Health Insurance Options When Retiring Before You’re Eligible for Medicare

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If you are considering retiring before you reach age 65 and are Medicare eligible, you will need to have a plan for how you're going to receive your health insurance coverage. Otherwise, you could be in for a big surprise financially.

Hello and welcome to Retired-ish. I'm your host. Cameron Valadez, certified financial planner, and today we are talking about healthcare coverage in and around retirement. If you're fortunate enough to walk away from your longtime career earlier than most Americans, you'll need to be mindful of how you're going to receive medical coverage. You don't want to be surprised by potentially expensive medical insurance premiums at the last minute, and you especially don't want to find yourself uninsured for any period of time. If you weren't already aware, you generally won't be eligible for Medicare coverage until you reach age 65. Therefore, if you leave your job or sell your business, for instance, prior to age 65, you'll need to get coverage through some other means.

Now, there are a limited number of options available at this point, and it will ultimately come down to your personal situation. And one route isn't necessarily always better than any of the others. So if you are going to need some other means of coverage before age 65, in general, the more common options are to, number one, see if you can get coverage through your spouse's employer's health plan if they have one and, of course, if you have a spouse. And number two is to go on Cobra, which is essentially a continuation of your previous employer's coverage. And in this case, the length of coverage is limited.

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Number three is to get your own coverage on the federal or state health insurance marketplace or exchange, and that is brought by the Affordable Care Act, also referred to commonly as Obamacare. I will refer to this coverage as the marketplace as we go on. The fourth option you'll have is to consider looking into a healthcare cost-sharing arrangement, which is commonly referred to as faith-based cost-sharing programs that are often sponsored by Christian nonprofit organizations such as Christian Healthcare Ministries, as an example. And the last option I want to talk about is that if you are fortunate enough to have worked for a public, federal, state, or local municipal entity, they may offer you retiree health benefits similar to those you received while working. While this isn't the case for most people, it's a good option.

Some examples may be that you were maybe a teacher, firefighter, a federal worker under the Office of Personal Management, or maybe eligible to receive care through TRICARE, which is available to military service members.

So let's take some time to go through the most common options one by one to help you get a better understanding of how they each work. Typically, the easiest route to go if it applies to your situation is jumping on your spouse's employer group health plan. If they're still working and covered, this is usually one of the more affordable options and oftentimes also offers more comprehensive coverage. This is especially beneficial if you and your spouse see the same doctors or get care within the same health provider organizations.

It is also fairly straightforward to get done. Simply have your spouse contact their HR or benefits department to understand the next steps in getting you the coverage due to you losing coverage because of retirement or separation from your employer. But understand that even if your spouse's company shares in paying all or most of the cost for your spouse's coverage, they may charge them significantly more to add you to their plan. However, it still may be cheaper than some of the other options. Now, if your spouse also retires but is able to be on a retiree health plan from their former employer, oftentimes, they will not allow you to get on the plan as well.

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In these cases, the spouse without retiree health plan coverage, assuming that's you in this situation, will have to find coverage via one of the other means that I mentioned. The next option that commonly comes up when retiring before 65 is Cobra, which is short for the Consolidated Omnibus Budget Reconciliation Act. That's why we're just going to refer to it as Cobra. No thanks. This act basically requires employer group plans that regularly cover over 20 employees to provide a temporary continuation of group coverage that otherwise might have been terminated.

Cobra is offered to the former employee as well as their spouses, former spouses, and dependents when their coverage is lost due to certain events, such as a termination of employment or divorce, for example. If you go the Cobra route, your coverage should be fairly identical to the coverage that was available before while working. But as I briefly mentioned previously, Cobra has a time limit on it, which is a period of 18 or 36 months. In most cases, coverage will last you 18 months. But of course, there are some exceptions that I actually won't be getting into in this episode because there are many, and it's fairly complicated.

If you are entitled to continue coverage through Cobra, you will have at least 60 days starting on the later of the date you are given the election notice or the date you would lose coverage in order to choose whether or not to continue that coverage through Cobra. The biggest hang-up with continuing with Cobra is that oftentimes you will now have to foot the entire premium, whereas before, your employer likely paid for some or even all of it and might have shared that cost with you. In fact, more often than not, you will also have to pay an additional 2% administrative fee on top of your premium. So Cobra can get quite expensive compared to some of these other options.

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Sometimes if you receive any sort of severance package, your former employer may share in the cost with you, but don't count on it. Although in some situations, it can seem like the more expensive option, Cobra has its place. Some people choose it because they don't want to have to go through shopping the marketplace for new coverage, or they simply don't want any potential changes to their doctors or current services that they receive, so they continue to pay the devil they know. Now, the third and other most common scenario is going to what is called the health insurance marketplace to find your own coverage offered by a private insurance company. Now, this is not a group plan. This is you going to get your own health insurance policy, if you will.

You might be thinking, what the heck is the marketplace? Is that like a swap-meet-looking place where I have to go talk to a bunch of insurance people standing at booths? And the answer, thankfully, is no. This is actually an exchange run by the government that's accessible on healthcare gov. And even though this is a federal exchange, some states have their own version.

For example, in California, it's called Covered California. Now, if your state has its own marketplace, you'll want to go through there to apply for coverage if this is the route you ultimately choose to go. The other great thing is that you can have what's called guaranteed acceptance, meaning that you cannot be denied coverage even if you have a preexisting condition that requires continued care. Now, if you're in a situation where you lose your job-based coverage, like I mentioned before, it is actually considered a special enrollment event in the health insurance marketplace. The marketplace offers basically one-stop shopping to find and compare private health insurance options.

To qualify for special enrollment in a marketplace plan, you must select a plan within 60 days before or 60 days after losing your job-based coverage. The available plans vary from different private insurance carriers, and there are different tiers, such as bronze, silver, gold, and platinum. The higher you go generally, the higher the premium, but the deductibles and coinsurance can be lower should something catastrophic happen. Once you start looking into the available options, you should compare the benefits, the networks, doctors, as well as the costs to your other options, such as coverage under a spouse's plan or Cobra, et cetera. When it comes to cost, although the marketplace was formed as a result of the Affordable Care Act, sometimes it's anything but affordable.

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This will largely depend on your income. What I mean by that is that when getting a plan through the marketplace, you could be eligible for a tax credit that's known as the premium tax credit, which lowers your monthly premiums, and you can actually see what your premium, deductibles, and out of pocket costs will be before you make a decision to enroll. It's actually pretty nice. Again, just so you understand how it works, instead of waiting until you file your taxes to get the tax credit, if eligible, they actually will guesstimate what the amount of your credit will be, and then they apply that on a monthly basis as a subsidy to your premiums. Therefore, instead of waiting all year for money back or credit to offset any taxes you might owe, you instead have lower premium payments as the year goes on, making premiums more affordable on an ongoing basis.

When tax day does roll around, what happens is you will reconcile what you received in those premium tax credits compared to the actual amount of the credit you were eligible for, and you'll either get some money back or owe a little bit back. This is why it's important to try to be as accurate as possible when you're inputting your income and household information into the marketplace website when applying. I will dive a little bit deeper into the premium tax credit in a future episode. For now, I'm just going to keep it to the basics. The important thing to note is that if you get a plan from the marketplace and you expect to receive those lower premiums via the tax credit, you won't actually be eligible for the credit if you are able to be covered by another plan that is deemed affordable, say through your spouse's employer, for example.

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You can still get a plan if it's a better option for your healthcare needs, but you won't qualify for the credit even if your income is under that threshold. Whether or not the coverage is deemed affordable depends on the cost of the employee's coverage. So your spouse's own coverage, in this case for the least expensive option in the plan, is subject to a percentage of household income. Diving into this is beyond the scope of this episode, but just know that there are rules that determine whether a plan is deemed affordable, which will help determine whether or not you are eligible for any subsidy via the tax credit to help pay your premiums. If you need immediate health coverage in the time between losing your job-based coverage and beginning coverage through the marketplace, for example, if you or your family member needs medical care, you may wish to elect Cobra coverage first from your employer's or your former employer's plan.

Cobra continuation coverage will ensure that you have health coverage until the coverage through the marketplace plan that you chose begins. Again, even if you aren't eligible for any subsidy, the cost of a plan that suits you from the marketplace still may be more beneficial than any of the other routes. What you'll want to do is compare not only the premium costs but the deductibles copays cost sharing, also known as coinsurance, and things like out-of-pocket maximums healthcare providers and networks as well when making your decision. If you do decide to go get coverage through the marketplace, know that each year there are open enrollment periods where you will have a chance to shop plans again, and you will definitely want to consider this since your coverage may change year to year. Doctors may leave certain networks or other more affordable plan options may become available that maybe weren't before. Therefore, you'll want to go back to the marketplace each year and compare coverage and see if switching to another plan in the marketplace makes sense.

Another unique option I want to briefly cover is what is known as healthcare cost-sharing arrangements, also known as faith-based cost-sharing plans. Now, healthcare cost-sharing is not a new concept. It's just simply an overlooked and often misunderstood one. It is not considered health insurance but can cover many, if not most, of the same health care costs that you might incur.

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Most cost-sharing arrangements, also known as CSAs, are sponsored by Christian nonprofit religious organizations such as Christian Healthcare Ministries, for example. The strong appeal for these CSAs is the potential for dramatically lower premiums, which are actually referred to as contributions, and this is versus something like Cobra continuation and marketplace coverage through the Affordable Care Act. If you are exploring these types of plans, be sure to exercise careful due diligence when considering any specific CSA. Customer service coverage claims, paying history, and customer reviews differ significantly among your choices, which is actually also the case when choosing a healthcare insurance provider in the marketplace as well. Many, but not all, of these CSAs operate under a Preferred Provider Organization, or PPO model, in which the CSA contracts with a network of healthcare facilities and professionals. The network offers a discounted rate for in-network healthcare services, and members can obtain care outside of the network but often will pay more for their healthcare if they do so.

As an example, here's typically how this process works. You pay monthly contributions, aka premiums, and you typically have $500 or more in deductibles if you need care, then you submit a request for payment of costs in excess of that deductible. Then your request is then approved or denied based on whether it is covered, and the CSA sends payment directly to the healthcare provider. Some of the benefits of these types of plans, again, is that there is a potential for significantly lower premiums and possibly discounted dental and vision care. In addition, your membership cannot generally be terminated due to any amount of claims that you may have made.

Now, some of the cons are that you typically have to abstain from things like smoking, drinking alcohol, and prescription drugs. They also have very limited regulatory oversight and no legal protection if the CSA goes bankrupt. In addition, your annual and or lifetime benefits may be limited, and the payment of benefits may take longer than traditional health insurance policies. The bottom line of these types of plans is they can be very helpful in terms of affordability and give you some level of comfort in getting financial help if you run into health issues, but they can be very limiting and somewhat risky. However, it's better than nothing.

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Now, the last option I want to cover is a retiree health plan if your former employer offers it. As I mentioned, these are typically seen when working for a public or governmental entity or if you are in the military, for example. These agencies typically offer healthcare plans for you even after you retire and will sometimes cover a spouse as well, for a limited time. These plans typically offer coverage similar to what you may have had while working and are often very affordable.

Some examples are FEHB for federal workers, TRICARE for military, coverage from a state entity such as CalPERS or CalSTRS in California, for example, or even for those of you who worked for a particular city or municipality. Each of these types of entities has different eligibility and requirements that vary widely. If any of these pertain to you and you want more information, feel free to ask me a question on Retiredishpodcast.com, which I will link to in the episode show notes.

In addition, when someone under one of these plans reaches Medicare eligibility at age 65, they often will work alongside or with Medicare. That being said, you typically must also sign up for Medicare when eligible, even if you are still on one of these plans. Don't make the mistake of ignoring Medicare simply because you have coverage like this. If you sign up too late for Medicare, you will have penalties on your Part B and Part D premiums for the rest of your life. All in all, if you or your spouse are covered by one of these plans, great.

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You're lucky to have access to something like this. Just be mindful of the spouse who isn't a part of these agencies and whether or not they can also be covered by it after you retire and for how long. Regardless of what route you choose to go down, you should always consider all options you may have to get health coverage through other means before making your decision. You may assume that if you're able to continue coverage through Cobra or a retiree health plan, it will be better because you might have the exact same plan. However, there may be more affordable and more generous coverage options for you and your family through some of these other means. Be sure to check out the episode show notes for the episode today for some flowcharts that we've included and other resources that may help you with your decision.

That does it for today's episode. If you have more questions regarding healthcare planning when retiring before you are Medicare eligible that wasn't tackled on today's show, feel free to ask me a question on Retiredishpodcast.com. You can go to the Ask a Question page at the top. I will also include a link for that in the show notes and simply ask your question. I will do my best to answer it in a future episode.

If you have a minute and find this information actionable and insightful, and you want to stay up to date on the latest and useful retirement planning content, please subscribe to or follow the show on your podcast app. If you'd like to learn more about the rules and strategies discussed in today's show, you can find the links to the resources we have provided in the show notes on your podcast app, or you can visit us at retiredishpodcast.com/30. Be sure to sign up for our monthly Retired-ish newsletter, where each month, we discuss many of the topics we cover on the podcast and more relevant and up-to-date information surrounding the retirement landscape. We always include something actionable in our newsletters so that you can implement things right away, such as How-To guides and other simplified strategies.

Again, this can all be found at retiredishpodcast.com/30. Thanks again for tuning in and following along. See you. Next time on Retired-ish.

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