Article contributed by EANE Business Partner
The last decade has seen a dramatic increase in the number of older employees staying on the job beyond the traditional retirement age of 65. Even the disruption caused by the Covid-19 pandemic has not fundamentally changed this ‘new normal’ of an increasingly older workforce. These older workers often struggle to understand the complicated- and confusing- choices they face when transitioning from their retirement and healthcare benefits through work to Social Security and Medicare.
Here are the ‘Big 7’ fundamentals that can guide older employees to more confident and better informed Social Security & Medicare filing decisions…
The Online Filing Process
The Social Security Administration, which also administers Medicare, has made a significant ‘pivot’ away from in-person service at local field offices towards more efficient delivery of services online and by telephone. Filing for benefits, including Medicare, now can only be done online (which requires having a mySocialSecurity account), or by phone, or by mail.
Employees who anticipate filing for benefits in the foreseeable future should consider first setting up a mySocialSecurity if they have not already done so. This will give them the ability to file online for benefits, and access to a host of other online services.
Social Security Filing Age
The focal point of the Social Security retirement benefit is the Full Retirement Age (FRA). The FRA is determined by Year of Birth. In 2021 the new FRA is 66 + 2 months and is applicable to those born in 1955. It will be increasing over the next several years until 2027, when it will permanently settle at age 67 for everyone born in 1960 or later.
Benefits can be claimed as early as age 62. However, early claiming results in roughly a -7% reduction for each year prior to FRA. Conversely, delaying filing beyond FRA (but not later than age 70) earns an annual credit of +8%.
It’s prudent to think ‘long term’ and consider the potential impact of longevity when evaluating the decision of at what age to file.
Social Security Annual Earnings Test
The Annual Earnings Test applies to ‘Early Filing’ employees who claim Social Security before their FRA and continue to work. These employees face a limit on the amount of W-2 income they can earn without experiencing a temporary reduction in their monthly benefit.
The 2021 threshold is $18,960 of W-2 wages or net self-employment income. Every $2 of excess earnings triggers $1 in benefit withholding. In the “transitional” calendar year in which Full Retirement Age (FRA) will be reached, the threshold increases to $50,520. In this “transitional year”, $3 of excess earnings triggers $1 of benefit withholding.
The Annual Earnings Test ends upon attaining FRA. Any withheld benefit amounts are then incrementally restored monthly over the remainder of the person’s life expectancy.
Social Security Benefits by Marriage
In addition to providing benefits to individual wage earners, Social Security also can provide “Benefits by Marriage” to spouses (and ex-spouses). These are the 50% (Living) Spouse benefit, and the 100% Survivor (Widow/Widower) benefit. These benefits typically are available if they are greater than the claiming spouse’s Own benefit.
The Spouse benefit can be claimed as early as age 62- if the higher benefit Spouse has already filed. The Survivor benefit can be claimed as early as age 60 (even earlier under special circumstances). However, when claimed early (prior to the claiming spouse’s Full Retirement Age) both the Spouse benefit and the Survivor benefit are reduced and are also subject to the Annual Earnings Test.
The Survivor benefit still remains available in cases where remarriage occurs at age 60 or older.
In the event of divorce, the Spouse and Survivor benefits remain intact if the marriage lasted at least 10 years. For a divorced Spouse of any age, remarriage will result in termination of the 50% Spouse benefit. The 100% Survivor benefit for a divorced Survivor remains available as long as any remarriage occurs at age 60 or older.
Medicare’s Dual Option Structure
Let’s face it: Medicare is complicated. In my experience, the key to understanding Medicare is understanding that it is essentially a ‘Dual Option’ program where coverage is either through an Original Medicare arrangement (which typically also includes a supplemental Medigap policy) or through a private Medicare Advantage plan. Having a solid grasp of this fundamental ‘framework’ brings clarity to the deluge of confusing, unclear- and sometimes inaccurate- Medicare messaging that older employees receive.
The ‘inner workings’ of Medicare are built around its four Parts (A,B,C,D). These Parts are arranged to create the Original and Advantage options. The two primary Parts are Part A (hospital-related benefits) and Part B (physician and out-patient benefits). Part A is ‘free’ for most Medicare members, while Part B requires a premium… which includes a high-income surcharge known as ‘IRMAA’ (the Income-Related Medicare Adjustment Amount).
Transitioning to Medicare from Group
There are two key ‘entry points’ into Medicare for older employees: The Initial Enrollment Period (IEP) at age 65, and the Special Enrollment Period (SEP) for employees who continue to work past age 65 and remain covered by their group health plan. When these ‘deferring’ employees eventually retire and end their group coverage, the SEP allows them to enroll in Medicare without any delayed enrollment penalty.
The decision at age 65 whether to sign-up or defer Medicare can involve several different factors. Here
are some important ones;
- Starting Social Security benefits also ‘activates’ Medicare. If Social Security is claimed prior to age 65, Medicare will be ‘pre-loaded’ and will start once age 65 is reached.
- Among employees planning to remain covered by a ‘traditional’ health plan at age 65, some elect to enroll in the ‘free’ Part A only (thus avoiding the Part B premium), while others choose to enroll in both Parts A & B.
- For employees covered by a high-deductible health plan (HDHP) linked with a Health Savings Account (HSA), Medicare must be completely deferred (including the ‘free’ Part A) in order to continue ongoing HSA contributions. This also means delaying Social Security (see the 1st bullet point above!).
- Small employers (typically under 20 employees) have the option to terminate group coverage for Medicare-eligible employees at age 65. Even if they choose to allow continued coverage, the group health plan itself may- or may not- require them to sign up for both Medicare Parts A & B (with negative HSA implications… see the bullet point above). Pity the small business owner- and the employees- who must try to understand all of this!
Medicare Areas of Caution
While Medicare provides comprehensive coverage, there are also important exclusions and limitations. For example, there is no coverage outside the U.S. (There may be some limited coverage under Original Medicare through a supplemental Medigap policy, and under some Medicare Advantage options.)
Another area of limited coverage is long-term care. Medicare only covers 100 days in a skilled nursing facility, and only under certain conditions. Home care benefits are also limited, and available only when certain criteria are met.
COBRA and Medicare have a very confusing and dysfunctional relationship. In most cases, coverage terminates for former employees who turn 65, since they are now eligible for Medicare (which is legally deemed to be ‘adequate alternative coverage’). The rules are different if the former employee had Medicare first and subsequently becomes eligible for COBRA (but there’s not enough space to cover those details here!)
Social Security & Medicare form the foundation of retirement in the United States. Making informed, confident filing decisions is possible when targeted, practical information is communicated in an engaging and understandable way! For more information join us on August 18 for a special presentation Employee Healthcare Options at 65 | When Medicare meets the Group Health Plan.