Many younger retirees in the United States rely on Marketplace health insurance due to their ineligibility for Medicare before the age of 65. This option offers lower monthly premiums through 2025 thanks to boosted tax breaks. However, without proper planning, retirees can face a costly tax surprise, according to experts.
Data from the Kaiser Family Foundation shows that as of open enrollment in 2024, over 5.1 million Americans aged 55 to 64 had Marketplace coverage, a significant increase from roughly 3.4 million in 2021. The temporary enhancement of the premium tax credit by Congress in 2021 and 2022, extended through 2025, allows Marketplace enrollees to lower monthly premiums upfront or claim the tax break when filing their return.
Financial Implications in Retirement
Marketplace benefits are tied to earnings, allowing younger retirees to leverage lower premiums after leaving the workforce. However, some may face a “phantom tax” when income rises, warned Tommy Lucas, a certified financial planner and enrolled agent in Orlando, Florida. He emphasized the importance of being extremely careful with financial moves in retirement that could impact these valuable credits.
Before 2021, households with income between 100% and 400% of the federal poverty level were eligible for the premium tax credit. The American Rescue Plan Act temporarily removed those limits and capped premiums at 8.5% of income during the pandemic. Calculating eligibility for the premium tax credit involves determining the difference between a benchmark premium and a maximum contribution based on a percentage of income. Changes in reporting circumstances should be reported immediately to avoid overpaying or underpaying Marketplace premiums, as they are reconciled on tax returns.
The premium tax credit can save eligible younger retirees hundreds or even thousands per year, depending on their income. However, higher income can phase out eligibility for this benefit. Claiming Social Security at age 62 can affect eligibility for the premium tax credit, as the entire payment, including the nontaxable portion, counts toward the calculation. Long-term projections suggest waiting until at least age 65 to claim Social Security if claiming the premium tax credit. Similarly, boosting income through Roth IRA conversions can also impact eligibility for the credit.
Overall, while Marketplace health insurance offers cost-saving benefits for younger retirees, it is crucial to carefully consider the financial implications and potential tax surprises associated with this option. Proper planning and strategic financial decisions in retirement can help maximize the benefits of the premium tax credit and avoid unexpected costs. It is essential for retirees to stay informed about eligibility requirements and reporting guidelines to ensure they are making the most of their Marketplace coverage.