I have met with some clients recently that have turned 65, but have continued to work. All of them mistakenly believed that they should not sign up for Medicare Part A since they still had coverage at their current employer. This is a common misconception, and many people do not realize that Medicare Part A is free for most people, and can help to cover your hospital bills where your insurance has left off. If you work for a company that has less than 20 employees, you must sign up for Medicare, even while still working since Medicare is the primary payer, and the group insurance is the secondary payer. It is important to note that this must be done in the enrollment period, which includes three months prior to turning age 65, the month you turn 65, and three months after turning age 65. Also, it is important to note that even if you are receiving COBRA or insurance from some type of severance package from your prior job, you also need to sign up for Medicare or penalties may apply. Even though you have insurance, in those cases, Medicare is the primary payer, and your insurance is the secondary payer, so you could be surprised to learn that you would not receive coverage if you have not signed up for Medicare. If you are already receiving Social Security, you are automatically enrolled in Medicare.
There are other decisions that need to be made when considering what type of Medicare plan to choose. There is the traditional plan, which includes Part B, which is paid by the insured, and also an optional Part D, which is prescription drug coverage. In addition, many people choose to add a Medigap plan that covers what is not included in the traditional Medicare plan. There is another option, a Medicare Advantage Plan that replaces all of the traditional Medicare Plans.
Many financial planning clients face IRMAA surcharges since their modified adjusted gross income is above the current limits, which are $91,000 for single filers, and $182,000 for married filing jointly. Medicare Part B premiums currently range from $170.10 to $578.30 for clients with MAGI that exceeds $750,000 for married filing jointly. Some clients in the higher earning years right before retirement end up paying substantial Part B premiums, because the premiums are based on your MAGI from the tax return two years earlier when they were still working. It is very important to file a Form SSA-44, which is a Life Changing Event form to let them know that you are no longer earning that same income. This can save people thousands of dollars in the two years after they stop working.
It is important to select the best Medicare plan for your situation. There are many different Medigap plans available with different price points, and once you have decided on a plan, the next step is to choose the insurance company. It is important to select a company that might not raise the prices. Some of them set low rates, but their loss ratio is over 80%, and since that is not sustainable, they are likely to raise rates in future years. There three different types of plans to consider, which are attained age, issue attained and community rated. An age attained policy can increase each year, and these may start out cheaper, but can end up being the most expensive. An issue attained policy is based upon the age you are when you purchase the policy. Someone who purchased the same policy at age 65 will pay a lower premium for the same policy as someone who purchases it at age 72. Community rated plans charge the same amount to everyone purchasing the policy and do not base the rates on the age of the insured. Premiums on the issue attained and community based plans can go up based upon inflation or other factors, but not solely based on age. An attained age policy can have higher premiums each year based upon the age of the insured, and can also increase for inflation or other factors. It is important to look at these factors when deciding which Medigap policy makes sense.
Medicare is state specific, so it is important to know how your state handles changing Medigap plans. I live in Illinois, and they allow you to change plans without underwriting on your birthday, but many states do not, and this can be a problem if you develop a health condition that may prevent you from being able to switch plans.
As you can see, Medicare can be quite confusing, and the failure to enroll on time can cause you to incur penalties or to have no coverage. Also, it is so important to file the SSA-44 form when you have just stopped working so that you will not get hit with unnecessary IRMAA premiums.
Please contact me if you are nearing age 65 and would like comprehensive financial planning advice, including making the best decisions when it comes to Medicare coverage.
About the Author
Patti Hughes is a Chicago Fee-Only Financial Planner. Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions. She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her client