The Affordable Care Act (ACA), aka Obamacare, provides subsidies to Americans making up to 400% of the poverty level, about $94,200 for a family of four. Can you juggle finances to best cash in on subsidies?
Rather than limiting subsidies to only those with a small net worth, the ACA provides aid to all persons with low incomes, including those early or partial retirees.
Imagine a couple, Michael and Lisa, who are both 51 and own a family business. They have two children, 17-year-old Jacob and 14-year-old Emily. Last year their business produced income of about $140,000.
They live well below their means, saving and investing diligently. They can retire at any time and live comfortably. Until now, they carried individual health insurance but their policy costs rose even more than the annual average of 41%.
The most drastic option for Michael and Lisa: Get divorced, leaving one of them with the business and the income and the other with the children. The ACA heavily discriminates against married couples in favor of single parents; a family of three with a very low or nonexistent income can receive maximum federal subsidies.
Early retirement is a simpler option: Sell the business, pocket the money and realize little or no income. With the ACA in effect, early retirement becomes an easy decision for Michael and Lisa to receive subsidies for otherwise expensive midlife health care.
With a little tax planning, though, Michael and Lisa don't need to retire early or divorce to receive aid for health insurance. Imagine that Michael and Lisa each pay themselves $33,000 in wages. In 2014, they can each contribute $17,500 to the company's 401(k) and, because they are older than 50, an additional $5,500 of catch-up contribution.
Because of their contribution, the business can add to their 401(k) an additional 25% of their salary as a profit-sharing bonus or employer match at the end of the year. Via this match, they each gain an extra $8,250 untaxed.
All these 401(k) contributions leave them each with a $10,000 paycheck.
Under Obamacare, household income depends on modified adjusted gross income (MAGI), which includes individual retirement account distributions but also comes with deductions such as certain contributions to retirement plans, alimony, moving expenses and self-employment expenses.
In 2014, Michael and Lisa can each contribute $5,500 to a Roth IRA plus an additional $1,000 catch-up provision. Although these contributions do not reduce their MAGI, any interest and dividends in future years will not inflate their income.
Because the couple runs a family business, their children can earn incomes as well. At 17 and 14, Jacob and Emily both qualify as working age for nonhazardous jobs and can each earn $23,000 a year and put $17,500 of that back into the company's 401(k); the company contributes an additional $5,750 in match and profit-sharing.
This leaves each teenager with a $5,500 paycheck, perfect for funding their Roth IRA. (Contributing to a Roth between ages 14 and 20 is better than starting at 21 and contributing for the rest of their lives.)
Using this plan, the family puts $109,000 into the company 401(k) and $24,000 into Roth IRAs and now has a taxable income of only $31,000. With this MAGI, the family of four sits at 132% of the poverty level. This qualifies them for the maximum ACA benefit, requiring them to pay just 2% of their income for a health-care premium.
The cost of a Silver plan, normally $10,825 (34% of their MAGI), now costs them only $600 per year.
If the business becomes more profitable, they can also change their corporate structure to a C Corp and keep excess income in the business to help preserve government subsidies for insurance.
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David John Marotta, CFP, AIF, is president of Marotta Wealth Management of Charlottesville, Va., and a member of the AdviceIQ Financial Advisors Network, which is a USA TODAY content partner offering financial news and commentary. Its content is produced independently of USA TODAY.
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