It’s no secret that many clients are working longer than ever before—and with the introduction of the Affordable Care Act, many more of these clients will have access to employer-sponsored health insurance well past the age of Medicare eligibility. This might leave some of these clients wondering whether delaying Medicare enrollment is the smart financial move.
While not every client will be eligible for delaying enrollment in all parts of Medicare, for some clients the financial benefits of delaying enrollment can be substantial. Therefore, it is important to understand the rules that apply to Medicare deferments—the specific position of each client will determine not only whether he or she is eligible to defer, but also whether deferment is advisable.
Medicare: The Costs
While comprehensive Medicare coverage can provide health coverage akin to employer-sponsored health insurance, it is not entirely free—and, in some cases, can prove to be more expensive than a client’s required contributions to employer-provided coverage (whether provided by the client’s own employer, or the employer of his or her spouse). Medicare Part A coverage (also known as hospital insurance) is free, but will not provide comprehensive health coverage.
Medicare Part B is necessary to provide coverage for expenses stemming from things like doctor’s office visits and outpatient procedures, while Part D is used for prescription drug coverage.
Medicare Part B premiums are income based, and can cost as much as $4,677 per year if the client’s income is at the highest levels. Medicare Part D coverage (which is also means tested) can cost an additional $831 per year for the highest earners. Clients may therefore wish to delay Medicare enrollment to save on premium costs.
Who Can Delay Medicare Enrollment?
Not every client with employer-sponsored health coverage will be eligible to delay Medicare enrollment. To delay enrollment in all parts of Medicare, the client must have health insurance provided by his or her employer, or a spouse’s employer with more than 20 employees. The employer-provided health coverage must also provide prescription drug coverage that is “creditable” and the employee must delay Social Security benefits (including forgoing strategies such as “file and suspend”).
To delay enrollment in Medicare Parts B and D, the client must meet the requirements described above, except he or she may begin collecting Social Security benefits.
The creditable coverage requirement is met when the employer plan provides prescription drug coverage that is similar to Medicare Part D coverage—the client can request that his or her employer provide written documentation stating that its coverage is creditable each year.
It is important to note that the penalty for late enrollment in Medicare Part B is 10% for each year the client is late in enrolling if he or she was not eligible for deferment—however, this penalty is cumulative and will apply for each year the client was late.
For example, if the client enrolls in Part B 24 months after he or she was eligible to enroll (and not eligible to defer), he or she will pay a 20% penalty (10% for each year he or she was late) for as long as he or she is enrolled in Part B coverage.
The HSA Impact
Clients who are otherwise eligible to contribute to an HSA may wish to delay Medicare enrollment. Once a client enrolls in Medicare Part A, he or she is no longer eligible to contribute to an HSA. Despite this, the funds that have already been contributed to the HSA can remain in the account and can be withdrawn tax-free.
However, when a client begins collecting Social Security benefits, he or she is automatically enrolled in Medicare Part A, and thus must cease making HSA contributions. If the client wishes to continue working after age 65, of course, he or she can defer Social Security benefits and, thus, defer Medicare Part A enrollment in order to continue contributing to an HSA.
It is also important to note that the Social Security Administration provides six months’ worth of back pay on the client’s benefits, which can cause the client to be subject to penalty taxes on his or her HSA contributions unless those contributions end six months prior to enrollment.
If the client’s spouse has contributed to an HSA and enrolls in Medicare Part A, the client can open his or her own HSA and continue to contribute as long as he or she remains covered by a high deductible health plan (HDHP).
Delaying Medicare enrollment is a strategy that is likely to become more common as working past age 65 becomes more common, and employer-sponsored health coverage becomes the standard in larger employers. For eligible clients, the cost savings can be substantial—however, each client’s situation must be examined to determine both eligibility and advisability.
Originally published on Tax Facts Online, the premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.
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