Expenses and Healthcare

An expense is money that leaves the plan on a schedule. FinZot pays expenses at step 2 of each year, after income and before any withdrawal you schedule (how a year works). Debt payments and property costs are not expenses. They have their own pages and are always paid in full. This page covers ordinary living expenses, the two kinds of qualified expense, premiums taken from a paycheck before tax, and the two kinds of healthcare coverage FinZot models.

Sizing and timing

An expense has an amount per occurrence and an effective period. The amount can be a dollar figure in today’s dollars or nominal dollars, with an optional growth rate on top of inflation, or a formula, or a phased schedule that changes over the years. An expense occurs every year of its period unless it has a recurrence, such as every eight years.

Mandatory and flexible expenses

Every expense is either mandatory or flexible. This only matters when variable spending is on.

• Mandatory, the default. The expense is always paid in full, even when the spending budget cannot cover it.
• Flexible expense. When the budget is tight, the expense can be cut toward its Spending Floor, a percent of its full amount. At 0% it can be eliminated entirely. Each flexible expense also has a cut order from 1 to 10. Expenses with a lower number are cut first. The default is 5.

The mandatory expenses plus every flexible expense’s floor are the spending a plan must sustain, and the Monte Carlo success rate measures that floor (Projections & Monte Carlo).

Qualified expenses

An expense can qualify for one tax-advantaged account type, not both.

HSA Qualified Medical Expense. The expense can be paid from an HSA tax-free. You choose one of two strategies.

• Expense Immediately. FinZot withdraws the amount from the HSA in the year the expense occurs.
• Keep Receipt. FinZot pays the expense from cash and adds the amount to the pool of unreimbursed medical expenses. HSA Reimbursements are the list of entries that later draw on that pool, tax-free, in the order you set. Each entry depletes the pool for the next. You can also enter a starting pool for expenses paid before the plan began.

529 Qualified Student Expense. The expense can be paid from a 529 tax-free.

A qualified expense is not tied to one account. FinZot draws on every 529 in the scenario, one account at a time in a fixed order you cannot choose, until the expense is covered. An HSA expense draws on every HSA the same way.

A medical expense can also be marked SE Health Insurance Deduction. FinZot then deducts it above the line. The deduction is capped at net self-employment profit, less half the self-employment tax and any self-employed retirement contributions.

Premiums taken from a paycheck

A workplace health, dental, or vision premium usually comes out of your pay before tax. FEHB premiums work the same way. Check Deducted from a paycheck before tax on the expense and pick the Salary it comes out of. Only an income entry of the Salary type can be picked.

While that paycheck is paid, FinZot leaves the premium out of your taxable wages. The premium is also left out of the wages that Social Security and Medicare tax reach. This is the cafeteria plan (Section 125) treatment. Your state follows the federal figure.

FinZot splits each year by month. Say you retire in July. Six months of that year’s premium come out of pay before tax, and FinZot pays the rest from after-tax cash. After the paycheck stops, the whole premium is an ordinary after-tax expense. The premium costs the same either way. Only your taxes change.

A premium taken from a paycheck cannot also be a self-employed health insurance deduction. It cannot be marketplace coverage either. FinZot will not delete a salary while an expense comes out of it. Change the expense to after-tax first.

If the premium is also an HSA qualified medical expense, only the part paid from after-tax cash counts toward it. The premium comes out of pay first, so an HSA or retirement plan contribution from the same paycheck is capped at the pay left after it.

Some federal rules are not modeled. FinZot does not check the FEHB rule that coverage continues into retirement only after five years of enrollment. It does not tie a spouse’s FEHB coverage to the pension’s survivor election. Your Social Security estimate still counts the full wage, although the premium lowers the wages Social Security taxes. A state payroll tax, such as California SDI, is still charged on the premium.

ACA marketplace coverage

An expense marked Marketplace (ACA) is health insurance bought on the exchange before Medicare. You enter two premiums, both in the same dollar terms.

• Plan Premium. The full unsubsidized premium for the plan you buy.
• Benchmark premium. The second-lowest-cost Silver plan for your rating area, from healthcare.gov. It drives the subsidy math regardless of the plan you buy, and it grows with your premium, including any growth rate you set.

The benchmark follows the premium’s schedule. A Phased premium moves the benchmark by the same ratio at each step. A step from $12,000 to $15,000 raises a $10,000 benchmark to $12,500. Use a phase when the same coverage changes, such as a premium rising with age or a child leaving the plan. Enter a switch to a different plan as a new expense. As a phase, a cheaper plan would cut the benchmark too.

Each expense carries the benchmark for the people it covers. With one expense per spouse, enter each spouse’s own benchmark.

Each year FinZot computes the premium tax credit from that year’s ACA MAGI, which is AGI plus municipal bond interest plus the non-taxable part of Social Security. FinZot works out the credit month by month, as Form 8962 does. Each covered month gets its benchmark premium minus a twelfth of the share of MAGI the law expects you to pay. A month’s credit is never less than zero and never more than that month’s plan premium. The expected share rises with income as a multiple of the federal poverty level. Below the floor, 100% of the poverty level, 138% in a state that expanded Medicaid, or 200% in DC, whose Basic Health Program covers adults to that line, there is no credit. Above 400% of the poverty level the credit drops to zero, which is a real cliff. The enhanced credits that lifted that cap ended after 2025. The household size behind the poverty level is the tax household for that year: the living filers plus that year’s dependent children. A child aging out or a spouse’s death changes it on its own.

A part year counts only the covered months. In the year you leave an employer plan or start Medicare, FinZot charges the expected share only for the months a marketplace plan covers. Eligibility is still judged on the full year’s income. End the ACA expense the month before Medicare starts. When one person switches plans, end the old expense the month before the new one starts.

FinZot computes the credit once on the full year’s income. It does not model advance payments or the reconciliation on the tax return. An ACA expense must be sized as a specific amount or a phased schedule. A tax-targeted withdrawal or conversion can be sized to stay under an FPL multiple, which is how you hold the subsidy (Roth conversions and withdrawals).

Medicare

FinZot generates the Medicare Part B premium for each person from age 65. It is not an expense you enter. You can delay enrollment to a later start, for coverage that continues past 65 such as an employer plan. Part B never starts before 65 and ends at death.

Only the standard Part B premium is modeled. Part D, Medigap, and Medicare Advantage premiums are not. Add them as ordinary expenses. Medicare premium growth sets how fast the premium rises above inflation. Left blank, premiums track inflation. The setting applies to both the Part B premium and the IRMAA surcharges.

IRMAA is the income-based surcharge on Part B and Part D. FinZot models it as a tax. Each year’s surcharge tier comes from the household’s MAGI two years earlier, where MAGI is AGI plus municipal bond interest. For the first two projection years there is no history to read, so you enter Historical MAGI for IRMAA for those years. Left blank, FinZot uses that year’s own MAGI in its place, which understates the surcharge for a household whose income has just dropped and overstates it in a year with a large conversion. The surcharge is the Part B and Part D amounts for the matched tier, scaled by the months each person was enrolled. A tax-targeted withdrawal or conversion can be sized to stay under an IRMAA tier (Roth conversions and withdrawals).