Retiring before 65: what health insurance costs in the gap, and why 2026 is worse
COBRA, the ACA marketplace or an HSA until Medicare at 65. Why the 400 percent subsidy cliff is back in 2026, and the HSA rule that catches people at 65.
Most people planning to retire at 62 have thought carefully about the money and barely at all about the three years of health insurance between leaving work and turning 65. It is the single largest avoidable cost in an early retirement, and in 2026 it got considerably more expensive.
The short version: you have three instruments for the gap - COBRA, the ACA marketplace, and an HSA to pay with - and which one wins turns almost entirely on one number, your modified adjusted gross income. The enhanced marketplace subsidies expired at the end of 2025, so the hard cutoff at 400 percent of the federal poverty level is back. One dollar over that line takes the entire credit away. That makes the order in which you draw down your accounts a health insurance decision, not just a tax one.
What changed for 2026
From 2021 through 2025, enhanced premium tax credits did two things. They cut the share of income people were expected to pay at every subsidised level, and they removed the cliff at 400 percent of the federal poverty level by replacing it with a taper, so a household above the line still got help if the benchmark plan cost more than 8.5 percent of income.
Both of those expired at the end of 2025 and were not extended. For 2026 the pre-2021 structure is back: higher expected contributions across the income bands, and a cliff instead of a taper.
The cliff is the part that matters for early retirees, because an early retiree, unusually, often has substantial control over their taxable income. A 63-year-old couple living off a mix of taxable savings and an IRA can frequently choose whether their income lands at 390 percent or 410 percent of the poverty level. Under a taper that choice was worth a modest amount. Under a cliff, crossing it means paying the full unsubsidised premium for two people in their sixties, which is the most expensive age band before Medicare.
This is why the first number to write down is not a premium. It is 400 percent of the federal poverty level for your household size, because that is the line everything else is measured against.
COBRA: eighteen months, and the arithmetic of when you quit
COBRA keeps you on your employer’s plan after you leave, at the full cost. You pay what your employer was paying plus what you were paying, and the plan may add up to 2 percent for administration. People who have never seen the employer’s share are regularly shocked by the number, which is not COBRA being expensive so much as it is the first time the real price has been visible.
The standard duration for leaving a job is 18 months. That has a precise consequence worth planning around: 18 months before your 65th birthday is about age 63 and a half. Retire then and COBRA alone carries you to Medicare. Retire at 62 and COBRA leaves you about a year and a half short, so you need something else either before or after it.
Two things make COBRA better than its reputation for this specific job.
It keeps your doctors, your deductible progress for the plan year, and a group plan’s network, which is usually broader than what the individual market offers. And, unlike a marketplace plan, you can pay for it from an HSA.
The HSA rule that decides it for people with a large HSA
Health insurance premiums are generally not a qualified medical expense. An HSA withdrawal to pay one is an ordinary distribution: taxable, and before 65 subject to an additional 20 percent tax.
There is a short list of exceptions, and COBRA is on it. Continuation coverage required by federal law can be paid from an HSA tax free. So can premiums paid while you are receiving unemployment compensation, long-term care insurance within limits, and, once you are 65, Medicare premiums - though not Medigap.
Marketplace premiums are not on that list.
For somebody who has been filling an HSA for fifteen years, this changes the comparison in a way the headline premiums do not show. COBRA at a higher sticker price, paid with money that was never taxed going in and is not taxed coming out, can beat a cheaper marketplace plan paid with taxable dollars. Run the comparison on after-tax cost, not on the premium.
The marketplace, and why your withdrawal order is now a coverage decision
If you are under 400 percent of the poverty level, the marketplace is usually the better deal in the gap, and the subsidy is based on your estimated income for the year rather than on your assets. This is the quietly remarkable feature of the pre-65 gap: a household with a large portfolio and deliberately modest taxable income can be well subsidised.
That makes the drawdown order the lever.
Money from a taxable brokerage account shows up as income only to the extent of realised gains, and a sale at a small gain adds little. A withdrawal from a traditional IRA or 401(k) is ordinary income, dollar for dollar. A Roth withdrawal, once qualified, adds nothing at all. Same spending, three very different effects on the one number that decides your premium.
So the same Roth conversion that is a good idea for tax reasons in your early sixties can cost you the entire premium tax credit in the year you do it. Both can be true. The resolution is usually to size the conversions against the cliff rather than abandon them, or to do them in the years where you have other coverage and stop in the years you are relying on the marketplace.
Two practical warnings. Subsidies are paid in advance on an estimate and reconciled on your tax return, so an income estimate that turns out low means paying credits back, and above the cliff that repayment is the whole amount. And in most states a special enrolment period opens when you lose job coverage, which is a 60-day window, not an open invitation.
Medicare at 65: two deadlines and one trap
The enrolment window is seven months. The three months before your birthday month, the birthday month, and the three months after. Enrol in the first three and coverage starts at the beginning of your birthday month. Miss the window without a qualifying special enrolment period and Part B carries a late penalty of 10 percent for each full 12 months you could have been enrolled, for as long as you hold Part B. It is one of the few permanent penalties in the system.
What it costs in 2026. The standard Part B premium is $202.90 a month, up from $185.00, and the annual deductible is $283, up from $257. Part A is premium-free for most people, on the strength of 40 quarters of covered employment. Higher earners pay an income-related surcharge on top of the standard premium, and that surcharge is set from the tax return filed two years earlier - so your income at 63 sets your premium at 65, which is the same two-year lookback that shapes the claim-age decision for Social Security.
The trap is the HSA. If you enrol in Part A after your 65th birthday, coverage can be backdated by up to six months, though never to before you turned 65. You are not allowed to contribute to an HSA for any month you were covered by Medicare. So contributions made in months that retroactively become covered months are excess contributions, and excess contributions carry a 6 percent excise tax unless you take them out, with their earnings, by your filing deadline.
Nobody does this deliberately. It happens because somebody contributes right up to the month they apply, and the backdating reaches behind them. The fix is simple and has to be diarised: stop HSA contributions six months before you apply for Medicare.
The order to work through it
Four steps, and the first is not about insurance.
- Find 400 percent of the federal poverty level for your household size. Everything else is positioned relative to that line.
- Work out what your taxable income will be in each year of the gap, by account. Taxable, traditional and Roth withdrawals have different effects, and the mix is yours to choose.
- Price COBRA and the benchmark marketplace plan, then compare after tax. If you have a significant HSA, COBRA’s eligibility to be paid from it belongs in the comparison.
- Put three dates in the calendar. The month COBRA ends, the month your Medicare enrolment window opens, and the month to stop HSA contributions, six months before you plan to apply.
Our retirement planner has a healthcare tab built for exactly this stretch: the countdown to Medicare at 65, the pre-65 bridge options side by side, and the drawdown order on the same screen as the income it produces, since in the gap those are one decision rather than two. It is a single HTML file that runs on your own machine, with no account and nothing leaving the device.
This is a guide to how the rules work, not advice about your situation. The poverty level thresholds and premium figures change annually, and the legislative position on the enhanced credits has moved more than once, so confirm the current numbers before you act on them.
Frequently asked questions
How long does COBRA last after I retire?
Eighteen months for the standard qualifying event of leaving a job, and the employer may add up to 2 percent for administration on top of the full premium. Eighteen months means COBRA on its own bridges a retirement at about 63 and a half all the way to Medicare at 65. Retire earlier than that and COBRA runs out before Medicare starts, so it is the second half of the bridge rather than the whole of it.
Why did ACA marketplace premiums jump in 2026?
The enhanced premium tax credits that had been in place since 2021 expired at the end of 2025 and were not extended. That did two things: the share of income people pay at every subsidised income level went up, and the hard cutoff at 400 percent of the federal poverty level came back. Above that line the credit is zero, not reduced.
What is the 400 percent subsidy cliff?
Under the pre-2021 rules that returned for 2026, premium tax credits stop completely above 400 percent of the federal poverty level. A household one dollar over the line pays the full unsubsidised premium, which for a couple in their early sixties can be well over a thousand dollars a month. One dollar of extra income can therefore cost many thousands, which is why it is called a cliff rather than a taper.
Can I use my HSA to pay health insurance premiums before 65?
For COBRA, yes. COBRA and other federally required continuation coverage is one of the few premiums that counts as a qualified medical expense, so you can pay it from an HSA tax free. Marketplace premiums do not qualify, with one exception: premiums paid while you are receiving unemployment compensation are allowed. After 65 you can also pay Medicare premiums from an HSA, but not Medigap.
When do I sign up for Medicare?
Your initial enrolment period runs seven months: the three months before the month you turn 65, your birthday month, and the three months after. Signing up in the three months before means coverage starts at the beginning of your birthday month. Missing the window without qualifying for a special enrolment period means a Part B late penalty of 10 percent for every full 12 months you could have enrolled and did not, and that surcharge stays on your premium for as long as you have Part B.
What does Medicare Part B cost in 2026?
The standard premium is $202.90 a month, up from $185.00 in 2025, and the annual Part B deductible is $283, up from $257. Higher earners pay an income-related surcharge on top, set from the tax return filed two years earlier. Most people pay no Part A premium because they have at least 40 quarters of covered employment.
Why do I have to stop HSA contributions six months before I claim Medicare?
Because Part A can be backdated. If you enrol after 65, coverage can be made retroactive by up to six months, though never to before your 65th birthday, and you cannot contribute to an HSA for any month you were covered by Medicare. Contributions you made in a month that later turns out to have been covered become excess contributions, which carry a 6 percent excise tax unless you withdraw them with their earnings by your filing deadline. Stopping contributions six months before you apply avoids the whole problem.
Is COBRA or the marketplace cheaper?
It depends on one number: whether you can keep your modified adjusted gross income under 400 percent of the federal poverty level. Below the line, a subsidised marketplace plan usually beats COBRA. Above it in 2026 you pay the full marketplace price with no credit, and COBRA at group rates can be the cheaper of the two. Work out the income first, because the income decides the coverage, not the other way round.
Financial disclaimer: This guide is for general information and education only. It is not financial advice. Confirm balances, rates and fees against your own statements, and consult a qualified advisor about your situation.
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