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Buying pre-Medicare insurance

By Jennie L. Phipps ·
Monday, May 13, 2013
Posted: 4 pm ET

Finding affordable health insurance when you are a few years away from Medicare eligibility can be a tricky retirement planning job.

My husband is about to take retirement, and I'm about to lose the coverage I've enjoyed under his employer's plan. I feared that I would have trouble finding a replacement policy, but the search wasn't as onerous as it might have been -- thanks in part to changes under the Affordable Care Act, which limits what insurance companies can charge older customers.

I was offered coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, and turned it down. COBRA is a federal law that requires most companies offering health insurance to employees and their dependents to offer to continue that coverage after they leave the company. Anyone who buys COBRA is generally charged the full amount the company pays for the insurance. Coverage lasts 18 months, although there are circumstances under which it can be extended for 36 months.

In my case, it initially looked like I might be eligible for the maximum extension because of how close I am to being eligible for Medicare. But the rules are complex, and it turned out that because my husband is currently signed up but not receiving Medicare, I'm not eligible for an extension. If you find yourself in a similar situation, it pays to call Medicare to get clarification.

If you opt for COBRA, you must stick with your company's plan. I thought it was more insurance than I needed at greater cost, so I instead chose a group conversion policy with the same insurer. Under the conversion policy, the insurer allowed me to shop among its plans and waived any pre-existing condition limitations. Group conversion options aren't universal, but worth asking about.

I am choosing a high-deductible plan for $390 per month with a $5,000 deductible. I am self-employed, and the plan will be a company benefit of working in my one-person company. Under Internal Revenue Service rules, I will be able to deduct 100 percent of the cost of the plan from my income. I also will be able to put the 2013 maximum of $3,250 in a health savings account, plus another $1,000 because I'm older than 55, for a total tax shelter of $4,250. That makes nearly the entire out-of-pocket cost of this plan tax-advantaged. As long as I use the $4,250 for health care, I never have to pay taxes on it.

It looks like a big bargain to me, and it is another good reason to run your own little business during retirement.

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May 15, 2013 at 11:42 am

You cannot use money from and HSA to pay health insurance premiumns. You may use them towards Long-Term Care Insurance only.

beverly mcgrath
May 15, 2013 at 3:14 am

does anyone know if i would be able to use the $4250.i would put in my hsa to pay my health insurance premiums every month?

Toby Speed
May 14, 2013 at 9:13 am

Thanks for this information, Jennie. I didn't know about the tax benefits you described and the pluses of running a small business in retirement. Love all your columns, by the way!