How to get Obamacare at an affordable rate

Update: As a result of the Tax Cuts and Jobs Act being signed into law, the tax code for 2018 has changed and the numbers cited below for standard deductions/personal exemptions will be different (the personal exemption of $4,150 is eliminated, but the standard deduction is doubled to ~$12,000). Your MAGI will increase or decrease slightly, but probably not too much. You can still use qualified retirement accounts (401k, Traditional IRA, etc…) and health savings accounts (HSAs) to reduce MAGI. This article will be updated once the IRS issues guidance on the new rules.

When I discuss Obamacare with people, the most common complaint I hear is that it’s too expensive. One middle-class family of three was paying $1,700 per month for a high-deductible insurance plan (which wasn’t actually on the exchange). Another claimed a “$30 per month plan was unaffordable” because her husband was out of work. Neither of these people had ever actually shopped for a plan on the exchange, because they just “wanted nothing to do with Obamacare”. Others report that their income is too high.

I was able to get the first family a plan for $236 per month. The second family would almost certainly qualify for free coverage through Medicaid, although they wanted nothing to do with it.

This article is addressed to people that “make too much money” to qualify for subsidies – you probably can – and to the people that say they can’t afford it because it’s too expensive.

Obamacare Subsidies and the Federal Poverty Line

The first thing you need to understand about Obamacare is how its subsidy structure works – everything is based off of the federal poverty line (FPL). The federal poverty line is based off of the number of people in your household (e.g. you, your spouse, and anyone you claim as dependents.) For example, if you file taxes as an individual, the federal poverty line for 2018, as it applies to you, is $12,060. If you are a family of three, your federal poverty line is $20,420.

Persons in Household100% FPL138% FPL250% FPL400% FPL
1$12,060$16,642$30,150$48,240
2$16,240$22,411$40,600$64,960
3$20,420$28,179$51,050$81,680
4$24,600$33,948$61,500$98,400
5$28,780$39,716$71,950$115,120
2018 Federal Poverty Lines in the Continental U.S. Add $4,180 to 100% FPL for each additional dependent. If you live in Hawaii or Alaska, see these charts instead.

 

Obamacare works by subsidizing health insurance for consumers with a modified adjusted gross income (MAGI) up to four times the federal poverty line (400% FPL). A family of three with a MAGI of $80,000 per year will receive a discount of ~$1,700 per month off their health insurance. In my area, this family could buy a health insurance plan for as little as $236 per month. I do not think that is expensive to cover three people. If you make more than this or you tell me that it’s a high-deductible plan, then keep reading, I’ll get to you…

Insurance plan for a family of three based on $80,000 MAGI

At the other end of the spectrum, a three person family with a modified adjusted gross income less than 138% of the federal poverty line – $28,179 per year – will pay nothing for their health insurance, assuming they live in one of the 33 states that chose to expand Medicaid. The person claiming “$30/Mo is too expensive” most likely qualifies for Medicaid, but because she refuses to go to the exchange for ideological reasons, she doesn’t have coverage. In states with expanded Medicaid coverage, there is no means testing – you can qualify based on income alone. See this page for more info on qualifying.

Finally, consumers with a modified adjusted gross income above 138% of the federal poverty line but below 250% – $51,050 for a family of three – will qualify for “extra savings”, which is an additional subsidy on silver plans to lower premiums and deductibles. As your modified adjusted gross income increases, the size of your subsidy decreases, meaning you pay more towards premiums and have higher deductibles. A family of three with a MAGI of $30,000 per year can get a silver plan for $20 per month with a $350 deductible and $1,200 out-of-pocket maximum. The same family on the same plan with a MAGI of $45,000 will pay $189 per month with a $4,500 deductible and $11,700 out-of-pocket maximum. They can also get a bronze plan for $4 per mo.

Insurance plan for a family of three based on $45,000 MAGI

As you can see, Obamacare is structured to make health insurance affordable by having the government pay a portion of it, based on your income. The more you earn, the less the government pays towards your insurance.

Understanding the components of Modified Adjusted Gross Income (MAGI)

It’s important to understand that there are different deductions you can take to lower your modified adjusted gross income. Assuming you do not itemize your deductions, right off the bat you get to subtract $6,500 (or $9,550 for families) and a personal exemption of $4,150, from your income. Then you get to deduct things like alimony, student loan interest, retirement contributions, tuition costs, and health savings account contributions. Common deductions are listed on lines 23-35 on IRS form 1040.

Assuming you are paid a salary of $30,000 in 2018, your adjusted gross income might look something like this:

Gross Income$30,000
Adjusted Gross Income$18,550
Standard Deduction($6,500)
Personal Exemption($4,150)
Student Loan Interest($800)

If you entered $30,000 on healthcare.gov for a single individual in my area, your premiums would be $185 per month, with a $2,250 deductible and a $5,850 out-of-pocket maximum.

Insurance plan for an individual based on $30,000 MAGI

If you entered $18,550, your plan would cost far less – $48 per month with a $750 deductible and $1,450 out-of-pocket maximum.

Insurance plan for an individual based on $18,550 MAGI

To someone that makes $30,000 per year BEFORE TAXES, $185 per month for a plan with high deductibles seems expensive. But the plan for $48 per month seems reasonable, at least in my opinion. It should seem extremely reasonable if you’ve ever owned an insurance plan prior to Obamacare becoming law.

The larger point I’m trying to make is that the more deductions you take, the lower your healthcare costs will be. If you are a family of three making $82,000, you should throw $400 into an IRA, because this will lower your income below 400% of FPL, qualifying you for subsidies, and saving you about $1,700 per month in insurance costs. If the $30k salary person above contributes another $1,908 towards a retirement account, they will be under 138% of the federal poverty line, which qualifies them for Medicaid. So their choice is to pay $48 per month in premiums, or invest $159 per month into an asset they’ll get to withdraw in retirement. Nearly anyone can open an IRA, including young people.

If you’re self-employed, you can leverage a lot of options to lower your income. For example, a person earning $100,000 can contribute ~$8,400 to an SEP IRA and $5,500 ($6,500 if you’re over 50) for a traditional IRA, lowering your income by $13,900. Certain plans with high deductibles qualify for health-savings accounts, in which you can shelter an additional $2,700 per family. These deductions would put a family of three making $116,000 below 400% of the federal poverty line, qualifying them for subsidies.

Gross Income$116,000
ADJUSTED GROSS INCOME$80,750
Standard Deduction (Family)($9,550)
Personal Exemption ($4,150 x 2)($8,300)
Student Loan Interest($800)
SEP IRA Contribution($8,400)
Traditional IRA Contribution($5,500)
HSA Contributions($2,700)

Furthermore, each person earning income can make these contributions. So if both you and your spouse work for employers offering 401k accounts, you can each contribute up to $18,500 ($37,000 total) and reduce the amount from your taxable income.

Is this complicated? Yes. Is it worth it? Absolutely. You get health insurance in case anything happens, and you’re putting away a substantial amount of money towards your retirement (you get to keep all those contributions). By not doing this, you pay the full unsubsidized price for your health insurance, which costs an extra $20,400/year, instead of saving $19,400/year. This is a net gain of nearly $40,000.

Setting up a SEP IRA (or one of the many other types of retirement accounts) is not necessarily straightforward, so you should get someone qualified to help you. Roth IRAs are after-tax money, so anything you put in there will not lower your adjusted gross income.

For a full list of what you can deduct, see the deductions page on healthcare.gov.

Final Thoughts

If you do it correctly, I do not think Obamacare is unaffordable. Is it expensive? Yes, but then again, so is our healthcare system. I had a routine surgery a year and a half ago. I walked in at 7AM and was out by noon. The bill was $21,500. My responsibility? $50. We don’t see a lot of the costs of our medical system because they are absorbed by insurance, but it is far more to deliver healthcare in the US than in other parts of the world (for various reasons that have nothing to do with Obamacare). Somebody is paying that tab, and the fact that it even costs $21,500 for a few hours in the operating room is insane.

While this tax jargon crap may seem complicated and unwieldly (and I agree that it is), it is worth it to get affordable coverage.

Common Questions:

What if I don’t know what my income is going to be?

You need to have some sort of estimate. When you sign up for health insurance, the government will pay an amount based on this estimate to your health insurer. If you have an adjusted gross income higher than this estimate at the end of the year, you will need to pay back the difference on your tax return. If you estimated your income too low, you will receive the difference back. The amount you are required to pay back is listed on the IRS website. You will use IRS form 8962 to reconcile the amount of subsidies you are entitled to at the end of the year.

If your income is more than 400% of the federal poverty line, you need to pay your entire premium back, so it’s important to stay below that number. You do not want to get hit with a tax bill for $20,000. Do whatever it takes (legally) to reduce your MAGI below 400% FPL.

If your income is less than 100% of the federal poverty line, you will also need to pay your entire premium back, so make sure you do not go below that amount (Medicaid recipients don’t have premiums, so this doesn’t apply to them). You can take money out of a retirement account (you will need to pay income taxes and penalties on it), but it’ll count towards income to get you above the threshold.

If you are self-employed and really aren’t sure what you’re going to make, I’d suggest putting in a lower amount and staying on top of your books, so you’ll know what you’ll owe when tax time comes. Or, you can estimate a higher income and get money back. It depends on the type of person you are, but either way it will be a good time to learn an accounting system like QuickBooks, or to hire a bookkeeper/accountant to keep you apprised on your financial standing (this is a business expense, which will also lower your adjusted gross income). It may also help you decide when it’s appropriate to make financial business decisions – for example, in order to keep yourself under the 400% FPL, you might decide it’s better to hire someone to do some of your tasks, rather than pay an extra $20k in insurance costs. Bookkeepers are usually around $30-60/hr, and accountants can cost between $75-150/hr. Accountants can usually train you to use QuickBooks (mine charged me something like $75, and set up my accounts for me).

What if I lose my job/income?

Obamacare subsidies are based on your annual income, while Medicaid is based on your monthly income. If you lose your job in March and your three-person family’s income drops to $2,300 per month, you and your family can apply for Medicaid and be covered until you get another job. If you were receiving coverage through your employer, you are covered retroactively for 60 days from the time you leave your job through COBRA. So if you quit, get hit by a car, and need to go to the emergency room, you can buy COBRA up to 60 days AFTER you leave your job, and it will apply retroactively. You will need to pay the full amount (the employee + employer portions, which can hundreds or thousands of dollars), as well as any deductibles, but that is better than a $60,000 emergency room bill.

The Medicaid advice only applies if you live in one of the 33 states that expanded Medicaid. If your state did not expand Medicaid, I’m not sure what your options are (I suggest you start by calling the number on healthcare.gov).

If you lose coverage from work, get married, have a kid, or some other life qualifying event, you’ll be eligible for a special enrollment period to purchase coverage outside of open enrollment. You must apply for coverage within 60 days of the qualifying event.

What if I earn more money than I estimated?

You will need to pay the difference back. If you earn more than 400% FPL or less than 100% FPL by the end of the year, you will to pay the entire amount back, so don’t get caught in that situation.

You have until April 15th the following year to make IRA and SEP IRA contributions, so if you find that you are $5,000 over the 400% FPL limit, contribute $5,000 before April 15th and you should be OK. Other deductions are required to be paid in the year they are deducted, so this should be incentive to get your financial situation under control well before December 31, giving you time to make any necessary adjustments.

Explain Health Savings Accounts (HSAs) to me

Health Savings Accounts (HSAs) allow you to put money into a tax-free savings account. For example, if your adjusted gross income (AGI) is $30,000 and you put $1,000 into an HSA, your AGI is now $29,000. There are certain stipulations for HSAs – you must have a plan with a deductible over a certain amount and an out-of-pocket maximum below a certain amount, but in these circumstances, they work well. I believe (but am not entirely sure) you are also allowed to put money into an HSA and immediately withdraw it to pay medical expenses. So if you have a plan with a $4,000 deductible and need to go to the emergency room, you can put money into your HSA and then pay it from there. The contribution to your HSA will lower your AGI, which may result in you getting more money back at the end of the year, because your AGI will be lower than what you first reported, qualifying you for more subsidies.

You keep any money you contribute to an HSA, it rolls over from year-to-year, and you can invest it to grow (it works like a retirement account, for health-related expenses). This is a good solution for high-deductible plans, although some of the out-of-pocket maximums are too high to qualify. You should evaluate whether it is better for you and your family to select an HSA-eligible plan with lower premiums and higher deductibles, or higher premiums and lower deductibles, based on your estimated healthcare needs.

There are other types of HSA-like plans available, but you’ll need to do your own research because I’m not too familiar with them.

What else can I do to lower my MAGI?

If you work for a small employer that does not provide health insurance, or provides insurance through the exchange, ask them to look into setting up 401k plans for their employees. Even if it offers no employer-matching component, the 2018 contribution limit is $18,500, so you could earn quite a bit above 400% FPL, and put money away to bring it down below that amount. If both you and your spouse work, you can each contribute up to $18,500 of earnings per person to an 401k ($24,000 if you’re over 50). Using only the standard deduction, personal exemption, and 401k, a family of two can earn up to $120,170 and still qualify for subsidies. If you have additional deductions, you can earn even more.

If you earn below 250% FPL, there is a huge advantage to putting as much into retirement accounts as possible. Ideally, you want to offset whatever you are spending on premiums by redirecting them to your retirement account, because anything that goes into your retirement account is yours to keep.

Unlike an IRA, 401k contributions need to come directly from your paycheck, and need to be funded in year they are deducted (you only have until Dec 31 to make these contributions, not April 15). Make sure you know where you stand financially well before the year ends, so you have time to make adjustments if necessary.

There are other retirement accounts you may want to investigate here (though not all of these are tax-deductible).

If you have a really high income, you should meet with a tax specialist and figure out how to get your income below 400% FPL. For example, if you own rental property, one option might be to take out a home equity loan on your rental properties, which will increase your mortgage interest deduction expense. Then you can invest that money into something that is not taxed as regular income – for example, a growth ETF will only be taxed when you sell it and realize any gains. Doing so may have unintended consequences (high-risk investments may not be appropriate for people needing to cash out in less than 10 years, for example). Getting a good financial planner that can answer these questions for you will be key to figuring this out.

I don’t understand “premiums”, “coinsurance”, “deductible”, “out-of-pocket maximum”, and other insurance jargon…

Check out the glossary on healthcare.gov. The link is in the footer if you ever need to find it later. This does a good job explaining different terms with examples. I also suggest calling the phone number listed on healthcare.gov and speaking with someone if you have questions.

Where can I get more information?

This site is a good resource that explains a lot about the Obamacare subsidies.

How does Modified Adjusted Gross Income (MAGI) differ from Adjusted Gross Income (AGI)?

MAGI is AGI, plus a few deductions added back in. For many people, MAGI is the same as AGI.

To learn more about MAGI, see this page on healthcare.gov.

What else should I know?

  • On December 22, 2017, the Republicans passed the Tax Cuts and Jobs Act, which affects all of the numbers cited in this article for 2018 tax returns. The TCJA eliminates the personal exemption, but doubles the standard deduction, so most people’s adjusted gross incomes will change slightly. I will update this article once the IRS issues new guidelines regarding the new law.
  • To shop for plans and pricing without creating an account, check out this link.
  • You need to actually purchase a plan on the exchange to qualify for subsidies. If you buy an insurance plan outside of the exchange, you do not get any subsidies.
  • Your household income includes income from your spouse as well as your claimed dependents. If you have kids that earn more than the standard deduction, make sure you factor this into your financial plan. If you’re really close to the 400% FPL, you might be able to gift them up to $5,500 and have them put it into an IRA, wiping out their net income for the year. (Gifts up to $14k are not taxable to the recipient.)
  • I am not an accountant. This information is provided as-is and without any warranties. While I feel this information is well-researched and correct (it is the research I have accumulated to get health insurance for myself), I take no responsibility for any omissions or errors, or problems that may arise from using this information. If you have any questions, I highly recommend you seek financial advice from a qualified tax accountant.

Other Questions?

Leave a comment in the comments section, and I’ll help you if I know the answer.

 

Public Comment on Amtrak’s Proposed Rate Increase

Picture of the Amtrak Downeaster Logo

 

To the Amtrak Fare Review Board:

Amtrak is soliciting public comment on its proposed 2018 fare plan for its Downeaster route between Portland, ME and Boston, MA. The full plan is located on the Downeaster’s Website. Please accept these comments in response to this plan.

Amtrak’s plan calls for an increase in one-way fares between most city pairs. One-way fares between Dover and Boston would increase from $20 to $21; Fares between Portland and Boston would increase from $25 to $29. Unlimited-ride monthly pass fares to Boston would increase $20, from $299 per month to $319 per month.

As a resident of Dover, NH, I oppose the one-way fare increases.

Amtrak’s plan states that 22% of Downeaster riders travel using a multi-ride pass, and after delving into the numbers, it is easy to understand why. An unlimited-ride ticket to Boston costs $319 per month, which equates to approximately $16 per round-trip (assuming you work in Boston 5 days per week.) By comparison, someone making the trip using their personal vehicle from Dover (DOV) to Boston would incur roughly $1,469 per month in expenses, or $73 per round-trip. For a Portland-Boston commute (POR), the cost is $2,506 per month, or $125 per round-trip.

Commute Cost to Boston North Station via Downeaster

StationBRKFREPORORBSAOWEMDOVDHMEXRHHL
Miles To Boston1461361161041008468625134
One-Way Trip$79$73$63$56$54$45$37$33$28$18
Cost Per Round-Trip$16$16$16$16$16$16$16$16$16$16
Cost Per Month$319$319$319$319$319$319$319$319$319$319
*Assumes 20 days travel per month.

Commute Cost to Boston Using Personal Vehicle

StationBRKFREPORORBSAOWEMDOVDHMEXRHHL
Miles To Boston1461361161041008468625134
Cost Per Round-Trip$158$147$125$112$108$91$73$67$55$37
Cost Per Month$3,154$2,938$2,506$2,246$2,160$1,814$1,469$1,339$1,102$734
*All prices calculated using IRS standard mileage rate of $0.54 per mile. Assumes 20 days travel per month.

 

The cost benefit for Boston commuters using Amtrak versus driving are substantial. Riders from Dover save $1,150 per month; riders from Portland save $2,187 per month.

While commuting to Boston on Amtrak’s Monthly Pass program makes financial sense, taking the same route using one-way fares does not. I suspect that many of Amtrak’s one-way fares are purchased by consumers for leisure travel. It is great to take the train to see a Bruins game, attend the Boston Beer Marathon, or spend a day visiting Boston’s museums. Unfortunately, the cost to do so with the train is expensive compared to driving.

An Amtrak rider purchasing a value fare from Dover to Boston will spend $42 round-trip. For a group of two people, the cost is $84, $10 more than driving. For a group of three, the cost is $126, $52 more than driving. Amtrak’s pricing model discourages use of public transportation for small groups of people wanting to attend events in Boston because it is too expensive. This seems antithetical to one of their strategic goals – getting more people using public transit.

Round-Trip Ticket to Boston Purchased as One-Way Fares at Proposed Price

Originating CityPORDOV
Driving$125$73
1 Rider$58$42
2 Riders$116$84
3 Riders$174$126

 

In addition to the high price tag of one-way fares, we need to consider the lack of available trains, which limits options for commuters and leisure travelers alike. During any given day of the week, there are only 5 trains departing in each direction throughout the day. Leaving from Dover on a Saturday, one can catch a train to Boston at 7:17AM, 9:17AM, 1:12PM, 4:35PM, or 8PM. These sporadically spaced trains do allow for much flexibility, or for contingency options if a train is missed. Want to catch a concert at 9? You need to take the 4:35 and arrive 3 hours early. Want to head home at midnight? You need to take a bus, because the last train leaves Boston at 10:30PM. Commuters face a similar problem: You can arrive in Boston Monday morning at 7:50AM or 10:50AM, but if you need to be at work at 7AM, you’re out of luck. If you miss your train, the next one won’t arrive for 3-4 hours, depending on the time of day.

The lack of available trains severely diminishes the usefulness of the Downeaster; you need to plan around the train’s schedule instead of relying on one just being there. Amtrak used to have more trains, but canceled them due to low-ridership. When you consider the price-point of one-way fares, it’s easy to see why: it’s much cheaper for a small group of passengers to drive to Boston instead of taking the train. If Amtrak lowered the price of its one-way fares to be competitive with driving, demand for Amtrak’s services would greatly increase. This would in turn support additional train times, making train travel more flexible and available for both leisure travelers and commuters alike. In exchange for this improved service, I believe monthly-pass commuters may accept a steeper fare increase, given that the current cost compared to driving is so low. Even if additional trains run revenues at cost or below cost, having them available makes the peak trains more valuable because you are no longer stuck waiting for a train. Lower one-way fares would help subsidize this cost through increased ridership.

I would ask Amtrak to consider the following changes to its proposal:

  • Reduce the cost of one-way trips on non-peak trains from Dover to Boston to $14.50. Round-trip tickets for two passengers at this price point would cost $58, which is $15 less than driving and $26 less than Amtrak’s proposed rate. This is low enough that it actually makes traveling on the train competitive with driving. Also consider reducing Portland-Boston fares to around $25. These prices are similar to what you would find on a comparable route to New York City using Metro-North or L.I.R.R.
  • Add more trains, so that they run every 60-90 minutes during peak hours, and every 2-3 hours during off-peak hours. I suspect that a lot of people do not take the train right now because of its rigidity in scheduling, and I think adding additional inbound trains arriving at 6:50AM and 8:50AM along with additional return times in the evening would increase demand for the service. It may be beneficial to study EZ-Pass data to determine when people are traveling and align it with train schedules. It would also help determine the towns commuters originate from, so you can market to them directly.
  • Replace the myriad of pricing plans currently available (saver vs value vs flexible vs premium) with a single classification, and allow ticket values to be used on any train. One problem with the current “saver” fares (in addition to not always being available to purchase) is that a ticket is good for that trip only. If you miss your train or cancel your plans, then you’re out of money; a very frustrating occurrence that makes you not want to take the train ever again! Not a good way to keep customers. To promote flexibility, the fare should retain its value for 1-year, or allow a refund for the value of the ticket minus a reasonable refund fee.

For completeness, I’ve included the cost comparison table with driving using the suggested price points of $25 and $14.50 from Portland and Dover, respectively:

 PORDOV
Driving$125$73
1 Rider$50$29
2 Riders$100$58
3 Riders$150$87

Thank you for your time and consideration.

Casey Eyring
Dover, NH