Postretirement health care costs are one of the largest expenses that clients will face later in life — and since most couples will spend upwards of $400,000 on their health during retirement, finding ways to save on Medicare can be critical to retirement income security.
While there is little that clients 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, as 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
Clients generally become eligible for Medicare when they turn 65, but the sign-up period is a seven-month period that begins three months before the client turns 65, includes the month the client turns 65 and ends three months later. If the client is already receiving Social Security, enrollment in Medicare Parts A and B is automatic (Part B coverage can be declined).
While Part B coverage can be declined, clients should be aware of the penalties that can apply if the client chooses to decline coverage. For each year that the client is eligible for Part B coverage but does not enroll, a penalty equal to 10% of the Part B premium will apply — 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 clients who are still working and covered by employer-provided 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-provided health coverage must also provide prescription drug coverage that is “creditable.” The employee must delay Social Security benefits in order to delay Part A coverage.
The IRS has created a temporary program to provide equitable relief for late enrollment penalties that might apply to individuals who purchased health insurance through the ACA health insurance exchanges and believed they could maintain this coverage instead of enrolling in Part B coverage without penalty. Individual health coverage, however, will not be sufficient to exempt clients from late enrollment penalties once this transition relief has expired (the relief program expires Sept. 30, 2017).
The HSA Complication
Once a client enrolls in Medicare Part A, he or she becomes ineligible to contribute to an HSA. Despite this, funds that have already been contributed to the HSA can remain in the account and can be withdrawn tax-free. 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).