This year we’ve decided to take our Blog, It Really IS All About You! in a slightly different direction by broadening its scope. While we will continue to feature our remarkable clients and their fascinating lives, we are also going to include financial planning and wealth management content. By staying true to our theme, but broadening our scope, we hope this current content will be invaluable to you.
This month, we launch into this new direction with Marilyn Plum’s excellent commentary on Medicare costs and planning ideas.
If you are nearing Medicare age, on Medicare, or have high earned or unearned income, this information will be especially pertinent. Our goal is to explain current Medicare costs, penalties and how to control or avoid them. We will also cover the new taxes on high income that affect taxpayers of all ages.
So, Marilyn, thank you so much for agreeing to help us forge new territory with our well received Blog. Before we go further, let’s review Medicare basics so that we are all using the same terminology.
Marilyn: Great idea. Here are the Medicare basics as provided by the U.S. Social Security Administration:
Medicare Part A - Hospital Insurance: Part A is paid for by a portion of Social Security tax. It helps pay for inpatient hospital care, limited skilled nursing care, hospice and other services.
Medicare Part B - Medical Insurance: Part B is paid for by the monthly premiums of people enrolled and by general funds from the U.S. Treasury. It helps pay for doctors' fees, outpatient hospital visits and other medical services and supplies that are not covered by Part A.
Medicare Part C - Medicare Advantage: Plans allow you to choose to receive all your health care services through a provider organization. These plans may help lower your costs of receiving medical services, or you may get extra benefits for an additional monthly fee. You must have both Parts A and B to enroll in Part C.
Medicare Part D - Prescription Drug Coverage: Is voluntary and the costs are paid for by the monthly premiums of enrollees and Medicare.
So, we know that Medicare starts at the age of 65, but what do we need to do?
Marilyn: It can be very confusing, not just when enrolling for the first time, but any time that you might want to make changes in your coverage. What actions you should take as you approach age 65 will depend on your current situation. Here are the three possible scenarios:
1) If you are approaching age 65, start early to make your Medicare coverage decisions. If you are turning age 65 and not on Social Security, you need to sign up for Medicare within a 7 month window starting 3 months before the month that you turn 65, including the month you turn 65, and ending 3 months after you turn 65.
2) If you are already receiving Social Security benefits, you will automatically be signed up for Part A and Part B starting on the first day of the month you turn 65. You then need to add on a Medigap or Advantage Plan and Part D.
3) If you or a spouse are still working at age 65 and have employer health coverage, contact your benefits department to learn about how your coverage works with Medicare. This includes federal or state employment, but not military service.
- Note that if you are on COBRA or a retiree health plan, you are not considered covered by insurance based on current employment. You must sign up for Medicare when you are first eligible at the age of 65 or face penalties.
Marilyn: First, penalties for late enrollment are significant and those penalties apply to your premium for as long as you have Medicare. Your Part B monthly premium can have an add-on penalty of 10% for each full year that you should have been enrolled and were not.
Second, know that Part D prescription drug plans are available to everyone on Medicare. Part D plans are separate from other coverage and are run by private insurers, like your Medigap provider, or are included in Medicare Advantage Plans (HMOs, PPOs). Even if you don’t take any prescription medications now, elect to join the plan with the lowest amount of coverage so you are at least enrolled. Penalties apply if you do not sign up for a Part D plan when you are first eligible, or if you go for 63 days or more in a row without a Medicare drug plan or other creditable coverage. The late enrollment penalty is 1% of the “national base beneficiary premium” ($31.17 in 2013) times the number of full, uncovered months that you were eligible, but not covered by a drug plan. Again, this penalty is permanent and will continue as long as you are on Medicare.
Why are there penalties? Like any insurance plan, Medicare does not want you to come to them only when you are sick or needing prescription coverage. In other words, the insurance provider needs to collect your premiums while you are healthy to help pay for your care later when you are not, so they can stay financially viable.
What happens if I’m a high income taxpayer? How is that defined, and what additional Medicare costs would a high income taxpayer experience?
Marilyn: Let’s walk through the important points:
1) Higher costs for your Medicare: Shall we call it means testing? Your cost for Medicare is based on your modified adjusted gross income (MAGI) which is your adjusted gross income plus your tax-exempt interest income. (Yes, your municipal bond income is added back in for this calculation!) This is called Income Related Medicare Adjustment Amount or IRMAA. The amount that you pay can change each year, not only due to increased costs of the Medicare premium itself (a 5% increase from 2012 to 2013), but also based on changes in your income.
2) If your income is lower now than the year that they are basing your premiums on (currently 2011), you can contact Medicare at (800) 772-1213 to appeal based on certain criteria, like retirement.
3) The current premium for Medicare Part B is $104.90 if your income is $85,000 or less. The following table shows the income related extra cost in addition to the base Medicare premiums for 2013:
IRMAA costs from Medicare.gov
How can we benefit from this information, Marilyn?
Marilyn: Two important ways:
1) You may be able to control your income to stay in a lower cost range.
2) This additional health care cost needs to be taken into consideration in your long-range financial independence planning.
The new Medicare taxes on earned and unearned income related to the Patient Protection and Affordable Care Act begin this year, in 2013, and are creating a bit of planning havoc due to their complexity. Can you please walk us through the key issues we need to pay attention to?
Marilyn: Here are two critical areas you need to understand:
1) New Medicare tax on earned income
This is an additional tax on wages, compensation or self-employment income that exceeds the threshold income amounts. The tax is 0.9% and applies to:
Filing Status and Threshold Amounts
Single - $200,000
Married filing jointly - $250,000
Married filing separately - $125,000
Head of Household - $200,000
Qualifying widow(er) with dependent child - $200,000
Examples of how this tax is calculated can be found on the IRS website.
2) New Medicare tax that applies to investment income of high income taxpayers
The trigger for this tax occurs if your Modified Adjusted Gross Income (MAGI) exceeds the threshold amounts of $200,000 if you are single or $250,000 for married couples. This 3.8% tax will apply to the lesser of:
a) net investment income or
b) the excess investment income (if any) of adjusted gross income (AGI) over the $200,000 or $250,000 threshold amounts.
This tax is very confusing and has been widely misinterpreted. One of the points of confusion is regarding the sale of a primary residence. If you meet the primary residence holding period, you still get the capital gains exemption of $250,000 for a single person or $500,000 for a married couple. If your gain exceeds these amounts and your income exceeds the threshold amounts, the excess gain is included in MAGI and can be subject to this tax.
Okay --- this is really helpful and a whole lot of information! Let’s do a summary of the key points for our readers.
Marilyn: Here are three key points to remember:
1) When signing up for Medicare, get good advice and make sure that you sign up on time and include Part D coverage.
2) For high income earners, there may be opportunities to control income
3) Be aware that these new taxes are in place for your long-range planning and budgeting purposes.
We are sure there will be further clarification on new taxes and, of course, Congress is still at work.
Do you have any resources to recommend for those who have more Medicare questions they’d like answered?
Marilyn: In addition to consulting with your own trusted advisors, we have found these resources to be particularly helpful:
Medicare
1-800-MEDICARE (1-800-633-4227)
TTY 1 877 486 2048
www.medicare.gov
Health Insurance Counseling and Advocacy Program (HICAP) for Contra Costa County
HICAP offers free local group presentations and individual counseling on Medicare and supplemental plans to help you determine the right coverage for your needs. They are independent and do not represent any insurance company.
(800) 510-2020 or from a cell phone (925) 229-8434
www.cchicap.org.
The Henry J. Kaiser Family Foundation
http://www.kff.org
Marilyn, many thanks for taking a huge and complex subject and really breaking it down for us in ways that are understandable. We encourage you to call us with any specific questions you may have pertinent to your own or a loved one’s situation.
We’ll revisit this complex topic with Marilyn in future Blogs as well. If you’d like to reach out to Marilyn directly, you can reach her at marilyn@ballouplum.com or (925) 83-2201.
Thanks for reading!
