2020 Seattle-area ACA plans: an early look

Next year will be our family’s first experience buying health insurance on the individual market through our state’s ACA exchange. In 2019 there are four companies offering insurance in King County (home to Seattle, many of its suburbs, and nearly a third of Washington’s population): Ambetter, Kaiser Permanente, Molina, and Premera. Premera offers EPO plans, while the other three insurers are HMOs.

That’s this year. What about next year?

While the insurers aren’t actively selling their plans yet, they have all submitted proposals to the state insurance commissioner for the plans they would like to offer and rates they would like to charge. The commissioner has to review and approve these rates before the plans go on sale during open enrollment later this year.

I spent a little time looking through these proposals to see what’s in store for next year. All four of the companies currently offering individual insurance in King County plan to continue doing so next year. We’ll also see the addition of two more companies to the local exchange: BridgeSpan and LifeWise.

Keep reading for a company-by-company summary of the proposals for next year.

Continue reading 2020 Seattle-area ACA plans: an early look

The negative-tax small business

As someone who recently joined the ranks of the FIREd, I have plenty of options for how to spend my time. It’s pretty nice! While I’m confident that our savings should be enough to see us through the rest of our lives, I fully expect to come across some opportunities to do interesting things and also earn some money on the side.

My first thought when considering the impact a small side gig might have on our finances is that the self-employment taxes will be huge, and that the amount left over might not be worth the effort. As I found out, this is not necessarily the case for a FIREd family.

Example 1: Roth conversion ladder

Consider a retired couple with two kids living at home, spending $50,000 per year. They have essentially all of their savings in retirement accounts, and use the Roth conversion ladder to access this wealth prior to age 59½.

Their federal income tax situation, in a nutshell, looks like this:*

  • Adjusted Gross Income: $50,000 from Roth conversions
  • Standard deduction: $24,000
  • Taxable income: $26,000
  • Tax before credits: $2,742
  • Child tax credit: $2,742
  • Total tax (before ACA credits): $0

No income tax for this family. Not bad! This family buys their health insurance through their state’s ACA exchange. With an AGI of $50,000, the second-cheapest silver plan will have annual premiums of $3,225. They pay for these premiums out of their $50,000 budget.

Now consider what might happen if one of the adults in this family starts a small part-time business, bringing in a pretty modest $15,000 per year. They use this money to help pay their living expenses, reducing their need for Roth conversions by an equal amount. This business would expose the family to self-employment tax of 15.3% on the business income, but it also opens up a few interesting tax breaks for self-employed folks.

First, self-employed people can deduct the cost of their health insurance premiums. This deduction is calculated prior to AGI, similar to the treatment that people who get health insurance through their employer get to claim.

Self-employed people also get to deduct half the cost of their self-employment tax from their AGI, similar to how employees have their employer pay half their FICA taxes and this half never enters into their own personal income tax calculations.

The tax cuts that went into effect in 2018 introduced a new deduction for business owners: the 20% qualified business income deduction. This applies to business income that is not otherwise deducted from income, so the deductible half of self-employment tax and the health insurance deduction don’t count toward the income that is used for this deduction.

Finally, the fact that this family now has some work-related income makes them potentially eligible for refundable child tax credits and the earned income credit.

Let’s see how their taxes shape up now!

  • Roth conversion income: $35,000
  • Business income from Schedule C: $15,000
  • Gross income: $50,000
  • Deduction for half of self-employment tax: $1,060
  • Deduction for health insurance premiums: $2,679
  • Adjusted gross income: $46,261
  • Qualified business income deduction: $2,252
  • Standard deduction: $24,000
  • Taxable income: $20,009
  • Tax before credits: $2,022
  • Child tax credit: $2,022
  • Regular income tax: $0
  • Self-employment taxes: $2,120
  • Additional child tax credit: $1,716
  • Earned income credit: $1,099
  • Total tax (before ACA credits): $-695

That’s right, negative $695 of tax! Far from being an expensive proposition tax-wise, this self-employment activity unlocked tax credits that more than paid for the self-employment tax. The pre-AGI deductions from self-employment also increase their ACA premium tax credit by $546. That’s a total benefit of $1,241, even before taking into account the effect that this extra $15,000 of work income will have on their eventual social security benefits.

Example 2: Spending down a taxable account

The previous example looked at a family who was going with the Roth conversion ladder for 100% of their spending. Now let’s look at a family in a situation more similar to my own, starting out in FIRE with a taxable brokerage account that they want to spend down before moving on to tax sheltered funds.

Same family size and $50,000 spending as before. This time they take the full $50,000 from a taxable account: $10,000 of dividends and $40,000 from selling shares with an average basis of half the current market value, leading to $20,000 of long-term capital gains income.

They also do $20,000 of Roth conversions to prepare for future years when they’ll be relying on seasoned Roth basis for their Roth conversion pipeline.

Tax situation before starting a small business:

  • Roth conversion income: $20,000
  • Qualified dividend income: $10,000
  • Long-term capital gains: $20,000
  • Adjusted Gross Income: $50,000
  • Standard deduction: $24,000
  • Taxable income: $26,000
  • Tax before credits: $0
  • Child tax credit: $0
  • Total tax (before ACA credits): $0

Similar to the family living off Roth conversions above, the family in this example has no federal tax liability before starting their small business. Let’s see what happens afterwards with $15,000 of self-employment income.

As they’re still trying to spend down their taxable account, they keep withdrawing from their taxable savings as before, and save their full self-employment earnings in Roth retirement accounts. They reduce their Roth conversions by $15k to keep their taxable income pretty steady.

New tax situation:

  • Roth conversion income: $5,000
  • Business income from Schedule C: $15,000
  • Qualified dividend income: $10,000
  • Long-term capital gains: $20,000
  • Gross income: $50,000
  • Deduction for half of self-employment tax: $1,060
  • Deduction for health insurance premiums: $2,679
  • Adjusted gross income: $46,261
  • Qualified business income deduction: $2,252
  • Standard deduction: $24,000
  • Taxable income: $20,009
  • Tax before credits: $0
  • Child tax credit: $0
  • Regular income tax: $0
  • Self-employment taxes: $2,120
  • Additional child tax credit: $1,716
  • Earned income credit: $0
  • Total tax (before ACA credits): $404

In this scenario the family is ineligible for the earned income credit due to their taxable investment income. Anyone with more than $3,500 of such income is ineligible for the earned income credit. The additional child tax credit and the additional ACA credits still combine to more than annihilate the self-employment taxes.

This is a result I didn’t really expect when looking into the impact a side business would have on an early retiree’s taxes. I thought that surely the taxes would go up. In many cases, especially where kids aren’t involved, that probably would happen. But when you bring kids into the mix, tax credits meant to help low-income working families can help you too!

* All calculations in this post use tax formulas from 2018. Amounts in 2019 will differ slightly due to annual inflation adjustments in the tax code.