5.5 Health Coverage Before Medicare & the Retiree Health Expense Budget
Key Takeaways
- Medicare generally starts at 65, so early retirees need a bridge: employer retiree coverage, COBRA (usually up to 18 months at up to 102% of the premium), a spouse's employer plan, or ACA marketplace coverage.
- The temporary enhanced premium tax credits expired after 2025, so for 2026 marketplace subsidies are again limited to household income between 100% and 400% of the federal poverty level.
- Marketplace subsidies use MAGI, so Roth conversions, capital gains, and large IRA withdrawals can reduce or eliminate premium tax credits, and starting in 2026 excess advance credits must be repaid in full.
- HSA contributions must stop once a person enrolls in any part of Medicare; because Part A can be retroactive up to six months when enrolling after 65, contributions should stop six months before enrollment.
- A retiree health budget should itemize Part B ($202.90 per month in 2026) and any IRMAA, Part D, Medigap or Medicare Advantage premiums, cost-sharing, and dental, vision, and hearing costs, and inflate them faster than general prices.
5.5 Health Coverage Before Medicare & the Retiree Health Expense Budget
Core Principle: Health care is a guaranteed, rising expense in retirement, and before 65 it is often the deciding factor in whether early retirement is affordable. RICP 355 asks planners to help clients build a health expense budget and navigate coverage choices. That means planning the bridge to Medicare, coordinating income with subsidy and IRMAA rules, and projecting lifetime costs realistically.
The Coverage Gap Before 65
Most people become eligible for Medicare at 65, whatever their Social Security full retirement age. Retirees in EBRI's 2026 survey reported a median retirement age of 62, so many households need several years of private coverage.
| Option | How It Works | Key Planning Points |
|---|---|---|
| Employer retiree health plan | Former employer continues group coverage for retirees | Less common than in the past. Check eligibility rules (age and service), the premium share, and whether the employer can change or end it. At 65, it usually becomes secondary to Medicare, so enroll in Part B on time. |
| COBRA continuation | Keep the employer's group plan after leaving | Generally up to 18 months, longer in some disability and dependent situations. Premiums can be up to 102% of the full cost. COBRA is not active-employment coverage for Medicare enrollment purposes. |
| Spouse's employer plan | Join a working spouse's plan | Often the cheapest bridge. Watch the working spouse's own retirement timing. |
| ACA marketplace (HealthCare.gov or state exchange) | Individual coverage with possible premium tax credits | Losing job-based coverage opens a 60-day special enrollment period. Subsidies depend on projected MAGI. |
| Part-time work with benefits | Some employers offer coverage to part-time staff | Can also reduce early portfolio withdrawals. |
ACA Marketplace Subsidies and MAGI Management
2026 Subsidy Rules
- Premium tax credits (PTCs) are based on household income as a percentage of the federal poverty level (FPL).
- The enhanced PTCs created in 2021 (which removed the 400% FPL cap) expired at the end of 2025. For 2026, eligibility again requires household income between 100% and 400% of FPL. For 2026 coverage, that is roughly $62,600 for one person and $84,600 for a two-person household, based on the prior year's poverty guidelines. Above the limit, there is no credit, however high premiums are.
- Repayment: Starting with the 2026 tax year, if advance credits turn out too large, the full excess must be repaid. The earlier repayment caps no longer apply.
What Counts in Marketplace MAGI
Marketplace MAGI is AGI plus tax-exempt interest, non-taxable Social Security benefits, and excluded foreign income. So:
- Increase MAGI: wages, traditional IRA and 401(k) withdrawals, Roth conversions, realized capital gains, dividends, and municipal bond interest.
- Do not increase MAGI: spending cash savings, withdrawing Roth IRA contributions (basis), or selling high-basis assets with little gain.
The Early-Retiree Trade-Off
The same low-income "gap years" that are ideal for Roth conversions (Section 12.2) are also when marketplace subsidies are available. A large conversion can raise MAGI above 400% of FPL and eliminate the credit. The planner must compare:
- Value of the subsidy (can be thousands of dollars a year for older enrollees), versus
- Tax savings from converting now instead of at higher future rates.
Often the answer is to fund living costs from cash and taxable accounts, keep MAGI within the subsidy range before 65, and do larger conversions after Medicare starts. From 63 on, conversions also affect IRMAA two years later.
Health Savings Accounts (HSAs) Around Medicare
| Rule | Detail |
|---|---|
| 2026 contribution limits | $4,400 self-only or $8,750 family coverage, plus a $1,000 catch-up at age 55 or older |
| Eligibility | Must be covered by an HSA-eligible high-deductible plan and not enrolled in Medicare |
| Medicare enrollment | Contributions must stop the month Medicare coverage begins. If Part A is claimed after 65, it can be retroactive up to 6 months, so stop contributing 6 months before enrolling to avoid excess contributions. |
| Paying Medicare costs | Tax-free HSA withdrawals can pay Part B, Part D, and Medicare Advantage premiums and qualified out-of-pocket costs, but not Medigap premiums |
| Long-term care insurance | Tax-free for qualified LTC premiums up to the age-based limits (2026: $4,960 for ages 61–70; $6,200 over 70) |
| After 65 | Non-medical withdrawals are taxable income but no longer face the 20% additional tax |
Building the Retiree Health Expense Budget
A realistic health budget itemizes each cost and uses a higher inflation assumption than general spending.
Example: Couple Both 67, Original Medicare With Medigap (Illustrative 2026 Figures)
| Line Item (Per Person Unless Noted) | Monthly | Annual (Couple) |
|---|---|---|
| Medicare Part B standard premium (2026) | $202.90 | $4,869.60 |
| Part D prescription plan premium (illustrative; varies by plan) | $45 | $1,080 |
| Medigap Plan G premium (illustrative; varies by state, age, and insurer) | $190 | $4,560 |
| Part B deductible (2026) | — | $566 |
| Dental, vision, and hearing (not covered by Original Medicare; illustrative) | — | $2,400 |
| Prescription cost-sharing (capped at $2,100 each for Part D-covered drugs in 2026; illustrative typical use) | — | $1,200 |
| Estimated total | About $14,700 |
Budget adjustments:
- IRMAA: Add surcharges if MAGI from two years earlier exceeds the thresholds. In 2026, Tier 1 adds $95.70 per person per month ($81.20 for Part B plus $14.50 for Part D).
- Medicare Advantage alternative: Premiums are often lower, but budget for cost-sharing up to the plan's out-of-pocket maximum (as high as $9,250 in-network in 2026).
- Inflation: Health costs have usually risen faster than general inflation, so project them separately.
- Benchmark check: Fidelity's 2026 estimate is $185,500 per 65-year-old over retirement (excluding long-term care). Compare the client's itemized projection with it.
- Long-term care is a separate budget and risk (Chapter 13).
Advisor-Client Case Scenario: Bridging to Medicare at 61
Tom and Rita, both 61, retire with $1.4 million, mostly in traditional IRAs, plus $250,000 in a taxable account. They need $80,000 a year and plan to delay Social Security.
- Option A (convert aggressively now): Take IRA withdrawals plus $80,000-a-year Roth conversions. MAGI of about $160,000 exceeds 400% of FPL, so the marketplace credit is $0. They pay full premiums of roughly $2,300 a month for two 61-year-olds (illustrative).
- Option B (subsidy-aware): Fund spending mostly from the taxable account (mostly basis) and keep MAGI near $60,000 with modest IRA withdrawals and small conversions. They qualify for premium tax credits worth thousands of dollars a year.
- Plan: Use Option B until 65, then shift to larger Roth conversions after Medicare starts, keeping an eye on the IRMAA thresholds that apply from 63 onward. Their advisor updates projected MAGI with the marketplace each year to avoid repaying excess credits.
Exam Tip
- Medicare starts at 65 for most people. COBRA is a temporary bridge, not active employment coverage, and it does not delay Part B penalties.
- 2026 ACA credits: Income must be 100% to 400% of FPL, since the enhanced credits expired after 2025. Marketplace MAGI includes Roth conversions, capital gains, and tax-exempt interest.
- HSA + Medicare: No contributions once enrolled in Medicare. Stop 6 months before a late Part A enrollment. HSAs can pay Part B, D, and Advantage premiums, but not Medigap.
- Health budget: Itemize premiums, cost-sharing, and uncovered dental, vision, and hearing costs, plus IRMAA, and use a higher health inflation rate.
A 63-year-old couple buys ACA marketplace coverage in 2026 and plans a $90,000 Roth conversion that would push household MAGI well above 400% of the federal poverty level. What is the likely consequence?
A 66-year-old who is still working and contributing to an HSA plans to enroll in Medicare Part A next month. What should the advisor recommend about HSA contributions?
Which item belongs in a retiree's health expense budget but is NOT paid by Original Medicare, even with a Medigap Plan G policy?