As the retirement age in our country continues to push into the late sixties and early seventies, many individuals are realizing that delaying Medicare enrollment may be a prudent plan. Considering the significant impact health care costs have on retirement income, helping your clients think through this timing can be very beneficial.
The normal age for Medicare enrollment is 65. Medicare has costs. Some of these costs are substantial. To list a few:
• Medicare B premiums are based on an individual's income, meaning the premium includes a tax for those with higher incomes. Annual 2016 Part B premiums for an individual range between $1,258 and $4,677.
• The national average for an annual 2016 Part D premium is $409. This premium is also means-tested meaning it can be increased by up to $831 per year.
• In addition to original Medicare, a Medigap policy can cost approximately $2,000.
Medicare coverage is, overall, extensive. If your client, however, has comprehensive coverage provided by an employer or even their spouse's employer, it may be prudent to defer some or all of Medicare enrollment to simply defer the above-mentioned costs.
The second reason your client may want to defer is to continue funding their health savings account (HSA). An HSA is an account offered in conjunction with a high-deductible health insurance plan. The account allows you to contribute funds and take a full tax deduction for the contribution. The earnings on the funds grow tax-free and can be distributed free of taxes for a broad range of health care expenditures. Consistently funding an HSA is one of the best ways to prepare for retirement health care costs. Once your client enrolls in Medicare, they are no longer eligible to contribute to an HSA.
Let's look at two fairly common situations in order to work through the key considerations.
DEFERRING MEDICARE ENROLLMENT
In order to defer Medicare in its entirety, one must:
• Have health insurance coverage from their employer or their spouse's employer of 20 or more employees.
• Defer enrollment in Social Security retirement benefits.
• Have creditable prescription drug coverage with their employer plan.
If your client meets these qualifications, they can defer Medicare enrollment and continue to fund their health savings account.
It is important to realize that your client must defer Social Security retirement benefits in order to defer Medicare enrollment. Even a file-and-suspend strategy (which will not be an option much longer) is considered enrollment, which prevents an HSA contribution. For those who defer their Social Security retirement benefit and have creditable coverage, the continued funding of an HSA account can provide a substantial, tax-free cash flow to pay for health care expenses. For example, with proper planning, clients can pay Medicare premiums with tax-free dollars.
I advise getting written documentation each year from the employer's benefits department stating that the insurance coverage is creditable. “Creditable” is a Medicare term, which basically states that the prescription-drug coverage is extensive enough to work in lieu of Medicare Part D prescription-drug coverage.
Please note that the employer must have 20 or more employees. Unfortunately, the smaller end of the employee market cannot take advantage of this opportunity.
When your client (or their spouse who is providing health insurance) retires, they will be provided a special Medicare enrollment period. These periods of time vary, depending on which part of Medicare you have deferred. For example, there is an eight-month special enrollment period to sign up for Part A and/or Part B that starts the month after employment ends or the group health insurance ends, whichever happens first. Many employees elect to use COBRA for their insurance for 18 months upon retirement. Note that the special enrollment period begins when your client retires, not at the end of the COBRA period. The penalties for missing the special enrollment, and thereby enrolling late, are significant. For example, the Part B penalty is 10% for each year you are late, paid for life and cumulative for each year you missed.
ENROLLING IN SOCIAL SECURITY AND DEFERRING MEDICARE PART B
It is important to realize that once your client enrolls in Social Security, they have enrolled in Medicare Part A. Part A is free for most individuals, so the main drawback of enrolling is losing the ability to fund a health savings account. Clients may, however, be able to defer Parts B and D. This is often prudent as Part B has the largest cost especially for upper income earners.
In order to defer Medicare Parts B and D one must:
• Have health insurance coverage from their employer or their spouse's employer, of 20 or more employees.
• Have creditable prescription-drug coverage with their employer plan.
If this describes your client, they can defer their Medicare Parts B and D enrollment.
Planning out the proper timing of Medicare enrollment is a staple component of a comprehensive retirement income plan.
Peter Stahl is the founder of Bedrock Business Results, which provides training to financial advisers and their clients on the convergence of health care and financial planning.