We help answer the many questions you may have about Medicare, including who is eligible, what services are covered, and how to avoid potential penalties, surcharges, and taxes for high earners
For many people, Medicare becomes the primary source of healthcare coverage in retirement. This guide to Medicare planning will help answer the many questions you may have about Medicare, including who is eligible, what services are covered, and how to avoid potential penalties, surcharges, and taxes for high earners.
To help ensure that you make the best Medicare choices, it’s a good idea to check the following items off your list before you turn 65.
1. Set a reminder. When you turn 64, mark the calendar for your initial Medicare enrollment period. If you already receive Social Security or Railroad Retirement Board benefits, you will be enrolled automatically in Part A and Part B coverage on the first day of the month you turn 65. If not, your initial enrollment period begins three months before your 65th birthday and ends three months after you turn 65. If you don’t sign up for Part A, Part B, or both when you are first eligible, you can enroll during the general enrollment period, which occurs between January 1 and March 31 every year. Your Medicare benefits will not begin until July 1, and you may be required to pay a penalty for late enrollment.
Note the special enrollment period. If you’re currently covered by group insurance through an employer or a spouse’s employer that has 20 or more employees, you may be able to delay Medicare enrollment. Talk to your employer to determine how the group plan coordinates with Medicare. You may sign up without penalty while you are covered by a group health plan or during the eight-month period that begins the month after your employment ends or the coverage ends, whichever comes first. Note that COBRA and retiree health plans are not considered “insurance based on current employment” and are not eligible for the special enrollment period when that coverage ends. This means the COBRA coverage period and the eight-month special enrollment period run simultaneously. The eight-month special enrollment period does not begin when the COBRA coverage period ends.
2. Research Medigap and Medicare Advantage plans. It’s wise to look into how Medigap and Medicare Advantage plans work and decide if either type of plan would benefit you. Here’s an overview:
Talk to your healthcare providers. Most, but not all, healthcare providers accept Medicare, so it’s essential to double-check that your physician and his or her affiliated healthcare system do as well. Also, be sure to ask if the provider accepts assignment, which means he or she will accept the Medicare-approved amount as full payment for services. This is important because some providers may not restrict their fees to the amount paid by Medicare. If your healthcare provider accepts assignment, it also means you won’t have to pay upfront for treatment, file a claim form, and wait for reimbursement. Instead, the healthcare provider will file your claims, and you will be billed only for your share of the costs, such as the deductible and coinsurance amounts.
To locate doctors near you who accept assignment, you can use Medicare’s provider search, available at medicare.gov/physiciancompare.
Seek advice from a trusted resource. When faced with an array of Medicare choices, it’s easy to become confused and frustrated with the enrollment process. Unfortunately, many people aren’t aware of the decisions they will need to make or the factors they should consider. We can answer your questions about Medicare, guide you through the enrollment process, and help you make the most of your benefits. By planning ahead, you’ll pave the way for a smooth transition to Medicare.
Let’s start by defining the letters that make up the Medicare alphabet soup and what they mean in terms of coverage.
We’ve all made decisions we wish we could change. If you enroll in Medicare Part C, also known as Medicare Advantage, during the annual fall open enrollment and now doubt whether it’s the right health insurance for you, you may have the opportunity to complete a do-over. The second Medicare Advantage open enrollment period runs from January 1–March 31 and is a separate enrollment period for those who are enrolled in Medicare Advantage which allows you to reevaluate your Medicare Advantage choice.
Several factors could prompt you to rethink your choice of Medicare Advantage plans. One of the primary reasons is learning that your doctors and hospital left the plan’s coverage network. Discovering that the Medicare Advantage plan’s formulary does not cover your prescriptions is another common reason.
During what effectively is a Medicare Advantage do-over window, you can:
The Medicare Advantage do-over window does not allow you to make any of the following changes that can be made during the fall open enrollment period:
You may change your coverage only once during the Medicare Advantage open enrollment period. In other words, you can’t select one Medicare Advantage plan in January and then switch to another before March 31. New coverage will become effective on the first day of the first full month following your decision. If you select a new Medicare Advantage plan in February, for example, coverage will begin in March.
Individuals who are 65 or older are eligible for Medicare. Medicare requires enrollment at particular triggering events and at specific times throughout the year. If you are receiving retirement benefits under the Social Security program, you will be automatically enrolled in Medicare Part B at age 65. If you are covered under a larger group health plan (20 or more employees), you can opt out of Part B and Part D coverage without a penalty.
A specific triggering event (e.g., when you lose group employer coverage) requires that you enroll during the special enrollment period. Enrolling within eight months of a triggering event will help avoid Part B penalties but may not prevent coverage gaps. You should start the enrollment process at least three months before a triggering event occurs to avoid gaps in coverage or the risk of missing a penalty deadline.
A key factor in determining a Medicare penalty is whether you have “creditable coverage.” Let’s take a closer look.
COBRA coverage, group employer plans for businesses with fewer than 20 employees and retiree health plans may not be considered creditable coverage for Medicare Part B. With one of these plans, you would not avoid the Part B enrollment penalty. Medicare would be the primary payer for health services, while these plans are secondary. These plans, however, may qualify as creditable coverage to avoid the Part D enrollment penalty. Here’s a breakdown of those penalties:
Please note: You should verify that your current insurance is considered creditable coverage for Medicare purposes to avoid these permanent surcharges.
The coordination of claim payments between Medicare and other health insurance coverage can directly affect your health care costs. Your Guide to Who Pays First outlines the coordination of benefits for Medicare-eligible individuals. Let’s review some common scenarios and how Medicare coordinates payments.
Once you are no longer an active employee, the retiree health plan for Part B is not considered creditable coverage. Medicare is the primary payer. This plan may be creditable coverage to avoid the Part D prescription plan penalty and may serve as your supplemental gap plan.
Once you enroll in any part of Medicare, including Part A, you can no longer contribute to a health savings account (HSA). If you are considering collecting social security benefits, in general, you should stop making contributions six months before enrolling in Medicare to avoid a potential health savings account contribution penalty.
Medicare premiums are means-tested. The higher your modified adjusted gross income (MAGI), the higher your monthly premium costs. If you have a higher MAGI, you will pay a surcharge, known as the income-related monthly adjustment amount (IRMAA).
In the case of IRMAA for Medicare, your MAGI is generally your adjusted gross income, which includes all taxable income (e.g., retirement account distributions, capital gains, and interest), plus dividends from tax-free bonds, interest from savings bonds used to pay higher education tuition and fees, and foreign earned income excluded from gross income. For 2024, the premium cost will be based on your 2022 MAGI.
Hold harmless rule. This rule protects current Social Security beneficiaries from increasing Medicare costs in a year when there is no or a very low cost-of-living adjustment. When this rule applies, the cost of any increase in premiums for Medicare is absorbed by a smaller group of recipients: new enrollees and current beneficiaries subject to IRMAA.
You can appeal the IRMAA surcharge amount for specific life-changing events, which include death, divorce, loss of pension, loss of income-producing property, work stoppage, or an error in the determination records. Further information on the appeal process is available on the U.S. Department of Health & Human Services website.
The 2.9 percent Medicare tax continues to be applied to wages and net self-employment income. Half of the tax (1.45 percent) is picked up by the employer and the other half (1.45 percent) by the employee. An additional 0.9 percent tax, made effective in 2013, is now levied on wages and self-employment income above certain thresholds.
Wages or net earnings above $200,000 (single), $250,000 (married), or $125,000 (married but filing separately) will now be taxed at an overall rate of 3.8 percent. The 0.9-percent rate increase applies only to the employee’s (or self-employed taxpayer’s) share of the Medicare tax. Unlike the social security tax, which has a “wage base” ceiling, there is no compensation limit. Each dollar is subject to the Medicare tax.
The 3.8-percent Medicare tax also applies to most net investment income. It is applied to the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over the applicable threshold. The exceptions are distributions from retirement accounts—including pensions, 401(k)s, and IRAs—and income generated from municipal bonds. Keep in mind, however, that distributions from retirement accounts can push your adjusted gross income over the threshold, thus subjecting you to a 3.8-percent tax on your other investment income.
The following types of investment income are affected:
The law also applies to estates and most trusts. The threshold for estates and trusts is the amount at which their highest tax bracket begins.
Calculating the tax. For individuals, the 3.8-percent Medicare tax is applied to the lesser of net investment income or the excess of MAGI over the applicable threshold ($200,000 for single filers, $250,000 for married filers, and $125,000 for married filing separately).
Example: Mark and Sue have earnings from wages of $175,000 and investment earnings of $100,000. The couple’s total wages and investment earnings (MAGI) equal $275,000. According to the rule, the 3.8-percent Medicare tax will be applied to the lesser of net investment income ($100,000) or the excess of MAGI over the applicable threshold ($25,000). In Mark and Sue’s case, then, only $25,000 will be subject to the Medicare tax. The entire $100,000 in investment income will be subject to either capital gains or ordinary income tax, depending on the nature of the income.
If you believe that your income tax rate will be higher in the future than it is today, you may want to consider taking some kind of action to minimize the impact. One possibility for Medicare planning might be a Roth IRA.
Roth IRA conversions. Roth IRAs have become popular alternatives to traditional IRAs. Not only does money held in a Roth IRA grow tax-deferred for federal income tax purposes, but distributions are also tax-free if certain requirements are met. (Please note: State tax treatment of Roth IRAs differs. Consult your tax advisor about your state’s rules.) Another advantage is that no minimum distributions are required upon reaching age 70½. Thus, you may avoid having retirement distributions increase your adjusted gross income over the threshold and exposing other income to the Medicare surtax.
If a Roth IRA makes overall financial sense for you, you can convert a traditional IRA to a Roth IRA. When you convert to a Roth IRA, you pay income tax on the taxable dollars that are converted. These taxes are due in full in the year of conversion. Paying taxes on the conversion today may allow future distributions to escape scheduled tax increases later. It is generally better to pay these taxes with funds from another account; using IRA assets will typically result in more taxes and may involve early withdrawal penalties, depending on your age.
If have any questions about the information shared in this guide, please contact me. Medicare planning is a complex topic, and I am happy to talk through the available options and help guide you to appropriate decisions.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Kris Maksimovich is a financial advisor located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at firstname.lastname@example.org.
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