Overview of Medicare Enrollment
One important area of planning for a successful retirement is to have adequate health care coverage. Health care costs have been escalating at over twice the rate of inflation for a number of years. For those wanting to retire prior to age 65, health care is typically one of the largest “bridge” expenses to cover until Medicare eligibility.
For most people, their health insurance is provided through their employer. Or, if self-employed, they likely own a private health insurance policy. But once you reach age 65, you have the opportunity to transition to the federal government’s Medicare health care system. This article will provide a quick overview of some of the options available, answer some frequently asked questions and provide some resources to help you navigate the system.
Medicare consists of four main parts:
Part A – is hospital insurance and provides coverage for inpatient hospital services, care received in skilled nursing facilities, hospice care and some home health care. There is no premium cost for this coverage. However, there are co-pays, deductibles and co-insurance when seeking medical care.
Part B – is medical insurance and provides coverage for outpatient care such as doctors’ visits, laboratory and imaging tests, medical supplies and preventative services. There is a monthly premium which is automatically deducted from your monthly Social Security check. If you are not receiving Social Security benefits, your premium will be billed to you once a quarter. In 2016 the base premium is $121.80/month. You may pay a larger premium if your annual income is higher. You can learn more about your potential premium costs by reading the article I wrote titled “How Much Will I Pay For Medicare Premiums?” Your Part B coverage generally covers 80% of your covered care expenses after a deductible has been met.
Part C – is Medicare Advantage Plans, which are Medicare approved private insurer plans that typically provide medical coverage for Part A, Part B and often include prescription drug coverage. Many of these plans provide extra coverage and may lower out of pocket costs.
Part D – is prescription drug coverage. This particular coverage is optional and has a monthly premium that varies depending on the plan you choose. Similar to Part B coverage, those with higher levels of income may pay higher premiums. The link to my article above provides a chart of premium surcharges for Parts B and D based on income level.
What is Medigap insurance?
In addition to the options mentioned above, there are approximately 12 different private insurance plans which vary by state. These extra coverage plans are often referred to as Medicare supplemental insurance or Medigap. These policies are designed to fill in the coverage gaps found in Original Medicare Parts A and B. A large percentage of those receiving Medicare are also enrolled in one of these policies.
When to apply
If you are already receiving Social Security benefits prior to turning age 65, you will automatically be enrolled in Medicare Parts A and B. If you are not receiving Social Security benefits, then you have a seven month window to apply. You can apply 3 months prior to turning age 65, the month you turn 65, and up to 3 months after you turn 65. Your Medicare benefits will generally begin approximately one month after you enroll.
How to apply
You can enroll in Medicare Part A and Part B in the following ways:
• Online at www.SocialSecurity.gov.
• By calling Social Security at 1-800-772-1212, Mon to Fri from 7am to 7pm.
• In person at your local Social Security office. It is recommended that you call first for an appointment.
How do I determine if I should choose a coverage plan for Part C, Part D or a Medigap policy?
Because each person has a unique healthy history with specific health coverage needs, you may want to consult with a local resource to help you compare and contrast your options. Every state offers a free health benefits counseling service for Medicare beneficiaries. You can click on this link and search by your state for the local SHIP office (State Health Insurance Assistance Program). This is a valuable service available to answer all of your Medicare questions. You can also seek a private, independent health insurance broker that specializes in Medicare plans.
What if I don’t enroll on time? Is there a penalty?
If you don’t sign up for Medicare Part B (medical insurance) when you are first eligible at age 65, there is a 10% penalty for every 12 months you are not enrolled on time. The current base premium for part B is $121.80. Thus you would pay an extra 10% every month for this premium going forward. If you didn’t sign up for 2 years you would pay 20% extra every month for as long as you are enrolled in Part B.
What if I didn’t enroll in Medicare because I had health coverage provided by an employer?
Medicare does provide an exception if you are covered under group health care via an employer. You need to provide a “letter of credible coverage” from your employer when you sign up and they will usually waive the penalty.
Additional resources for your Medicare questions.
Besides the SHIP link above, or an independent health insurance broker, another option is to call Medicare directly at 1-800-Medicare or 1-800-633-4227. If you prefer searching for your answer online, you can go directly to www.Medicare.gov.
How Much Will I Pay For Medicare Premiums?
Note – some investors well below age 65 may not read this assuming it does not apply to them or Medicare is too far away. However, I think this is valuable information to understand because the federal government’s shift towards “means testing” will likely grow as a larger portion of the national budget transitions toward entitlement spending for Medicare, Medicaid, Affordable Care and Social Security in the years to come.
Many of those aged 65 or greater with higher incomes are sometimes surprised at the amount they have to pay for Medicare medical insurance (Part B) and their Medicare prescription drug coverage (Part D). Unbeknownst to some, Medicare started means testing in 2007 to determine your Part B premium. In 2011, they also began means testing for Part D.
Means testing is another way of saying they are assessing your annual income and those with higher incomes will pay higher premiums.
Medicare uses a cost sharing formula with the intent that a tax payer will pay approximately 25% of their Medicare premium and the government pays the other 75%. The share cost for those impacted by means testing ends up rising from 25% to 35%, 50%, 65% and potentially 80% if their income meets the highest income threshold, as outlined later in this article.
How do they assess my income?
The income reported is taken directly from your 1040 tax return filed with the IRS. They use a Modified Adjusted Gross Income (MAGI) number, which is essentially your Adjusted Gross Income (AGI), line 37 of your 1040 and add line 8b (any tax-exempt income). Note, these are gross income numbers. Unlike on your tax return, they are not reduced by personal exemptions or deductions.
How often do they review my income?
This is reviewed annually. Typically there is a two-year time lag. For example, I am writing this in 2016, but Medicare likely reviewed your 2014 income (reported on your 2015 tax return to the IRS) to determine your 2016 premiums.
What could impact my income for the purposes of determining my Medicare premium?
There are a number of potential situations or events that could increase or decrease your income from year to year, thus impacting your Medicare premium:
- If you retire near age 65 with high earned income, your initial premiums may be initially higher until the 2 year time lag of tax returns shows a lower income in retirement.
- A large Roth IRA conversion could increase income.
- If you experienced a large amount of capital gains via stock sales or a property sale, you may have a higher MAGI.
- If you sold stock options near, or in, retirement that could drive up your income.
- If you take large IRA distributions in retirement, or beginning at age 70 ½ when IRA distributions are mandatory.
- If you receive large deferred compensation distributions in retirement.
- If you receive a sizeable annual pension distribution.
Do they inflation adjust the income thresholds?
The Affordable Care Act of 2011 eliminated inflation adjustments from 2011 to 2019. Thus the income threshold brackets will remain the same for a period of time longer. The end result being more and more Medicare recipients will potentially be forced to pay higher premiums as their income slowly increases via inflation and they are pushed into the higher Medicare income threshold brackets.
What are the additional Medicare Part B and D charges by income threshold?
|Married Joint MAGI||Part B Monthly Premium||Part D Prescription Drug Monthly Premium||
Total (B + D) Over Base Premiums Monthly
|<$170,000||2016 standard premium = $121.80||Your plan premium|
Up to $107,000
|Up to $214,000||Standard premium+ $48.70||Your plan premium+ $12.70||+$61.40|
Up to $160,000
|Up to $320,000||Standard premium+ $121.80||Your plan premium+ $32.80||
Up to $214,000
|Up to $428,000||Standard premium+ $194.90||Your plan premium+ $52.80||
|>$214,000||>$428,000||Standard premium+ $268||Your plan premium+ $72.90||
How do I pay for these additional monthly charges above base premiums?
The additional monthly charges will be deducted from your monthly Social Security check. If you are not yet receiving Social Security benefits, you will receive a separate bill for these charges each month.
What if I experience a life event that causes my income to go down?
Social Security will on a case by case basis consider reducing the monthly amount you pay over the base premium for certain life events, such as:
- You were married, divorced or widowed.
- You or your spouse stopped working or reduced your work hours.
- You or your spouse lost income producing property due to disaster or other event.
- You or your spouse had an employer’s pension plan impacted by termination, reorganization or cessation.
How do I confirm how much of a premium I will have to pay?
The Social Security Administration will automatically send you a letter notifying you of any additional amounts above base premium(s) you may be charged for Part B and Part D, with an explanation of their determination.
What if I disagree with Social Security’s decision about my monthly extra charges?
You have the right to appeal any of Social Security’s decisions by doing so in writing and filing a “Request for Reconsideration” (Form SSA-561-U2). You can find the appeal form online at www.socialsecurity.gov/online, request a copy through your local Social Security office, or call them directly at 1-800-772-1313.