Money Talk: Effectively transitioning to Medicare takes advanced planning
Since healthcare expenses can be significant during retirement, they are a key expense to factor into any retirement plan. Some retirees have access to employer-provided coverage, but these arrangements are rare and still can be tricky to coordinate with other health insurance options. For most retirees, Medicare will become the primary insurance coverage, but eligibility for this government program starts at age 65 for retirees. Those who want to retire earlier will need to look for other insurance options such as COBRA or plans available under the Affordable Care Act at Healthcare.gov. Navigating these plan options can be tricky but even those retiring when Medicare kicks in need to understand and create a plan to effectively navigate potential pitfalls.
Many retirees are surprised to learn that their health insurance costs will likely decline once they go on Medicare. Medicare comes in three parts. Part A covers hospital costs and is provided free of charge unless the enrollment deadline is missed. Be sure to sign up during your initial enrollment period which starts 3 months before you turn 65 and ends 3 months after. You, or a current or former spouse, must have paid Medicare tax for at least 10 years to be eligible for free Part A coverage. Part B covers doctor’s services and carries a base premium of $164.90 monthly. Part D provides prescription drug coverage. Cost varies by plan and can be quite low, but there is a penalty of 1% monthly if not enrolling in Part D with your other Medicare plans or if you lose creditable drug coverage for more than 63 days.
The downside is that Medicare has a sizeable deductible for hospital visits ($1,600) and doctor’s visits require 20% coinsurance. These coverage “gaps” can be filled either by purchasing a Medicare supplement (Medigap plan) or opting for HMO-type coverage called a Medicare Advantage plan. Note that Medigap plans have a time limit on when they can be issued without medical underwriting. This guaranteed-issue period ends six months after enrolling in Part B. Those who continue working past age 65 and keep their employer insurance should delay enrolling in Part B until they are ready to stop working. This way they will still qualify for a Medigap plan once their employer insurance ends. Medicare Advantage plans can provide additional benefits but may not be the best fit for retirees who travel or snowbird because their provider networks are limited. This may preclude obtaining covered services while away from home, or if a retiree wants care from a specific doctor. While nearly all providers accept Medicare, not all providers will be in a specific Advantage plan’s local network. Switching from Medicare Advantage to original Medicare is no problem, but you may not be able to secure a Medigap policy depending upon your health status since you will be signing up outside the guaranteed issue period. So, it is important to do some planning to decide which option is best for your health situation and retirement goals.
Opting for COBRA coverage at retirement can also be problematic. While this allows employer coverage to be continued for up to 18 months after retirement, those who retire before age 65 and use COBRA need to be sure to enroll in Medicare during their initial enrollment period. Workers retiring after age 65 need to sign up for Medicare within 8 months so should not plan on using COBRA for as long as it is available. COBRA is also generally quite expensive, particularly relative to Medicare even factoring in Medigap coverage and typical out of pocket costs.
Finally, higher-income workers should understand how the income-related monthly adjustment amount (IRMAA) works. IRMAA requires those with larger Modified Adjusted Gross Income on their tax return to pay higher premiums for Part B and Part D. The applicable tax return is for two years prior since this is the latest information Medicare has when determining your premium. The IRMAA can be appealed if income was above the applicable thresholds prior to retiring and has since declined. The appeal is filed with Social Security on Form SSA-44. Spouses should each file an appeal. IRMAA thresholds should also be kept in mind when considering Roth conversions, starting with the tax year two-years before going on Medicare. You cannot appeal based on high income from a Roth conversion or large capital gain income.
David T. Mayes is a CERTIFIED FINANCIAL PLANNERTM professional and IRS Enrolled Three Bearings Fiduciary Advisors, Inc., a fee-only advisory firm in Hampton. He can be reached at (603) 926-1775 or david@threebearings.com.
This article originally appeared on Portsmouth Herald: Money Talk: Effectively transitioning to Medicare takes advanced planning
