Health insurance before Medicare usually comes from COBRA, a former employer's retiree plan or a marketplace plan, and Scotia Wealth Management prices each one against the income your withdrawals and payouts will show. Many executives assume COBRA carries them all the way to 65. It generally lasts only 18 months. Someone leaving at 60 still has 42 of 60 months, roughly three and a half years, to cover some other way. The question usually starts with the COBRA election notice, which arrives with a monthly rate that can look shockingly high next to what payroll used to deduct.
Scotia Wealth Management wrote this guide for executives who hold deferred compensation and company stock. The steps follow the order in which they will actually reach you, and the cash-flow question comes first: once salary stops, which account pays the premiums, and how much income does that withdrawal show? Each step lists the papers to collect, the choice to make and the mistake that usually happens there. Our related guide on deferred compensation when leaving a company covers the payout timeline in more depth.
By Robert Kim, AIF — Wealth Manager | Reviewed by Elena Rodriguez, CFARobert helps tech executives and business owners optimize equity compensation and manage concentrated stock positions.
Count the months, not the years: leaving at 60 means 60 months to Medicare, and COBRA's 18 leave 42 that need another plan.
Senior Financial Planner, Scotia Wealth Management
Under a 10 percent expected contribution, every extra $10,000 of counted income costs about $1,000 a year of premium credit, so check that before a Roth conversion.
CPA and Tax Director, Scotia Wealth Management
A December stock sale nobody planned can turn into a credit repayment in April; keep the Form 1095-A and revisit your estimate whenever income changes.
CFP® and Lead Advisor, Scotia Wealth Management
Step 1: How many months sit between your last paycheck and 65?
Most people believe the gap is a number of years. It's really a number of months, and the count drives every later choice. Gather your exact last day of employer coverage (often the last day of the month you leave) and the month you turn 65. Then subtract. Leaving at 60 means 60 months to cover; COBRA's 18 leave 42 for something else.
The cutoffs fall in a fixed order. About 90 days before your last day, ask HR in writing for the COBRA monthly rate, which can be up to 102 percent of the plan's full cost, and for any retiree plan terms. Your employer coverage then ends. From the later of the coverage loss or the COBRA notice you have at least 60 days to elect COBRA, and the first premium is due within 45 days of electing. A separate 60-day marketplace window opens when job coverage ends, and you can apply up to 60 days ahead.
After that comes fall open enrollment (dates are set yearly; check HealthCare.gov or your state exchange). When COBRA's 18 months run out, a new 60-day window opens. Three months before your 65th birthday month, the seven-month Medicare initial enrollment period begins, as set by Medicare.
The slip at this step is counting years instead of months. Medicare Part B starts on the first of your birthday month only if you sign up in the first three months of the window, so a January birthday means signing up by December. Miss that and you wait, sometimes with a gap in coverage.
The calendar, in order
The slip: counting years
Step 2: Price COBRA, retiree coverage and a marketplace plan for the same months
Each option wins for a different person, so price all three over the same stretch of months. COBRA gives you the same doctors, the same network and credit for the deductible you already met that year. What you give up is any premium help, since you pay the full cost plus up to 2 percent. That trade usually suits someone mid-treatment or with a specialist they won't leave.
Retiree coverage from a former employer, where it exists, can be cheaper than COBRA. Ask HR whether the company can change or end it, and whether it stops at 65 or wraps around Medicare. A marketplace plan suits the reader whose counted income in a calendar year can stay modest, because premium help shrinks as counted income rises.
People also think COBRA must be used up before switching. It doesn't. But dropping COBRA voluntarily outside open enrollment does not open a new window, so make the switch at open enrollment or when COBRA runs out.
| Feature | COBRA | Retiree plan | Marketplace |
|---|---|---|---|
| Premium help | None | Varies by employer | Yes, income-based |
| Typical monthly cost | Full cost plus 2% | Often lower than COBRA | Benchmark minus credit |
| Network | Same as before | Employer's choice | New, plan-specific |
| Length | 18 months generally | Until 65 or set by plan | Yearly renewal |
| Employer can end it | Only if plan ends | Yes, often | No |
Step 3: What income does the marketplace count in a bridge year?
Premium help is based on the whole calendar year's modified adjusted gross income, which is the figure the IRS builds from your return. It includes traditional IRA and 401(k) withdrawals, deferred compensation installments, severance, capital gains from stock sales and Roth conversions. Tax-exempt municipal bond interest and the untaxed part of Social Security are added back. Qualified Roth IRA distributions and spending from cash savings are not counted.
Two beliefs mislead here. Municipal bonds do not keep income invisible, because the interest is added back. And only the months you're enrolled do not matter alone; income from January counts even if the marketplace plan starts in August.
For you, the big lines are deferred comp installments and company stock sales. Shares held after a net unrealized appreciation (NUA) distribution are one example: if the basis is 15 percent of the value, selling $40,000 of shares adds about $34,000 of counted gain. Advance credits are estimates, settled on Form 8962 with your tax return, so a December stock sale you didn't plan for can mean repaying credit in April.
The common advice to fill the years before Medicare with Roth conversions backfires in a marketplace year. A $50,000 conversion in a year spent fully on a subsidized plan adds $50,000 of counted income. Under a 10 percent expected contribution, that trims about $5,000 of annual premium credit, on top of the income tax. Conversions in a full COBRA year don't touch any subsidy, though they still count in Medicare's two-year income lookback. Our article on net unrealized appreciation for company stock in a 401(k) covers that strategy.
What counts and what doesn't
The Roth conversion trap
Step 4: Move one modest withdrawal and recompute the credit
Peggy retires at the end of January, just after turning 63 (hypothetical, round numbers). She's a widowed senior vice president of sales with one grown son and a $1.4 million 401(k) that includes $600,000 of company stock with a $90,000 basis. COBRA covers February through July of the following year, then she buys a marketplace plan for the five months before her January Medicare start. She needs $60,000 that year. For illustration, assume a $1,100 monthly benchmark premium (the second-lowest-cost silver plan for her ZIP code on HealthCare.gov) and a flat 10 percent expected contribution.
Here are the steps you can repeat. First, add up counted income. Second, multiply by the expected contribution percentage and divide by 12. Third, subtract that from the benchmark premium to get the monthly credit. Fourth, multiply by the months enrolled.
If all $60,000 comes from her rollover IRA, 10 percent of $60,000 is $6,000, or $500 a month. Her credit is $1,100 minus $500, so $600 a month, or $3,000 over five months. If $24,000 comes from cash and $36,000 from the IRA, 10 percent of $36,000 is $3,600, or $300 a month. Her credit is $800 a month, or $4,000 in total. The shift is worth $1,000. Our calculator handles this kind of arithmetic with your own figures.
What does one assumption moving do to her credit? Each extra $12,000 of counted income costs her $100 a month, and a pricier benchmark raises the credit at the same income.
Real contribution percentages rise with income and are set by current law, which may cut help off entirely above an income cutoff. Check the current figures at HealthCare.gov before relying on any of this. If large deferred comp installments or stock sales land in every bridge year, you may get little or no premium help, and the choice comes down to network, deductibles and monthly cost.
The shift isn't a free lunch. The $24,000 left in the IRA is still taxed when it comes out after 65. Peggy simply pulls it in a year with no premium credit at stake. That later withdrawal can still raise her Medicare premiums, because Medicare sets income-based surcharges from income two years earlier: a withdrawal at 66 shapes her premium at 68. Markets can fall as well as rise, and selling investments for cash in a down year can lock in losses, principal included. This is general education, not individual tax or insurance advice.
Peggy's two versions of the same year
Reading the sensitivity table
Before you schedule optional income such as a Roth conversion, a stock sale or an extra IRA withdrawal into a year when you'll hold a subsidized marketplace plan, price the lost premium credit next to the tax. Under a 10 percent expected contribution, each extra $10,000 of counted income costs about $1,000 a year of credit.
| Assumption that moves | Her monthly share | Credit per month | Credit, five months |
|---|---|---|---|
| Counted income $36,000 | $300 | $800 | $4,000 |
| Counted income $48,000 | $400 | $700 | $3,500 |
| Counted income $60,000 | $500 | $600 | $3,000 |
| $60,000, benchmark $1,300 | $500 | $800 | $4,000 |
Step 5: Who raises it at home, and who keeps the paperwork
The question usually surfaces when the first COBRA bill arrives. Often a spouse or a grown child asks why the premium jumped; in Peggy's hypothetical case it's her son. Agree on one person who keeps the Form 1095-A from the marketplace each January, since it's what the tax return needs to settle the credit. Then put three dates on a shared calendar: the COBRA end month, fall open enrollment and the opening of the Medicare window.
Where Scotia Wealth Management fits in your bridge years
Scotia Wealth Management reviews the roadmap you already have and marks which calendar years carry a marketplace subsidy. If a Roth conversion or deferred comp installment lands in one of those years, we flag it and leave the parts that work alone. Use the request form to send your COBRA notice and payout schedule; there's no fee you haven't seen and signed off on in writing.
Each extra $10,000 of counted income costs about $1,000 a year of premium credit.
Common questions on health insurance before Medicare
What happens if a deferred compensation installment pays out in a year I'm on a subsidized marketplace plan?
My mother is retiring at 63; how can I help her estimate the income she reports on the marketplace application?
How soon before my last day should I ask HR for the COBRA rate and the retiree plan terms?
Does a severance check paid in my final month change what I'll pay for marketplace coverage the next year?
Sources
This content is general information and education only. It is not individualized investment, tax or legal advice. Investing involves risk, including possible loss of principal. Before making any financial decision, consult a professional about your own circumstances.