deductible and the other annual out-of-pocket expenses required to be paid under the plan (other than for premiums) for covered benefits does not exceed—
(I) $5,000 for self-only coverage, and
(II)twice the dollar amount in subclause (I) for family coverage.”

There seem to be two possible interpretations.

  1. New annual HSA limit = minimum(maximum out of pocket allowed by law, your actual max out of pocket as defined by your plan) OR
  2. New annual HSA limit = maximum out of pocket allowed by law.

My plan has an out of pocket maximum for the family of $5,200. For 2017 the maximum out-of-pocket allowed by law for a family plan that can be offered on the marketplace is $14,300. With interpretation ‘1’ my HSA limit for the year would go down. Interpretation 2, on the other hand, results in a significant increase in tax advantaged space.

When do they propose the (hopefully) higher HSA limits take effect?

“The amendments made by this section shall apply to taxable years beginning after December 31, 2017. “

AHCA also proposes reducing the penalty for using HSA funds for a non-medical expense from 20% to 10%.

“(a) HSAS.—Section 223(f)(4)(A) of the Internal Revenue Code of 1986 is amended by striking ‘‘20 percent’’ and inserting ‘‘10 percent’’. 

AHCA and Early Retirement

Let’s start with what may be good-ish news for an early retiree . The AHCA does away with Obamacare subsidies and replaces them with a simpler tax credit.

“IN GENERAL.—The monthly credit amount with respect to any taxpayer for any calendar month is the lesser of

(A) the sum of the monthly limitation amounts determined under subsection (c) with respect to the taxpayer and the taxpayer’s qualifying family members for such month, or

(B) the amount paid for eligible health insurance for the taxpayer and the taxpayer’s qualifying family members for such month.“

In other words the tax credit will be the minimum of your actual healthcare premium and the following amounts:

  • $2,000 if you are younger than 30
  • $2,500 from age 30 to 39
  • $3,000 from age 40 to 49
  • $3,500 from age 50 to 59 and
  • $4,000 from age 60 till you die

On a per-family basis the credits are capped at $14,000.

These credits apply as long as you make <= $75,000 if you file Single and <= $150,000 if you are married filing jointly. So, below these income levels the amount of the tax credit is purely a function of age. Above these income levels, the credit is phased out based on the following formula:

Tax credit = maximum(0, age based credit – 10% * (MAGI – (75,000 or 150,000)))

So, if you are 40 years old, single and your MAGI is $90,000

Tax credit = maximum(0, 3000 – .10 * 90,000 – 75,000) = $1500.

If your MAGI goes up to $105,000, you receive no tax credit at all.

From the perspective of a young early retiree this new credit based scheme is probably good news. More early retirees would qualify for the credit than those who would have received subsidies under the old scheme. It is also much easier to compute.

Kaiser offers a cute interactive map to play with, where based on your income and age, and the state in which you live, it will tell you which of  AHCA or ACA would hurt your pocket more.

AHCA and early retirement

Image credit: kff.org

On to the less cheery stuff.

AHCA gets rid of the individual mandate

The AHCA does not include an annual penalty for choosing to be uninsured. The individual mandate is replaced by the Continuous Health Insurance Coverage Incentive. Under AHCA an individual pays a penalty if he/she chooses to get insured after having been previously uninsured for 63 or more continuous days. The amount of the penalty?

“an amount that is equal to 30 percent of the monthly premium rate otherwise applicable to such applicable policyholder for such coverage during such month.”

The penalty lasts for one year’s worth of premiums. The penalty is paid to the insurance company, not to the IRS or any other government agency.

Let’s do the math. I will play the part of a young, healthy adult, convinced of my own immortality, unwilling to pay for health coverage that I believe I am very unlikely to need. Assume that my monthly premiums would be $250. I choose to stay uncovered for three years, saving $9000. Then I decide to sign on. My monthly premium with the penalty would be $325, giving me a yearly premium of $3900 for the first year, instead of $3000. For a penalty of $900, I’ve saved $9000. Of course, if I got hit by a bus and taken to the ER, I would wipe out my advantage in a heartbeat, but the beauty of youth is believing that you will never be the one to be hit by the bus. I fear that a penalty of 30% for one year may not be nearly enough to encourage people to sign up. And if enough people don’t sign up, premiums go up for the rest of us. The early retiree needs to keep a careful eye on the effect of getting rid of the mandate and the eventual impact on premiums.

When does the individual mandate stop if the ACHA becomes law? As early as 2016.

“The amendments made by this section shall apply to months beginning after December 31, 2015

AHCA allows providers to charge older people more

Under the ACA insurance providers were not allowed to charge their oldest clientele more than three times what they charged their youngest ones. AHCA allows insurance companies more latitude:

“for plan years beginning on or after January 1, 2018, as the Secretary may implement through interim final regulation, 5 to 1 for adults …… or such other ratio for adults (consistent with section 2707(c)) as the State involved may provide’’

Insurance companies are allowed to charge their oldest customers 5 times what they charge their youngest and the AHCA also allows states to set their own ratios.

This could mean that premiums for early retirees in their 50s may go up. Note that the tax credit for the oldest population is only twice that of the youngest, but the premiums may be five times as much.

In Conclusion

It is early days yet. The ACHA is in its infancy. The pimple-ridden adolescent that emerges may bear little resemblance to the cherub-faced baby. It is certainly too early to change plans, or to rejoice in the streets, or to tear out one’s hair and run around like a headless chicken. At this time all we can do is increase our understanding of what might come, and be patient for a little while longer.

Related reading:

10 thoughts on “What might the AHCA mean for Early Retirement?”

  1. Kudos for being out with such a detailed post so quickly!

    I’ve been digging into this a little bit as it relates to my job, so I’ve got a couple thoughts. First, I like the tax credit rather than the subsidy. In my eyes it is more fair and how can you not like the simplicity?

    Also, I think what they are doing with the individual mandate is cute…actually on the face it seems like a good idea.

    Lastly, the 5 to 1 ratio for old person premiums is in line with norm and actuarily correct. ACA actually changed it from 5 to 1 to 3 to 1 which insurers knew was tight and unreasonable. That’s proven out as you can see how no insurance companies have been able to make money and most all have said they are pulling out. This was a big piece of the reason. So going back to 5 to 1 seems reasonable. What can you expect, old person healthcare is expensive! Although I did note the tax credit is only 2 to 1…I agree with you that it seems like this should tie…

    Sorry one last point, just like ACA, all the talking points and focus of the bill is who is paying for healthcare. Is it coming from your pocket, the governments via subsidies or credits, do the insurers need to pay more or the hospitals…no talk about actually helping improve the health of those in America or the inflation trends…

    1. Thanks TGS! And thanks for leaving such a detailed comment.

      You and I agree on the simplicity of the tax credit being a thing of beauty. I didn’t realize that 5:1 more accurately represented the actuarial reality. Good to know. I wish that the credit scaled the same way as the cost does though.

      And you are right: this is at best another bandaid. It does nothing to address the fundamental healthcare problems of this country.

  2. Thanks for putting this together! I like the tax credit because we’ll have a better chance to get help with health insurance than under the old bill that fixed the subsidies to 400% of the poverty level.
    But: this bill is probably bad news for the folks who plan FIRE on a shoestring who currently get very generous subsidies under Obamacare/ACA.

    1. You are welcome. And you are right of course – the tax credit helps more people than the subsidies did, but folks who were benefitting from the subsidies before are going to end up with bigger bills.

  3. Love the analysis here. It would be interesting if the HSA contribution actually did go up to $15k. That, combined with a lower penalty, would make it a much better investment vehicle than it is now.

    Given my families background, health care is one of my biggest concerns. I would love to see the individual market stabilize. Currently all the insurers are losing money every year, and the big ones are pulling out more and more as time goes on. If the market doesn’t stabilize and at least become break-even with an eventual route to profitability, they’ll all pull out. Then there will be no plans available, or only one per geographic region (as is already starting to happen).

    1. Thanks CMO. The HSA changes would be sweet, but I don’t know if this the plan that is going to allow for a stable market for insurance plans. I worry that too many young healthy people will choose not to sign up (given the low penalty when they eventually do decide to get insurance), and that will mean that insurance companies won’t have enough of a healthy base to absorb their costs. Time will tell, I suppose.

  4. Wow, Mrs. BITA, great article, and quite a bit of heavy-hitting analysis here. The lack of a bigger penalty for not signing up sounds worrysome. But, like you said, it’s early days. This is definitely a big issue for the FIRE community so thanks for this piece.

  5. As the others have commented, thanks for the quick analysis and presenting the areas of interest for the FIRE community.

    We are big fans of the HSA (granted our kids are grown and we are in good health), so an increase in the maximum yearly contribution limit would be a welcome change. Given that this is insurance rather than care, the 5:1 ratio for old:young seems fair – let’s face it, on average, older people have more health issues and cost insurance companies more money.

    However, this bill doesn’t seem to address some of the fundamental issues with the health insurance/care system in the United States. Not that I have any answers…

    1. You are welcome.
      And you are right. This bill fixes a sum total of zero fundamental issues related to health care.

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