Timing Your Medicare Enrollment
March 2016 Newsletter
“You don’t have to swing hard to hit a home run. If you got the timing, it’ll go.” Yogi Berra
The usual age for enrollment in Medicare is age 65. Many individuals, however, are realizing that delaying enrollment may be a prudent plan. In this issue, we will explore:
- The advantages of deferring some or all of your Medicare enrollment.
- The rules one must follow in order to defer.
Medicare has costs. Some of these costs are substantial. To list a few:
- Medicare B premiums are based on your 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.
- In addition to original Medicare, a Medigap Policy can cost approximately $2,000.
Medicare coverage is, overall, extensive. If you, however, have comprehensive coverage provided by an employer or even your spouses’ employer, it may be prudent to defer some or all of your Medicare enrollment to simply defer the above-mentioned costs.
The second reason you may want to defer is on order to continue funding your 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 yourself for retirement health care costs. Once you enroll in Medicare, you are no longer eligible to contribute to your HSA.
Let’s look at two fairly common situations in order to work through the key considerations.
Situation One: Deferring Medicare enrollment
In order to defer Medicare in its entirety, one must:
- Have health insurance coverage from your employer or your spouses’ employer, of 20 or more employees.
- Defer enrollment in Social Security retirement benefits.
- Have creditable prescription drug coverage with your employer plan.
If you meet these qualifications, you can defer your Medicare enrollment and continue to fund your Health Savings Account.
It is important to realize that you must defer your Social Security retirement benefits. Even a “file and suspend” strategy is considered enrollment, which would prevent your ability to make 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, you can pay your Medicare premiums with tax-free dollars!
I advise getting written documentation, each year, from your employers’ benefits department stating that your insurance coverage is creditable. “Creditable” is a Medicare term, which basically states that your prescription drug coverage is extensive enough to work in lieu of Medicare Part D prescription drug coverage.
Please note your employer must have 20 or more employees. Unfortunately, the smaller end of the employee market cannot take advantage of this opportunity.
When you (or your spouse who is providing your insurance) retire you will be provided a special Medicare enrollment period. These periods of time vary, depending on which part of Medicare you have deferred. For example, you have an 8-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 COBRA their insurance for 18 months upon retirement. Note that the special enrollment period begins when you retire, not at the end of your COBRA period. The penalties for missing your 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.
Situation Two: Enrolling in Social Security and Deferring Medicare Part B enrollment
For those who wish or need to receive Social Security, it is important to realize that once you enroll in Social Security, you 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. You 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 your employer or your spouses’ employer, of 20 or more employees.
- Have creditable prescription drug coverage with your employer plan.
If you meet these qualifications, you can defer your Medicare Parts B and D enrollment.
If you utilize either of these two scenarios, when you (or your spouse who is providing your insurance) retire you will be provided a special Medicare enrollment period. These periods of time vary, depending on which part of Medicare you have deferred. For example, you have an 8-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 COBRA their insurance for 18 months upon retirement. Note that the special enrollment period begins when you retire, not at the end of your COBRA period. The penalties for missing your 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.
Planning out the proper timing of Medicare enrollment is a staple component of your comprehensive retirement income plan.
The information in this presentation is provided as a general overview. It is derived from the Internal Revenue Code, Medicare.gov and other government publications, all subject matter sources reasonably believed to be reliable. Tax law and the laws governing Medicare/Medicaid are complex and subject to change. Clients should consult with their attorney and/or qualified tax advisor when making decisions regarding these matters.