What do financial advisors need to know about how Medicare impacts people’s financial planning?
That’s the topic of this article. We’re not going to go into every aspect of Medicare here – we have other pages for that – but we’re going to hit the highlights of the top things financial advisors need to know.
1. Over-65 Healthcare Costs Are High
The total projected lifetime health care costs (excluding long-term care) for the average 65-year-old couple retiring this year are expected to be $295,000 in today’s dollars. Do your clients have that much set aside for health?
2. HSAs don’t play well with Medicare
Once clients enroll in any part of Medicare, including Part A, they can no longer contribute to a health savings account. If clients are considering collecting social security benefits, in general, they should stop making contributions six months before enrolling in Medicare to avoid a potential health savings account contribution penalty.
More about HSA contributions when on Medicare
3. Medicare is more expensive if you make more money.
In the case of IRMAA (Income-Related Monthly Adjustment Amount) for Medicare, your client’s MAGI is generally his or her adjusted gross income, which includes all taxable income (e.g., retirement account distributions, capital gains, and interest), plus dividends from tax-free bonds, interest from savings bonds used to pay higher education tuition and fees, and foreign earned income excluded from gross income. For 2021, the premium cost will be based on a client’s 2019 MAGI.
Part B IRMAA Costs
In 2021, the standard Part B cost is $148.50 per person per month. The top Part B IRMAA threshold for a married couple filing jointly is a MAGI of $750,000 or greater. The monthly premium, including the IRMAA surcharge per person, for these enrollees is estimated to be $504.90 per month.
Part D IRMAA Costs
In 2021, the top Part D IRMAA threshold for a married couple filing jointly is a MAGI of $750,000 or greater. In addition to the monthly premium, an IRMAA surcharge per person for enrollees is $77.10 per month.
4. Medicare isn’t free and doesn’t cover everything.
Medicare is like swiss cheese- full of holes. There are copays, coinsurance and deductibles, just like any healthcare coverage. Often, dental, vision and hearing are not covered (hearing aids can cost $5k). Long-term care coverage is not complete. If you get cancer or a critical illness, medical-related travel is not covered. Prescriptions are not covered unless you get a Part D plan.
5. Medicare costs increase every year to keep pace with inflation.
6. Long-term care is barely covered without an additional policy.
The coverage that is provided by Medicare for custodial care, when you cannot complete at least two activities of daily living like bathing and toileting, is extremely limited. The first 20 days are fully covered, followed by a period of coinsurance where costs are shared, and then followed by a period where 100% of the expenses fall on the patient.
The average cost of a nursing home facility in the United States for a semi-private room is $7,513 per month, so you can imagine how quickly costs add up if you need care for two to three years. According to the National Care Planning Council, the average nursing home stay is 835 days (over two years, which adds up to $206,000). If someone has a long-term care need, and it hasn’t been accounted and planned for, it will likely decimate any retirement assets they have managed to save.
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7. Lifetime penalties for signing up late.
Both Part B and Part D can cost more if you don’t enroll in them as soon as you are entitled. With Part D, if you have creditable employer coverage, you can delay that, but as soon as you leave or go on COBRA, you need to enroll in Part D. Part B penalties can be particularly high.
See below for more about the Part D penalty.
Calculating the Medicare drug coverage (Part D) late enrollment penalty
The late enrollment penalty is an amount that’s permanently added to your Medicare drug coverage (Part D) premium.
You may owe a late enrollment penalty if at any time after your Initial Enrollment Period is over, there’s a period of 63 or more days in a row when you don’t have Medicare drug coverage or other creditable prescription drug coverage. You’ll generally have to pay the
penalty for as long as you have Medicare drug coverage.
Note: If you get Extra Help, you don’t pay a late enrollment penalty.
3 ways to avoid paying a penalty
- Enroll in Medicare drug coverage when you’re first eligible. Even if you
don’t take drugs now, you should consider joining a Medicare drug plan or a Medicare Advantage Plan with drug coverage to avoid a penalty. You may be able to find a plan that meets your needs with little to no monthly premiums. - Enroll in Medicare drug coverage if you lose other creditable coverage.
Creditable prescription drug coverage could include drug coverage from a current or former employer or union, TRICARE, Indian Health Service, the
Department of Veterans Affairs, or individual health insurance coverage. Your plan must tell you each year if your non-Medicare drug coverage is creditable coverage. If you go 63 days or more in a row without Medicare drug coverage or other creditable prescription drug coverage, you may have to pay a penalty if you sign up for Medicare drug coverage later. - Keep records showing when you had other creditable drug coverage, and tell your plan when they ask about it. If you don’t tell your Medicare plan about your previous creditable prescription drug coverage, you may have to pay a penalty for as long as you have Medicare drug coverage.
How much more will I pay for a late enrollment penalty?
The cost of the late enrollment penalty depends on how long you didn’t have
creditable prescription drug coverage. Currently, the late enrollment penalty is
calculated by multiplying 1% of the “national base beneficiary premium” Medicare drug coverage (Part D) ($33.06) by the number of full, uncovered months that you were eligible but didn’t enroll in Medicare drug coverage and went without other creditable prescription drug coverage.
The final amount is rounded to the nearest $.10 and added to your monthly premium. Since the “national base beneficiary premium” may increase each year, the penalty amount may also increase each year. After you enroll in Medicare drug coverage, the plan will tell you if you owe a penalty and what your premium will be.
See Some Example Medicare Scenarios
Example: Mrs. Martinez is currently eligible for Medicare, and her Initial Enrollment Period ended on May 31, 2017. She doesn’t have prescription drug coverage from any other source. She didn’t join by May 31, 2017, and instead joined during the Open Enrollment Period that ended December 7, 2019. Her drug coverage was effective January 1, 2020.
Since Mrs. Martinez was without creditable prescription drug coverage from
June 2017–December 2019, her penalty in 2020 was 31% (1% for each of the
31 months) of $32.74 (the national base beneficiary premium for 2020) or
$10.15. Since the monthly penalty is always rounded to the nearest $0.10, she
paid $10.20 each month in addition to her plan’s monthly premium.
Here’s the math:
.31 (31% penalty) × $32.74 (2020 base beneficiary premium) = $10.15
$10.15 rounded to the nearest $0.10 = $10.20
$10.20 = Mrs. Martinez’s monthly late enrollment penalty for 2020
In 2021, Medicare recalculated Mrs. Martinez’s penalty using the 2021 base
beneficiary premium ($33.06). So, Mrs. Martinez’s new monthly penalty in
2021 is 31% of $33.06, or $10.25 each month. Since the monthly penalty is
always rounded to the nearest $0.10, she pays $10.30 each month in addition
to her plan’s monthly premium.
Here’s the math:
.31 (31% penalty) × $33.06 (2021 base beneficiary premium) = $10.25
$10.25 rounded to the nearest $0.10 = $10.30
$10.30 = Mrs. Martinez’s monthly late enrollment penalty for 2021
