At our extensive Retirement Right Lane Classes which fill seats all over Houston, our planning group spend hours with a wide demographic of attendees who give up their Saturdays to tackle head on, the challenging topics that are crucial to financial survival in retirement.
An important goal of the class is to rewire the years of bad advice consumers have been given from an industry which thrives on outdated theories. From “pre-tax investment vehicles are the greatest invention since electricity,” to “you need to take Social Security at 62 because it’s going away,” our planners are proud to address myths and help hundreds of people avoid permanent mistakes, maximize retirement, Medicare benefits and reduce taxes in the creation of lifetime retirement income. I only touch on a few of the topics we address; the class is extensive and lasts over two hours. If attendees gain enough insight to avoid just one mistake, our RIA team has accomplished their mission.
During and after classes, most of the feedback and questions involve Social Security and Medicare. Inaccurate information is pervasive; the sources are varied – Financial professionals, insurance brokers, HR departments, friends and family. Thankfully, we are able to help before actions are taken.
Many brokers would rather avoid a discussion about Medicare. We find that when advice is provided, it’s generally incorrect or based on anecdotal information, not facts.
Here is some of the bad Medicare advice we hear from class participants who spend their Saturday mornings with us:
Don’t worry about signing up for Medicare, you’re covered by an employer’s plan.
The multiple (initial, general, special) Medicare enrollment periods are confusing enough. Understanding when to sign up for Part B (medically necessary services, preventive services) when covered by an employer plan, adds another element of confusion. So, when a 67 year-old woman explained to me that her insurance agent was adamant that she did not need to enroll for Part B even though she was employed by an organization with less than 20 workers, I knew she was not going to like what I was about to tell her.
The BENES Act which is designed to simplify the enrollment process has stalled in Congress. Unfortunately, the responsibility of Medicare enrollment awareness will continue to fall on senior Americans and the professionals they turn to for guidance. The Medicare Payment Advisory Committee (MedPAC), estimates that 800,000 Medicare recipients were paying Part B permanent late-enrollment penalties as of 2016. I’m certain as of this writing, the number has increased.
Retirement at 65 is an outdated concept. It’s not unusual for older Americans to work longer or return to the workforce at 70 or older. Frankly, I find it delightfully odd when someone looks to retire sooner unless there is a pension available (rare). Perhaps you have a working spouse with employer-covered health insurance who is eligible to cover you as well – or fortunate enough to have healthcare benefits as part of a corporate retirement package. Otherwise, the purchase of healthcare insurance in the open marketplace or ‘bridge coverage’ before Medicare is cost prohibitive. To enroll or not enroll in Medicare at 65 when more older Americans are working means the decision isn’t as easy as it used to be back in the 1960s and 70s.
Per the Bureau of Labor Statistics:
“Since 1996, participation rates have steadily increased among the 65-years-and-older age groups. The participation rate for workers age 65 to 74 is projected to be 30.2 percent in 2026, compared with 17.5 percent in 1996. For workers age 75 and older, the participation rate in 2026 is projected to be 10.8 percent, compared with 4.7 percent in 1996.”
Unless you have access to qualified (under Medicare) healthcare and prescription drug plans, you will need to enroll in Medicare Parts A, B and a Part D prescription drug plan. Envision Medicare as Swiss cheese. Original Medicare coverage has plenty of holes. Additional insurance is required to fill them. At RIA, we suggest Medigap supplemental policies. These plans are offered by private insurance companies and standardized by letter. All plans cover Part A coinsurance.
You also want a plan that covers at least 75% of Part B co-pay which is 20% of the Medicare-approved cost for most doctor-approved expenditures. Coverage for Part B excess charges or those above Medicare-approved charges, should also be mandatory. The most comprehensive plans available this year are F and G. Next year, per the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), Medicare supplemental plans that cover the Part B deductible will no longer be offered in 2020. Plans C and F will no longer be available to Medicare-eligible recipients next year.
If you’ve decided to postpone Social Security benefits to take advantage of the annual 8% delayed retirement credit that accrues after full retirement age up until age 70, you’ll need to proactively sign up for Part A and B coverage during the initial enrollment period which begins the first day of the third month before your 65th birthday and extends for seven months. Part A or hospital coverage has been paid through payroll taxes. Part B requires ongoing monthly premiums. The standard Part B premium is $135.50 per recipient this year and may be higher depending on income. Ostensibly, if your modified adjusted gross income is above specific thresholds, you’ll pay the standard premium plus an “Income Related Monthly Adjustment Amount.”
Part B (inpatient/medical coverage) enrollment can be tricky. For example, if covered by a qualified employer plan that covers 20 or more employees during the initial enrollment period, then you may postpone signing up until you leave employment or group coverage is terminated, whichever occurs first. Now, this special enrollment period goes out eight months from the first day of the month employment ends. However, it’s best not to wait. Sign up for Medicare before group coverage ends to prevent a lapse of healthcare coverage.
At our classes, we hear from attendees who are employed by companies with less than 20 employees and advised by human resources and financial professionals to wait to sign up for Medicare Part B, which is incorrect. We speak with clients and attendees who suffer 10% permanent penalties on Part B premiums due to this bad advice. It’s important to remember; don’t be dissuaded: If your employer does not have 20 or more workers, you will need to sign up for Medicare Part B. In most cases, a non-qualified (for Medicare purposes), employer health plan will serve as secondary coverage to Medicare’s Part A & B primary coverage. If you fail to enroll into Medicare and incur health expenses, your employer healthcare plan won’t cover the bills. They’ll default to Medicare as your primary option. If you don’t sign up for Medicare, expenses won’t be paid which means the costs are ultimately going to come out of your pocket. You don’t want this situation to occur!
It’s fine to continue an employer’s healthcare insurance option if it’s not qualified under Medicare. However, it may not be worth the risk.
For example, let’s say an employee of a company with less than 20 workers enrolls in Part B. The clock then starts for six-month enrollment into a Medigap policy which you’ll recall, is designed to ‘fill the holes in the Swiss cheese’. Importantly, during that period, insurers cannot deny coverage due to pre-existing conditions. The employee decides to stick with his employer’s coverage instead of obtaining a Medigap policy. The six-month window passes. Medicare becomes the primary healthcare coverage; the employer’s plan, secondary. In month eight, our employee decides to retire. The former employee is indeed covered by Medicare Parts A & B. However, he no longer has supplemental or secondary insurance for services Medicare doesn’t cover. Unfortunately, during the same month, our new retiree is diagnosed with a life-threatening illness. He attempts to sign up for Medigap during the next enrollment period; unfortunately he’s denied due to illness, a pre-existing condition. Our retiree is now responsible for out-of-pocket additional costs that Medicare Parts A & B do not cover.
The retiree can certainly look to switch from Original Medicare into an all-inclusive Medicare Advantage Plan during Fall Open Enrollment which runs from October 7th – December 15. Medicare Advantage Plans do not come with pre-existing restrictions. However, the sad stories about these plans and what they won’t cover appear regularly through reliable sources such as medicarerights.org. The retiree will likely suffer gaps in medical coverage depending on the time between when treatment started and the selected Medicare Advantage Plan becomes officially active. Also, since many Medicare Advantage providers operate as HMOs, it’s highly common for current doctors or treatment options to change or not be accepted by the new plan, thus creating undue stress at the worst possible time.
Don’t worry about signing up for Medicare, you’re covered by COBRA.
The problem we hear about often is when Medicare Part B special enrollment intersects with COBRA which is a temporary continuation of former employer group health insurance coverage. Those who utilize it are under the misconception that COBRA is employer coverage thus it qualifies for the Medicare special enrollment period. COBRA may be continued as secondary coverage for expenses Medicare doesn’t cover; however missing special enrollment may result in a permanent Part B late enrollment period penalty of 10% for each year (12-month period), missed.
It’s of utmost importance to partner with a knowledgeable professional before you navigate the coordination of employer healthcare coverage with proper Medicare enrollment. Employees of small companies and former employees who plan to utilize COBRA can suffer additional confusion.
What you don’t know or fail to anticipate can cost you, dearly.
Have Medicare-related questions? Reach out to our team at RIA.
Next up in the blog series:
4). The common Social Security mishaps we encounter at our Right Lane Retirement Classes.
Richard Rosso, MS, CFP, CIMA is the Head of Financial Planning for RIA Advisors. He is also a contributing editor to the “Real Investment Advice” website and published author of “Random Thoughts Of A Money Muse.” Follow Richard on Twitter.