Watch Out for the Cliff in the Affordable Care Act

For the 38 million Americans aged 55 to 64, there is much to like about the Affordable Care Act. But there is also a trap door that could cost some of them thousands of dollars.

First, the upside: 

Prior to the enactment of Obamacare, this age cohort faced serious healthcare obstacles as they waited to sign up for Medicare at 65. More than other age groups, they were not in employer-based plans. They often had pre-existing conditions that prevented them from obtaining insurance. The existing age rating system meant they faced higher premiums. And many of the plans they could afford had limited benefits.

Beginning Jan. 1, this Baby Boomer group will no longer have to worry about pre-existing conditions. The benefits have been standardized to eliminate gaps in coverage. The age rating system, which allowed insurance companies to charge premiums five times higher than those paid by people in their 20s, will be pared back to a three to one limit. And to help meet those premiums, the federal government will offer subsidies to individuals and families whose incomes do not exceed four times the federal poverty level.

Now for the trap door, or as it has become known among healthcare experts, the “cliff:”

Using a calculator developed by the Kaiser Family Foundation, let’s imagine a couple in Pasasdena, both 57 years old, seeking to enroll in a Silver level plan on Covered California, the state’s new health insurance exchange, with an annual premium of $11,663.  Their joint income is exactly four times the poverty level, or $62,040 a year, making them eligible for a subsidy of $5,769, or almost half their premium.

But the subsidies end abruptly at 401 percent of the poverty level. If the wife gets an unexpected $500 bonus at work, the $5,769 subsidy disappears. Hence, the “cliff.”

During a recent webinar for journalists, Kaiser Family Foundation Senior Fellow Karen Pollitz noted that most Americans aged 55-64 earn under 400 percent of the poverty level, and those who earn more most likely have employer-based insurance. She couldn’t estimate how many people in that age group might be in danger of the cliff, but suggested that it was probably “not a huge number.”

Still, for this group, the prospect of the cliff is more fearsome than it is for other age categories. Their premiums are still age-based, and therefore higher than for younger enrollees. That means higher possible subsidies, which also means higher possible tax bills at the end of the year if the income standard is exceeded.

For those whose income puts them near the cliff, Pollitz offers sound advice: see a tax advisor, be careful about working extra hours for extra pay, and keep an eye on how much is being withdrawn from 401(k) plans. Being alert “could save thousands,” she said.

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