2021-22 ACA cliff r...
 
Notifications
Clear all

2021-22 ACA cliff reprieve & Roth conversions

 

Stuart Matthews
(@smatthews51)
Member Admin
Joined: 10 months ago
Posts: 183
Topic starter  

{Stuart Matthews here...I'm adding this topic on behalf of another (unknown) user because, unfortunately, I experienced a website failure and had to restore from a backup copy and lost that user's post (luckily I received an email containing the same question and have posted it here for all to see).}

I understand due to the American Rescue Plan Act (ARPA) that the ACA “subsidy cliff" has been eliminated for 2021-2022, with a maximum 8.5% of income payable for premium when Modified AGI (MAGI) exceeds the cliff threshold of 400% Federal Poverty Level. I am curious what priority PRC is placing on maintaining ANY amount of subsidy in these two years, particularly with regard to Roth conversion optimization.

In my situation, I am insured under the ACA and qualify for the premium subsidy throughout the ACA period. I want to do Roth conversions until age 70 whenever advantageous. With constant (inflation-adjusted) income and expenses throughout the ACA period, PRC is calculating ginormous Roth conversions for 2021-2022 then going back to modest conversions for the remaining period years, keeping my MAGI exactly at the cliff as expected. In Tabular Projections, I see “ACA Subsidy Amount” as blank for 2021-2022 and “Final Margin to the ACA Cliff” of huge negative values (the projected Roth conversions). Then for 2023 and beyond I see the expected modest values for “ACA Subsidy Amount” and “Final Margin to the ACA Cliff” values of blanks, the Roth conversions doing their work right up to the cliff.

I’ve been wrestling in my own mind how to approach these two years of cliff reprieve but forgoing 100% of ALL subsidy and Roth converting to the moon was not something I had been considering. I was thinking I’d just pay a little extra ACA premium if I miscalculated my MAGI and exceeded the cliff by a few dollars but not intentionally go substantially above it. It would seem that PRC is otherwise placing an extremely high value on maintaining the ACA subsidy for as long as possible since it does not give us the option of allowing MAGI to exceed the cliff when projecting Roth conversions. If it’s normally such a bad idea to exceed the cliff and lose the subsidy, why is PRC seemingly forgoing all subsidy dollars in 2021-2022 by allowing such a stratospheric MAGI (when it could be at least limiting healthcare expenses to 8.5% of a less-than-stratospheric MAGI and holding onto some subsidy)? The subsidy post-cliff still reduces to zero as MAGI continues to increase, no?

When I purchased PRC I was actually eager to test out whether it might be wise to forgo the ACA subsidies entirely, pay 100% of the premium, and instead focus on optimizing Roth conversions to the max in the pre-Medicare years. But when I discovered that PRC placed such a high value on the ACA subsidy dollars that it didn’t even allow the option of Roth converting above the cliff, I concluded further investigation was likely unmerited. Now, with PRC making no attempt to limit MAGI in 2021-2022, I am wondering whether there may indeed be some valid tradeoffs between ACA subsidy vs. Roth conversion prioritization.

I am not necessarily questioning PRC nor its approach for 2021-2022. I have done a good bit of reading on the ARPA provisions but still do not fully understand them; the technicalities are confusing to me. I am likely misunderstanding some fundamental implications of the cliff elimination for these two years and am admittedly feeling a little fuzzy about it all. I’m so accustomed to tracking my MAGI to the penny to avoid that cliff that I haven’t yet been able to rejigger my thinking! Does this temporary mitigation of the ACA tax - normally exceedingly high when falling over the cliff - truly offer a rare opportunity for unthinkable (for me) AGI or should there still be some limit imposed to salvage at least some subsidy? I would just appreciate, if you could, a little explanation and education on the thought process behind PRC's ACA implementation for 2021-2022. Also, in Boglehead-style if you are familiar with that site, welcomed is enlightenment/strategy/insights from anyone else on this Forum who understands the ARPA implications better than I do and may have considered how best to capitalize on this opportunity.

Thanks all.

This topic was modified 3 weeks ago by Stuart Matthews

Quote
Stuart Matthews
(@smatthews51)
Member Admin
Joined: 10 months ago
Posts: 183
Topic starter  

To the statement "I am curious what priority PRC is placing on maintaining ANY amount of subsidy in these two years, particularly with regard to Roth conversion optimization", I can say that PRC gives no priority to maintaining subsidies in 2021 and 2022 when trying to optimize Roth conversions. While the algorithm to optimize Roth conversions is quite complex, it lacks the complexity to simultaneously optimize ACA subsidies. My suggestion would be to run the Roth optimization with a start year of 2021 and then adjust the starting year to 2023 (to prevent the Roth conversions from driving your AGI so high that you lose the ACA subsidies) and then see what long-term effect it has. I just set up and ran such a test and that approach did yield a slightly better long term result.

To the statement "If it's normally such a bad idea to exceed the cliff and lose the subsidy, why is PRC seemingly foregoing all subsidies in 2021-2022 by allowing such stratospheric MAGI (when it could be at least limiting healthcare expenses to 8.5% of less-than-stratospheric MAGI and holding onto some subsidy)", I'll just echo what I said above: PRC's algorithms simply don't contain the complexity to simultaneously optimize Roth conversions and ACA subsidies. With that said, I believe your thought process is very sound and you can explore that as I suggested above. I think there may very well be some valid trades between ACA subsidies and Roth conversion optimization.

With that said, I'll leave it for other users to comment further. Thanks for the thought-provoking post!!


ReplyQuote
Share: