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Managing Medicare:

Tips to Minimize Costs

  POST-RETIREMENT HEALTH CARE  

Post-retirement health care costs are one of the largest expenses that people will face later in life, and since most couples will spend upwards of $400,000 on their care health during retirement, finding ways to save on Medicare can be critical to retirement income security.

While there is little that people can do about projections that health care costs will continue to rise steadily each year, there are steps that can be taken to reduce the cost of Medicare coverage during retirement.

The Medicare rules are multifaceted and complex, making attention to detail key to maximizing the value of Medicare. Why? because one false move with respect to timing or income can have long-lasting consequences that can prove to be as costly as choosing the wrong plan options.

Important Medicare Timelines

People generally become eligible for Medicare when they turn 65, but the enrollment timeline is a seven-month period that begins three (3) months before turning 65, includes the month a person turns 65, and ends three (3) months after turning 65.

If the person is already receiving Social Security, enrollment in Medicare Parts A and B is automatic (Part B coverage can be declined).

Even though Part B coverage can be declined, people should be aware of the penalties that can apply if choosing to decline coverage. For each year that a person is eligible for Part B coverage but does not enroll, a penalty equal to 10% of the Part B premium will apply and the penalty is cumulative (i.e. a 24-month delay will result in a 20% penalty) and applies for life. Late enrollment in Medicare Part D (prescription drug coverage) results in a 1% monthly penalty.

Certain people who are still working and covered by creditable employer health insurance can choose to delay Medicare coverage without penalty, but this exception applies only if the employer-sponsored group health coverage covers 20 or more individuals. The employer health coverage must also provide creditable prescription drug coverage.



The HSA Complication

Once a person enrolls in Medicare Part A, he or she becomes ineligible to contribute to a Health Savings Account (HSA). Despite this, funds that have already been contributed to the HSA can remain in the account and can be withdrawn tax-free.

What many people overlook, however, is that when a person begins collecting Social Security benefits, he or she is automatically enrolled in Medicare Part A, and thus must cease making HSA contributions.

If a person wishes to continue working after age 65, the person can defer Medicare Part A enrollment if they are not receiving Social Security benefits.

Income-Based Surcharges

The current Medicare income-based surcharge rules increase the cost of premiums for Medicare Parts B and D for people with modified adjusted gross income (MAGI) that exceeds certain threshold limits.

Importantly, Medicare uses a two-year, or most recent income tax filings, lookback period to determine whether income-based surcharges apply, meaning that the wages a person earned in 2018 are used in determining the person's liability for income-based surcharges today.

The MAGI calculation used to determine whether income-based surcharges will apply includes a wide range of traditional income sources (wages, self-employment income, proceeds from a home sale, etc.).

Planning opportunities do exist, however, since income received on a tax-free basis in retirement is not included in calculating a person's MAGI. This means that income drawn from after-tax retirement savings vehicles, such as Roth IRAs or Roth 401(k)s, is excluded from a person's MAGI. Similarly, income drawn tax-free from HSAs is excluded.

Further, income from tax-preferred financial products, such as annuity payments received from a nonqualified annuity or loans taken from a whole life insurance product, will not increase a person's MAGI for Medicare means testing purposes.

Conclusion

The rules governing Medicare are, as mentioned earlier,  multifaceted and complex, but with proper planning and attention to detail, people can avoid increasing the already high cost of health care coverage during retirement to maximize the value of Medicare. 

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