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Health Plans for Early Retirees

Finding coverage until Medicare kicks in isn’t hard, but policies can be pricey.

Question: My wife and I plan to retire at age 55. Our main concern is what to do about health care until we are eligible for Medicare. What are our options?

Answer: As early retirees, you'll have several options for health insurance coverage until you qualify for Medicare at age 65. The biggest challenge is finding affordable health insurance coverage.

For example, most early retirees can keep their coverage for up to 18 months under COBRA, the federal law that requires companies with 20 or more employees to let workers remain on their health plan.) But under COBRA you'll have to pay the full premium. Keeping coverage under COBRA can make sense for retirees who need to fill a short gap or if you're undergoing treatment and other policies don't cover your current doctors or providers.

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Many early retirees buy health insurance through their state's health care exchange (for links to your state's site, visit healthcare.gov). The policies can be pricey, but insurers can't deny you coverage or charge you more because you have a pre-existing condition. And many retirees qualify for tax credits to help cover the cost of the premiums.  To be eligible for a subsidy, your income cannot exceed 400% of the federal poverty level ($49,960 for an individual, $67,640 for a couple and $103,000 for a family of four in 2020).

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As you get closer to retirement, estimate what your income will be after you stop collecting a paycheck and use the Health Insurance Marketplace Calculator at kff.org to estimate the subsidy you'll receive. If your household income is slightly over the threshold, there are several strategies that you can use to qualify for a subsidy. You may, for example, reduce the amount that you withdraw from tax-deferred retirement accounts, tapping other assets such as a Roth 401(k) or Roth IRA instead. And contributions to a health savings account or health or dependent-care flexible spending account can help reduce your modified adjusted gross income, which is used in the subsidy calculations.

You can also buy a policy directly from an insurer or through a health insurance agent (see nahu.org). Off-exchange policies are not eligible for tax credits, but some insurers offer off-exchange policies with different premiums, cost-sharing or provider networks than their on-exchange versions. These plans tend to be more expensive than those sold on the public marketplace but can be a good option if you don't qualify for a subsidy and are looking for specific plan features.

One option often overlooked: health sharing plans, sometimes known as health sharing ministries. Members of these groups, who typically share a religious faith, pay a monthly fee that goes toward paying members' medical bills. The cost is usually much lower than traditional health insurance premiums, but these arrangements are not insurance and generally do not cover pre-existing conditions.

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