Retiring Before 65? The ACA Subsidy Cliff Is Back.

What changed

The Affordable Care Act created premium tax credits to help people buy health insurance on the marketplace. For most of the law's history, those credits were only available to households with income up to 400% of the federal poverty level.

In 2021, Congress temporarily removed that cap and made the credits more generous. For several years, nobody buying benchmark coverage on the marketplace had to pay more than 8.5% of their income for it, no matter how much they earned. That made a big difference for early retirees with pensions.

Those enhancements expired at the end of 2025 and weren't renewed. So starting with 2026 coverage, the original rules came back:

• Subsidies are available only up to 400% of the federal poverty level.
• Above that line, there's no subsidy at all.
• Below it, people are expected to pay a larger share of their premium than they did in 2025.

For 2027 coverage, the marketplace uses the 2026 poverty guidelines. That puts the cutoff at about $63,840 for a single person and $132,000 for a family of four. Based on the same guidelines, it works out to about $86,560 for a couple.

Cross that line by a dollar and the whole subsidy disappears. There's no gradual phase-out.

Why this hits early retirees harder

The cliff is a bigger deal for early retirees than for most people, for a couple of reasons.

Premiums are highest right before Medicare

Health insurance premiums on the marketplace go up with age. Someone in their early 60s generally pays a lot more for the same plan than someone in their 30s. So the subsidy is worth the most right when you're in that gap before 65.

For a couple in their late 50s or early 60s, the difference between getting a subsidy and not getting one can be thousands of dollars a year. Some estimates put it at $10,000 or more.

Pensions count as income

A lot of public employees retire with a pension. That's a great thing to have. But for ACA purposes, your pension counts as income. So a retiree with a solid pension, maybe plus a spouse's income or some investment withdrawals, can land right around the cliff without realizing it.

One-time income can push you over

This is the one that catches people. A single big transaction in one year can move you over the line for that year, even if your normal income is well under it. For example:

• Taking a large withdrawal from a traditional IRA, 457 plan, or the FRS Investment Plan
• Taking a DROP payout as cash instead of rolling it over
• Selling investments with a big gain
• Selling a rental property or a business
• A spouse's income from work

Let's say a retired couple has $70,000 in pension income, comfortably under the roughly $86,560 cutoff. Then they take a $25,000 withdrawal from a retirement account to replace a roof. Their income for the year jumps to about $95,000. That could wipe out their entire subsidy for that year.

How the marketplace measures your income

The marketplace uses a specific version of income called modified adjusted gross income, or MAGI. It's not the same as the number on your paycheck, and it's not quite the same as your taxable income.

In general, ACA MAGI starts with your adjusted gross income from your tax return, then adds back a few things, including:

• The part of your Social Security benefits that isn't taxed
• Tax-exempt interest
• Certain foreign income

A few things that usually count as income for this purpose:

• Pension payments
• Wages, including a spouse's
• Withdrawals from traditional IRAs, 457 plans, 401(k)s, and similar accounts
• Taxable investment income, like interest, dividends, and capital gains
• Social Security benefits, including the untaxed portion

A few things that usually don't:

• Qualified withdrawals from a Roth IRA
• Money you already had in savings, like cash in a checking or savings account
• Loans

Pre-tax contributions to a workplace retirement plan can reduce MAGI, but most early retirees aren't making those anymore.

This is a simplified overview. Exactly what counts depends on your tax situation, and a tax professional can help you estimate your MAGI accurately.

The part that can cost you later: reconciliation

When you sign up on the marketplace, you estimate your income for the coming year. The subsidy is usually paid in advance, straight to your insurance company, based on that estimate.

Then, when you file your taxes, the IRS compares the subsidy you received to what you actually qualified for based on your real income. That's called reconciliation.

If your income came in higher than you estimated, you may have to pay some or all of the subsidy back.

Here's what's new. In past years, how much you'd have to repay was capped for many households. Starting with the 2026 tax year, that cap is gone. If you received more subsidy than you qualified for, you may have to repay all of it, no matter your income.

So if you estimate your income at $80,000, get a full year of subsidies, and then take a surprise withdrawal that puts you at $95,000, you could owe back the entire year's subsidy when you file.

In plain terms: the subsidy is really a loan against your income estimate. If the estimate is wrong, the bill comes due in April.

Ways people plan around the cliff

I'm not going to tell you what to do with your income. That depends on your whole situation, and it's worth working through with a tax professional. But here are the kinds of things people look at.

Know your number before you enroll

Before open enrollment, add up your expected income for 2027. Your pension, any Social Security, a spouse's wages, interest and dividends, and any withdrawals you plan to take. Compare that to the cliff for your household size. How close you are changes everything else.

Time big withdrawals

If you know you'll need a large amount of money, like for a roof, a car, or helping a family member, the timing can matter. Some people take a larger withdrawal in a year when they're not relying on a subsidy, or spread withdrawals across years to stay under the line.

Use cash and Roth money strategically

Money that's already in savings, and qualified Roth withdrawals, generally don't count toward MAGI. Some early retirees use those sources to cover spending in years when staying under the cliff matters. That's one reason having money in different types of accounts before retirement can give you more flexibility later.

Think carefully about DROP payouts and rollovers

If you're leaving DROP, how you take that money matters for taxes and for the ACA. A lump sum taken as cash is generally taxable income in the year you receive it. Money rolled over directly to an IRA or another eligible plan generally isn't taxed until you withdraw it. That choice can affect whether you keep a subsidy that year. It's worth deciding on purpose, with a tax professional.

Consider the timing of Social Security

For people who are eligible for Social Security before 65, starting benefits adds income for ACA purposes, including the untaxed part. That's one more factor in the claiming decision.

Watch capital gains

If you have taxable investment accounts, selling investments with large gains can push your income up. Some people plan sales across years or look for ways to offset gains.

Two couples, a thousand dollars apart

It helps to see how sharp the cliff really is. Let's take two hypothetical retired couples, both 62, both living in the same Florida county, both shopping for the same marketplace plan in 2027.

Couple A expects household income of $86,000. That's just under the roughly $86,560 cliff for a two-person household. They qualify for a premium tax credit, and their share of the benchmark plan's premium is capped at a percentage of their income.

Couple B expects household income of $87,000. That's about $440 over the line. They get no subsidy at all. They pay the full, unsubsidized premium for the same plan.

For couples in their early 60s, full-price premiums are high, because marketplace premiums rise with age. So the difference between those two couples' health insurance bills for the year can be many thousands of dollars, even though their incomes are only $1,000 apart.

That's what makes the cliff different from most tax rules. Usually, earning a little more means keeping a little less of the extra. Here, earning a little more can cost you far more than you earned.

It also means that for a household right near the line, small decisions matter. Whether a withdrawal happens in December or January. Whether a gain is realized this year or next. Whether a spouse picks up a few extra shifts. Those details can decide whether you keep the subsidy.

Report changes during the year

Your income estimate isn't locked in for the whole year. If your income changes, you can update your application on HealthCare.gov. That adjusts your advance subsidy going forward.

Let's say you enrolled expecting to stay under the cliff, and then in June you learn you'll need to take a large withdrawal. Updating your income estimate right away can reduce or stop your advance subsidy for the rest of the year. That can shrink what you'd otherwise owe back at tax time.

The reverse works too. If your income drops, reporting it could increase your subsidy for the rest of the year.

It's not the most exciting chore, but checking your income estimate at mid-year can save you from an unpleasant surprise in April.

A note on very low incomes

This post focuses on people near the top of the subsidy range, because that's where most early retirees with pensions land. But there's a floor too.

Premium tax credits generally start at 100% of the federal poverty level. Florida has not expanded Medicaid under the Affordable Care Act. So in Florida, adults with income below the poverty level may not qualify for marketplace subsidies, and may not qualify for Medicaid either, depending on their situation. That's rare for retirees with a pension, but it can come up for someone who retires early without one, or in a year with unusually low income. If that's you, it's worth checking your options on HealthCare.gov or with a navigator.

Other coverage options to compare

The marketplace isn't the only path. Depending on your situation, you might compare it to:

Your employer's retiree health options

Many Florida public employers allow retirees to continue on the group health plan, often at the retiree's own cost. The premium may be higher than what you paid as an employee, but for some people it's competitive with the marketplace, especially above the cliff. It's worth asking your employer's benefits office exactly what's available and what it costs.

COBRA

COBRA lets you keep your former employer's coverage for a limited time, usually 18 months, but you typically pay the full premium plus an administrative fee. It can bridge a short gap. It's often expensive.

A spouse's employer plan

If your spouse is still working and has access to coverage through their job, that may be an option. Keep in mind that access to affordable employer coverage can affect whether you're eligible for marketplace subsidies.

The FRS Health Insurance Subsidy

If you're an FRS retiree, you may be eligible for the Health Insurance Subsidy, a monthly payment to help with health insurance costs. It won't close a big premium gap on its own, but it's part of the picture. Make sure you've applied if you're eligible.

Key dates for 2027 coverage

• November 1, 2026: Open enrollment begins on HealthCare.gov, which is the marketplace Florida uses.
• December 15, 2026: The last day to enroll for coverage starting January 1, 2027. Open enrollment on HealthCare.gov continues through January 15, 2027, for coverage starting February 1.
• After open enrollment: You can generally only sign up or change plans if you have a qualifying life event, like losing other coverage, moving, or getting married.

A few other things are changing for 2027. Insurers are leaving the marketplace in more than 20 states, premiums are rising in many areas, and rules for automatic renewal and income verification have tightened. So even if you have marketplace coverage now, it's worth actively reviewing your options instead of letting your plan renew automatically.

If you're still working and planning to retire early

If you're a few years from retirement, this is the best time to plan for the gap, because you have the most options.

• Build flexibility into your accounts. Having money in savings, Roth accounts, and pre-tax accounts gives you more control over your taxable income in the years before Medicare.
• Map your income year by year. Sketch out your expected income from retirement until 65. Where does it land relative to the cliff each year?
• Price out your options. Get a sense of what marketplace coverage, employer retiree coverage, and COBRA would cost you, with and without a subsidy.
• Include health insurance in your retirement budget. It's one of the biggest expenses early retirees face, and it's easy to underestimate.

When it comes down to it, the retirement date isn't just a work decision. It's a health insurance decision too.

What I'm not going to do

I'm not going to tell you which health plan to pick or which option is best. That depends on your health, your doctors, your family, and your budget. HealthCare.gov and licensed insurance professionals can help you compare plans.

I'm also not going to tell you to shape your whole financial life around a subsidy. Sometimes going over the cliff is the right call, because the money you need is worth more than the subsidy you lose.

What I will say is this. The cliff is one of the most expensive surprises in early retirement, and it's also one of the most avoidable. The people who get hurt by it usually aren't the ones who planned and decided to go over. They're the ones who didn't know it was there.

The short version

• Enhanced ACA subsidies expired at the end of 2025. The subsidy cliff is back.
• For 2027 coverage, the cliff is about $63,840 for a single person, about $86,560 for a couple, and $132,000 for a family of four.
• Earn a dollar over and you lose the entire subsidy.
• Pension income, retirement account withdrawals, taxable DROP payouts, capital gains, and Social Security all count toward the income test.
• Starting with the 2026 tax year, there's no cap on repaying excess subsidies.
• Open enrollment runs November 1 to January 15. Enroll by December 15 for coverage starting January 1.

If you're retiring before 65, or already there, and want to map your income against the cliff and your other options, I'm happy to work through it with you.

Frequently asked questions

What is the ACA subsidy cliff?

It's the income limit for ACA premium tax credits. For 2027 coverage, households with income above 400% of the federal poverty level don't qualify for any subsidy. Going over the line by even $1 means losing the entire subsidy.

What is 400% of the federal poverty level for 2027 coverage?

For 2027 coverage, marketplaces use the 2026 poverty guidelines. That puts 400% at about $63,840 for a single person and $132,000 for a family of four in the continental U.S. For a couple, it works out to about $86,560.

Does a pension count as income for ACA subsidies?

Yes. Pension payments are generally included in the modified adjusted gross income used to determine ACA subsidy eligibility.

When is ACA open enrollment for 2027?

On HealthCare.gov, which Florida uses, open enrollment runs from November 1, 2026, to January 15, 2027. Enroll by December 15, 2026, for coverage starting January 1, 2027.

Do I have to pay back ACA subsidies if my income is higher than expected?

You may. Subsidies are reconciled on your tax return. Starting with the 2026 tax year, there's no cap on repaying excess subsidies, so you could owe back the full amount you received but didn't qualify for.

Do Roth IRA withdrawals count toward ACA income?

Qualified Roth IRA withdrawals generally don't count toward the modified adjusted gross income used for ACA subsidies. Traditional IRA and 457 plan withdrawals generally do.

Educational content only. Not individualized investment, tax, legal, or insurance advice. Examples are hypothetical and for illustration only. Joy Financial Group LLC does not sell insurance. Benowitz Wealth Management is a brand of Joy Financial Group LLC, a Florida state-registered investment adviser. Consult a qualified tax professional regarding your specific situation.

Neither Joy Financial Group LLC nor Benowitz Wealth Management is affiliated with, endorsed by, or employed by the Florida Retirement System, the Florida Division of Retirement, the State Board of Administration of Florida, MyFRS, or any government agency. FRS members may obtain free, unbiased guidance from the MyFRS Financial Guidance Line at 1-866-446-9377.