In a competitive environment, adding value to client relationships and prospects by understanding the convergence of health care and financial planning has never been more important. Advisers recognize the need to help clients make the optimal decision regarding when to claim their Social Security benefits. As we learn from the experts in this area, the choices are extensive and the financial implications connected with the decision are large.
It is critical, however, to understand that decisions on Medicare enrollment also carry a meaningful financial impact and are often closely tied to Social Security enrollment choices.
(Related read: Stakes for making the right Medicare decision are high)
At a minimum, two areas warrant particular attention by advisers. The first comes into play with clients who are working beyond age 65. Many clients in this situation will want to delay their Medicare enrollment in order to save thousands of dollars in annual costs. Medicare Parts B and D in particular carry monthly premiums and a tax — technically called an income related monthly adjustment amount, or IRMAA — for those who meet upper income thresholds.
In order to defer Medicare enrollment, clients must have what is called “creditable” health care coverage offered by their employer, in a firm that employs 20 or more employees. Obtaining this creditable coverage from a spouse's company health plan is also permissible. In addition, if you wish to defer your entire Medicare enrollment, you need to defer receipt of your Social Security benefits.
Once you pull the trigger on Social Security benefits (even with a file-and-suspend election), you have pulled the trigger, at a minimum, on Medicare Part A. Thus, clients who prefer their employer's health insurance coverage and wish to defer Medicare enrollment in its entirety should defer claiming Social Security benefits. Clients who at least desire to defer the costs and taxation of Parts B & D can commence Social Security benefits and Medicare Part A, while deferring Parts B & D.
The second scenario that often exists is one in which your client is contributing to a health savings account (HSA) and once again desires to continue working beyond age 65. For a more in-depth look at this strategy, you can refer to this recent piece on navigating HSAs.
HSA contributions are becoming a staple of benefit plans for many Americans, and a meaningful piece of investment plans for the particularly savvy. Enrollment in any portion of Medicare ends your ability to make HSA contributions. Therefore, deferring Social Security benefits in order to defer Medicare enrollment becomes the prudent path.
It is always worth mentioning that any time one defers Medicare enrollment, enrollment at a later date is conducted within a special enrollment period (SEP). One must pay attention to the rules of the SEP in order to avoid substantial late-enrollment penalties.
Peter Stahl is the founder of Bedrock Business Results, which provides training to financial advisers and their clients on the convergence of health care and financial planning. He can be reached by email.