In part 1 of BentOak Capital’s Medicare primer, we discussed the basics of this massive government health program. In part 2, we will look at some of the other questions we regularly get about Medicare. What happens if you’re still working at age 65? What if you don’t sign up for Medicare when you are “supposed to”? How does your annual income impact your Medicare costs? We’ll also explore the Medicare and income impact in detail. What if you have a Health Savings Account?
Medicare If You Are Still Working
If you are:
- age 65,
- employed at a company with more than 20 employees,
- are not yet receiving your Social Security benefits,
- and have group health insurance coverage,
you may (but are not required to) sign up for Medicare. This same option applies if you have health insurance coverage under your spouse’s current employer. Many people in this situation will enroll in Medicare Part A because it has zero monthly premium, so long as you or your spouse have paid in at least 40 quarters of Medicare taxes. In this case, Medicare will only pay for health benefits that your employer plan does not cover. If you want to continue contributing to a Health Savings Account, you may want to wait to sign up for Medicare. See below for more details.
If you or your spouse are age 65 and have health insurance through a smaller company (fewer than 20 employees), your employer may require you to enroll in Medicare. Prior to your 65th birthday, check with your HR representative to understand how your employer handles this situation. If the employer requires you to sign up for Medicare and you do not do so within three months of your 65th birthday, you will be subject to penalties.
Once you retire, you will need to sign up for Medicare within a window of time even if your former employer offers retiree health insurance coverage. In many ways, a retiree health plan can be comparable to the previously discussed “Medigap” or supplemental plans, in that they tend to cover things Original Medicare does not (out-of-pocket costs, dental, vision, etc).
Penalties for Late Enrollment
In Part I, we discussed the normal enrollment periods for Medicare. If you do not enroll during one of those periods, and you are not eligible for an exemption as discussed above, you will be subject to a late enrollment penalty.
- Most people will not incur a penalty for signing up late for Part A because most individuals or their spouse have earned at least 40 quarters (10 years) of Medicare credit through Medicare payroll taxes. If you are not eligible for premium-free Part A and you do enroll late, the penalty is 10% of your normal premium. You will pay the penalty for twice the number of years you delayed enrollment (e.g. if you wait one year to enroll in Medicare Part A at age 66, you will pay the monthly penalty for two years).
- The Part B late enrollment penalty is 10% of the standard Part B premium for every 12-month period where you should have been enrolled but were not. That can be somewhat complicated, so let’s break it down. The 2024 standard Part B premium is $174.70. If you sign up for Part B between 12 and 23 months late, your penalty is $17.47 on top of your Part B premium, meaning you will pay $192.20 per month in 2024 (rounded to the nearest 10 cents). If you sign up for Part B between 24-35 months late, your penalty will be 20%, or $34.94 per month. The Part B penalty is for life and is recalculated annually based on each year’s standard Part B premium. Note that if you sign up less than 12 months late, you will not be assessed that penalty since the calculation is based on full 12-month periods.
- You can have a late enrollment penalty for Part D if at any time after your initial enrollment period, you go for 63 days in a row without Medicare Part D or another comparable prescription drug coverage (such as a retiree insurance plan, TRICARE, or an individually-purchased policy). The penalty is 1% of something called the “national base beneficiary premium” times the number of full months you did not have Part D or comparable coverage. In 2024, the national base beneficiary premium is $34.70, so 1% is $0.347. This number may change up or down every year, so the penalty will change as well. If you wait 12 months to sign up for Part D and have no comparable coverage in the meantime, your penalty will be ($34.70 x 12% = $4.20, rounded to the nearest 10 cents). That $4.20 is in addition to your prescription drug plan’s monthly premium. You will have to pay the penalty as long as you have Medicare drug coverage, even if you switch plans.
Medicare and Income Impact: Premium Adjustments Based on Income
We have previously discussed on this blog how higher income earners pay more for Medicare Part B and Part D.
As of 2024, the standard Part B monthly premium is $174.70. If you are married filing jointly with an income over $206,000 or a single filer with income over $103,000 in 2024, you will instead pay $244.60/mo for Part B coverage. The price increases go up from there. Married couples making over $750,000 or single filers making over $500,000 will pay $594/mo for Part B, an annual surcharge of over $5000 above the standard premium.
Part D premiums also are subject to a surcharge based on your income and tax filing status, though at a smaller amount (between $154.80 to $972 per year, on top of your normal Part D premium).
Any premium surcharge is generally calculated using your two-years-ago tax return. For 2024 Medicare premiums, it is your 2022 tax return that is considered.
What counts as “income” for purposes of this premium increase? It’s your Adjusted Gross Income found on line 11 of your Form 1040 tax return plus any tax-exempt interest income found on line 2a of the Form 1040.
The Social Security Administration is responsible for managing these surcharges. If your income has dropped in the last two years because of certain life-changing events, you can contest the high-income surcharge directly with the SSA – not with the IRS or Medicare. There are eight life-changing events that will be considered, including marriage, divorce, death of a spouse, and retirement. The specific way you contest the surcharge is with Form SS-44. That link leads you to the PDF form. For a full description of how the life-changing events are defined, see page 5 of the PDF.
Understanding the Medicare and income impact is critical for retirees and high-income earners. At BentOak Capital, we consider these surcharges when discussing investment-related strategies such as portfolio management, Roth conversions, Qualified Charitable Distributions, and more.
Health Savings Accounts
Health Savings Accounts (HSAs) are one of the most valuable and least utilized tax-qualified accounts available today. Sadly, Medicare and HSAs, like oil and water, do not mix very well. When you sign up for Medicare – any Part, at any age – you are no longer eligible to contribute to a Health Savings Account1. In fact, for those who enroll after age 65, Medicare imposes a six-month lookback period, meaning you cannot contribute to an HSA for six months prior to enrollment2. This is important if you continue to work beyond age 65, you have not begun taking your Social Security benefit, and you maintain health insurance coverage through your employer. Let’s look at an example.
Christine turns age 67 in April of 2027 and intends to work until that time. She maintains her group health insurance coverage for both her and her spouse until then. According to normal Medicare rules, she has up to 8 months after that date (December of 2027) to enroll in Medicare parts A and B – this is called her Special Enrollment Period. If she chooses to enroll in Medicare the month she retires, in April of 2027, then according to the Medicare lookback rule she is deemed to have enrolled six months earlier (October 2026). This means she cannot contribute to her HSA after September of 2026.
It’s unfortunately not that simple, however. What this also means is that in 2026 (in this example) it’s not just that Christine cannot make salary deferrals to her HSA from October through December – but also her maximum HSA contribution for 2026 will be reduced. She can’t fund her HSA to the annual maximum ($8300 + $1000 catch-up in 2024) from January through September and then make no contributions the rest of the year. The lookback rule prorates the amount she can contribute. The amount Christine can add to her HSA in 2026 (including her employer’s contribution, if any) is limited to the annual maximum contribution amount, including the age 55 catchup amount, multiplied by 9/12ths (75%) of the year.
Navigating Medicare and Income Complexities
Medicare is, to say the least, a complex system. This two-part blog post was intended to hit some of the high points, discussing some of the most common questions BentOak Capital advisors get from clients. If you have questions about Medicare and would like to discuss them with a BentOak Capital advisor, please give us a call or get in touch with us here.
1 So does one spouse going on Medicare while the other does not affect the maximum family contribution limit to the HSA? Apparently not. Using the scenario above, Christine’s spouse could enroll in Medicare while Christine herself could stay on her employer’s insurance and keep contributing to her HSA up to the family limit of $8300+1000 catchup (in 2024).
2 The 6 month lookback is only a rule when someone enrolls after age 65, such as during a Special Enrollment Period after they have retired. If you enroll in Medicare the month you turn age 65, your HSA contributions for that year are still pro-rated to the month using the same formula in the example above, but it’s not retroactive to your age 64 + 6 months.
Please remember to contact BentOak Capital (“BentOak”), in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct that BentOak to effect any specific transactions for your account. A copy of our current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.bentoakcapital.com.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Securities offered through LPL Financial, Member: FINRA/SIPC. Investment advice offered through BentOak Capital, a registered investment advisor and separate entity from LPL Financial.
