Deciding to make a career change can be a huge leap of faith – and it can be especially harrowing if leaving your job means leaving behind employer-sponsored health insurance benefits. But now, more than ever, striking out in a new direction doesn’t mean workers have to sacrifice affordable, comprehensive health insurance.
Thanks to the Affordable Care Act (with help from the American Rescue Plan) workers can lock in their own health benefits – including health plans that rival employer-sponsored offerings.
Through income-based subsidies, the ACA promises affordable coverage for workers who are planning to leave a job to become self-employed, retire early, work part-time, or work for a small business that doesn’t offer health benefits. But if you’re among those workers and considering a move, here’s what you need to know to create your own benefits package that will fit your needs and budget.
If you currently have employer-sponsored coverage
The first point to keep in mind: Don’t try to recreate exactly what you already have. That will just be an exercise in frustration and/or very expensive. Instead, you’ll want to think about how you use your coverage, and what’s actually necessary for you and your family.
Depending on your employer, you may be paying a little or a lot for your benefits package.
But chances are, your employer is paying a large portion of the total cost. On average, employers pay about 83% of health insurance premiums for employee-only coverage, and nearly 74% of the premiums for family medical coverage.
There’s tremendous variation from one employer to another, and larger employers are more likely to offer a more generous benefits package, including supplemental benefits as well as major medical coverage. But the feasibility – and necessity – of recreating your employer-sponsored benefits in the individual market will depend a lot on the sort of benefits package that your employer provided.
Your new premiums might be lower than what you pay for employer-sponsored coverage
The various forms of supplemental coverage, which we’ll address in a moment, are optional. But a solid major medical health plan is a must-have. Fortunately, you’ll qualify for a special enrollment period to sign up for a new health plan when your old one ends.
And you’ll probably find that you’re eligible for substantial government subsidies that make the new coverage affordable. These subsidies have been available since 2014, but they’re larger and more widely available now, thanks to the American Rescue Plan (ARP) that was enacted earlier this year.
For some perspective, we’ll look at average premiums for employer-sponsored plans and marketplace plans. For a single person with employer-sponsored health coverage, the average payroll-deducted premium is about $104/month. (Average total premiums are about $623/month, but employers pay the majority of the cost.)
When we consider coverage that you can buy for yourself in the marketplace/exchange, the average total premiums are about $575/month. But for most people, subsidies (premium tax credits) cover the majority of the cost — especially now that the ARP has been implemented.
Among people who enrolled in coverage through HealthCare.gov over the last several months, average after-subsidy premiums are only $85/month. And 45% of the people who have enrolled since April 1 are paying less than $10/month for their coverage.
It’s worth noting here that the threshold for employer-sponsored coverage to be considered affordable is a higher percentage of household income than the affordability standards used in the marketplace. An employer-sponsored plan is considered affordable in 2021 if the employee’s portion of the premium (for employee-only coverage) isn’t more than 9.83% of the household’s income.
But if you’re buying coverage in the marketplace, you won’t have to pay more than 8.5% of household income for the benchmark plan (second-lowest-cost Silver plan), and you’ll pay even less than that if your income is under 400% of the poverty level. In addition, if you enroll your whole family, that 8.5% of income cap will apply to the family, whereas the affordability test for employer-sponsored health insurance doesn’t consider the cost to add family members to the plan.
Although many employers go above and beyond in terms of making their employees’ coverage affordable, the general affordability rules are more generous in the marketplace than they are for employer-sponsored plans. This is particularly true if you need to cover a family; doing so through your employer might have been prohibitively expensive, and you may be pleasantly surprised to see how your costs stack up once the family is no longer eligible for employer-sponsored coverage.
All this is to say that there’s a decent chance you might find that you actually pay less to purchase your own coverage in the marketplace than you were paying to enroll in your employer’s plan.
Factors you should consider with a coverage switch
There are plenty of caveats to keep in mind as you go about the process of creating your own benefits package. Depending on your specific circumstances, some may be more important than others, but here’s a basic summary:
- If you’ve already spent money towards your employer plan’s out-of-pocket limit this year, you’ll be starting over at $0 on a new individual/family plan. Depending on how much you’ve already spent, using COBRA (or state continuation), if it’s available, might be a good option until the end of the year.
- The average deductible on an employer-sponsored plan in 2020 was $1,644, whereas average deductibles are quite a bit higher than that for plans that people purchase in the marketplace — at least for higher-income people who don’t qualify for cost-sharing reductions (see below). But averages don’t tell the whole story. It’s important to remember that although your employer may have offered just one plan or possibly a handful of choices, you’ll have access to a wide range of plan options when you’re shopping for your new plan. You might pick a plan with a high deductible if that fits your needs, but you’ll also have options with lower out-of-pocket exposure.
- If you’re eligible for cost-sharing reductions (CSR), your deductible and out-of-pocket costs might be even lower than they were on your employer-sponsored plan. (The median deductible for people enrolling in plans through HealthCare.gov over the last few months was just $50, because so many people enrolled in plans with built-in cost-sharing reductions.) If your income is below 200% of the federal poverty level (in the continental U.S., that currently amounts to $25,520 for a single person and $52,400 for a family of four), you’re eligible for strong CSR, and picking a Silver-level plan will ensure that your out-of-pocket costs are lower than they would otherwise be (and likely lower than they were on your employer-sponsored plan).
- You don’t have to match your old benefits exactly. You might find that you come out ahead financially with a new plan that has a very different benefit structure from the one you’re leaving.
Provider networks and drug formulary
- If you’ve already got an established relationship with a specific doctor or hospital, you’ll want to check to see which marketplace plans include them in their provider networks (the marketplace will allow you to narrow down your plan selections based on specific providers being in-network). Be aware that provider networks can be different in the individual and employer-sponsored markets, even if the plans are offered by the same health insurance company. Provider networks on many self-purchased plans do tend to be narrower than provider networks for employer-sponsored plans, and self-purchased plans are more likely to be HMOs or EPOs, rather than PPOs. If having a specific list of providers in-network is important to you, you’ll want to pay close attention to this aspect of picking your new plan.
- If you take any prescription medications, you’ll want to check the formularies (covered drug lists) for any new health plan you’re considering (the marketplace plan comparison tool will also let you compare plans based on coverage of specific medications). Health plans create their own formularies, within parameters set by state and federal rules, so coverage will vary from one plan to another. If you take multiple medications and there are no marketplace plans that cover all of them, you can prioritize plans that cover the most expensive of your medications, or talk with your doctor about possible substitutions that are on the formularies of the new plans you’re considering.
Do you want an HSA?
- Your employer may or may not have offered an HSA-qualified health plan. But in virtually all areas of the country, these plans are available for purchase in the marketplace.
- If you enroll in an HSA-qualified high-deductible health plan, you’ll be able to make pre-tax contributions to a health savings account. This could be a versatile addition to your overall financial portfolio, and a good source of funds to cover future out-of-pocket medical expenses.
Employer-sponsored health benefits generally include medical coverage as well as a variety of supplemental benefits. These often include vision and dental plans, life and disability insurance, and accident and critical illness plans.
These plans are designed to cover things that your major medical plan doesn’t cover, to replace lost income, or to pay some or all of the out-of-pocket costs you’d otherwise have to pay on your own when you have a claim.
So if you’re trying to recreate your employer-sponsored health benefits package, you may be considering various types of supplemental coverage to go along with your new major medical health plan.
There are several key points to keep in mind as you do this:
- Your employer may have been paying part of the cost of your supplemental benefits, or the full cost may have been payroll deducted. But even if you were paying the full cost yourself, you may find that it’s more expensive to purchase similar coverage on your own, since employer groups tend to get a discount on supplemental benefits.
- Carefully consider the various supplemental benefits your employer provided, and try to determine which ones would be valuable to maintain when you have to buy them yourself. You might find, for example, that it’s more cost-effective to pay out-of-pocket for dental care rather than purchasing dental insurance – or you might come to the opposite conclusion.
- If you’re enrolling in a plan that has a higher deductible than your old plan, an accident supplement, critical illness supplement, or fixed indemnity plan might give you some additional peace of mind if you don’t feel like you have adequate savings to cover potential out-of-pocket costs.
- But also consider whether you might come out ahead by putting the money you would have spent on those plans into a savings account and dipping into it if you do have out-of-pocket costs. (If you’re enrolling in an HSA-qualified plan, the pre-tax money you put into your HSA can be used to cover out-of-pocket expenses.) And if you do choose to purchase supplemental coverage to pay out-of-pocket costs, be sure you read all the fine print and understand exactly what situations will be eligible for a payout and how much it would be.
- The cost of dental and vision care, as well as out-of-pocket costs under your major medical plan, will likely be manageable even if you have to cover them without supplemental coverage. But life insurance and disability insurance are important provisions to consider if you’re building your own “benefits package.” If being without your income for an extended period of time would be a hardship for you or your family, you’ll want to check with your insurance broker to see what life and disability plans are available to you, and how much they’d cost. These plans will generally require medical underwriting (which isn’t the case for employer-sponsored plans), but you may find that you’re able to get more life insurance than you had at work, and adequate disability insurance.
If you’re transitioning away from an employer-sponsored health benefits package, the idea of recreating your own benefits package can seem daunting. But there are Navigators and brokers nationwide who can provide zero-cost assistance with plan selections and enrollment.
And you may find that your new coverage is less expensive – and potentially more robust – than you may have expected, thanks to premium subsidies and cost-sharing reductions.
Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health marketplace updates are regularly cited by media who cover health reform and by other health insurance experts.