Beyond inflation and taxes, health coverage poses one of the greatest challenges for early retirees’ financial plans. Whether transitioning from an employer-sponsored plan, where premiums are often partially or fully covered by the employer, or moving away from self-employed coverage, where premiums are deductible as a business expense or income adjustment, many taxpayers are surprised by the high price of private health insurance.
To address these costs and inefficiencies of the U.S. healthcare system, the Affordable Care Act (ACA) introduced the federal healthcare marketplace in 2014, along with the federal Premium Tax Credit (PTC). This tax credit serves as a subsidy to help taxpayers who lack access to affordable coverage manage the cost of their monthly insurance premiums and can be a powerful financial planning tool for those retiring before Medicare eligibility at age 65.
Let’s discuss how the marketplace works and how you can qualify for the PTC.
The Healthcare Marketplace
The healthcare marketplace is an online platform that enables taxpayers to compare health insurance plans available in their region. The federal government operates the national healthcare marketplace, HealthCare.gov, while states like California run their own platforms, such as Covered California, for better autonomy and integration with local programs.
Plans are categorized into four tiers:
- Bronze: Low premiums, high out-of-pocket costs
- Silver
- Gold
- Platinum: High premiums, low out-of-pocket costs
The Federal Premium Tax Credit (PTC) and Enhanced Premium Tax Credit (EPTC)
Eligibility for the PTC requires enrollment in a marketplace health plan and is dependent on a taxpayer’s Modified Adjusted Gross Income (MAGI).
MAGI = Adjusted Gross Income (AGI) + untaxed foreign income + non-taxable Social Security benefits + tax-exempt interest (municipal bonds)
Initially, the credit was only available for those whose MAGI was between 100%-400% of the federal poverty line, which is an income threshold set by the government to determine eligibility for programs like food stamps (SNAP), Medicaid, and the federal PTC. For example, in 2025, the federal poverty line for a household of four is $31,200:
Under the original legislation, earning just $1 more than 400% of the federal poverty line meant losing access to the tax credit. This came to be known as the “subsidy cliff”.
That changed in 2021 with the American Rescue Plan Act, which introduced the Enhanced Premium Tax Credit (EPTC). This was then extended through December 31st, 2025, via the Inflation Reduction Act of 2022.
The EPTC removed the income cap and eliminated the “subsidy cliff”. Now, no taxpayer is required to pay more than 8.5% of their MAGI for a benchmark marketplace health plan, even if their MAGI exceeds 400% of the federal poverty line.
Taxpayers can choose to:
- Receive the credit in advance, paid directly to their insurer.
- Claim the credit when filing their tax return the following year.
If a taxpayer underestimates their income and opts for the advanced credit, they may need to repay some or all of it when filing their taxes.
Example: Robert and Debbie Retiree
Robert and Debbie sold their business last year and are now retired. They’re both 55 years old, have 15-year-old twins, live in Sacramento County and have MAGI of $124,801.
Step 1: Compare MAGI to the Federal Poverty Line
In 2025, the federal poverty line for a four-member household is $31,200. Robert and Debbie’s income is just over 400% of that amount.
Step 2: Calculate Maximum Plan Cost
At 400%, Robert and Debbie’s maximum premium payment for their counties’ benchmark health plan is 8.5% of their MAGI, which is $884/month or $10,608/year ($124,801 x 8.5%). This is known as their “expected contribution”.
Step 3: Identify Benchmark Plan
The second-lowest cost silver plan (SLCSP) is used as the benchmark plan to calculate the PTC. In Robert and Debbie’s case (and other similar aged four-member households in Sacramento County), the benchmark plan costs $2,874.48/month ($34,493.76/year).
You can see Sacramento County’s second-lowest cost silver plan in the screenshot below via Covered California’s website:
Step 4: Determine PTC Amount
Although Robert and Debbie’s MAGI is $1 more than 400% of the federal poverty line, they still qualify for a subsidy thanks to the Enhanced Premium Tax Credit (EPTC). Their expected contribution for the benchmark plan is capped at 8.5% of their MAGI, which equals $884/month or $10,608/year.
To calculate Robert and Debbie’s tax credit, subtract their expected contribution from the cost of the benchmark plan above:
$2,874.48/month (benchmark plan) - $884/month (expected contribution) = ~$1,994/month
So, Robert and Debbie’s 2025 PTC amount would be $1,994/month, totaling $23,928/year. They can elect to have the credit applied in advance, paid directly to their insurer, or pay the entire monthly premium out-of-pocket and claim the credit when filing their tax return.
See Covered California screenshot below:
A couple notes:
- Robert and Debbie can choose a bronze plan with lower premiums and higher deductibles, using their $23,928 credit to reduce their total cost of coverage. Alternatively, they could opt for a more expensive gold or platinum plan. The credit remains the same, but their out-of-pocket expenses would increase due to higher premiums.
- In this example, Robert and Debbie would not receive a subsidy if their MAGI was $405,809 or higher. Why? Because 8.5% of $405,809 equals $34,493.76, which matches the full cost of the benchmark plan, meaning they’d be expected to pay the entire premium themselves.
Bottom Line
Though imperfect, the ACA and subsequent legislation undeniably expanded access to affordable healthcare for millions of Americans. But that progress is at risk.
Absent legislation, the Enhanced Premium Tax Credit will expire December 31st, 2025. Meaning, early retirees like Robert and Debbie will again face the “subsidy cliff”, losing access to affordable healthcare.
In our example, without the enhanced credit, Sacramento County’s benchmark marketplace plan would cost Robert and Debbie nearly 28% of their MAGI:
$34,493.76 (benchmark plan) ÷ $124,801 (Robert and Debbie’s MAGI) = 27.6%
That would be a substantial financial burden, highlighting the significance of proactive tax planning, specifically for those seeking early retirement.
Proactive tax planning strategies may include:
- Traditional vs Roth Contributions:
- While pre-tax contributions to a 401(k) or IRA offer meaningful tax savings in your highest earning years, building a Roth 401(k)/IRA can be a great source of tax-free income in retirement. Consider making Roth contributions to your 401(k), executing mega back door Roth 401(k) contributions, and/or back door Roth IRA contributions.
- Build Non-retirement (Taxable) Assets:
- Beyond your 401(k) and IRA, having a well-funded brokerage account (non-retirement) is important, specifically if you retire before age 59.5. While investment earnings like dividends, interest and capital gains remain taxable, the account’s principal has already been taxed and can be accessed to cover retirement expenses while keeping MAGI low.
- Invest in Real Estate:
- Rental real estate can offer unique tax advantages. Through accelerated depreciation and cost segregation studies, investors can often offset all or some of their rental income, keeping MAGI low.
- Delay Social Security:
- While benefits are available starting at age 62, they’re included in MAGI and can reduce or eliminate subsidy eligibility. Consider delaying benefits at least until Medicare at age 65.
- Contribute to a Health Savings Account (HSA):
- Assuming you’re covered by a high-deductible health plan (HDHP), contributions to an HSA can be an easy way to reduce MAGI without requiring earned income.
By saving in the right investment vehicles and strategically managing taxable income, you can maintain access to valuable federal subsidies like the Premium Tax Credit, even as policy landscapes shift.
If you have any questions about retirement, healthcare or the Premium Tax Credit, please don’t hesitate to reach out.