Social Security & Medicare:Forewarned is Forearmed!

By Christine A. Romsdahl CPA/PFS, CFP®

December, 2014

Average retiree benefit: $1,328.00 * Maximum retiree benefit (at full retirement

age, or FRA): $2,663.00 Your benefit is defined as a percentage of

‘Primary Insurance Amount’, or PIA

* Calendar Year 2015

Social Security 101: What is the basic retirement benefit in 2015?

THREE TYPES OF RETIREMENT BENEFITS:◦ INDIVIDUAL BENEFITS on your record (100%): If you are fully

insured with forty quarters of coverage (10 years)◦ SPOUSAL BENEFITS on your spouse’s record (50%), if you have

been married to fully insured individual for at least nine months◦ FORMER SPOUSE’S (FS) BENEFITS (50%), if:

You are at least age 62; You are currently NOT MARRIED; You were married to your former spouse (FS) for at least ten years; and If your former spouse is not yet 62, you have been divorced from FS

for at least two years You receive the option that yields the highest monthly

benefit SURVIVOR BENEFITS are technically a separate type of

benefit per SSA

Social Security 101: Do you qualify for retirement benefits?

Your Spouse◦ At age 62◦ At any age, if caring for your child who is under

16 or disabled before age 22 Your Child

◦ Not Married & Under 18 (under 19 if in high school)

◦ Not married and disabled before age 22 Your Former Spouse

Social Security 101: Who else qualifies on your record for retirement benefits?

Maximum family benefit limits total benefits paid to 150% - 188% of insured’s PIA.

Maximum Family Benefit◦ Applies to all who receive a benefit based on one

worker’s record except :1. A divorced spouse collecting benefits on former spouse’s record.2. To the extent a family member receives benefits on their own record, these benefits aren’t subject to maximum family benefit rules

Social Security 101: Maximum Family Benefit

1. Your wages are adjusted for inflation.2. Take the average of your highest 35

earnings years.3. Result is “Average Indexed Monthly

Earnings (AIME)”.4. AIME is placed into standard SSA formula,

and PIA is the result.5. PIA is reduced for early retirement, and

increased for “late retirement”.

Social Security 101: How Are Benefits Calculated?

90% of first $A of AIME+ 32% of next $B of AIME+ 15% of remaining $C of AIMEPrimary Insurance Amount

>> “A” and “B” are bend points in Social Security lingo. The SSA assigns bend points annually.

>> The bend points in your first year of eligibility are the bend points that are used in all subsequent recalculations of your retirement benefit.

Social Security 101: Primary Insurance Amount Formula

The bend points for 2015 are $826 and $4,980.

Example: If Jerry’s AIME is $8,000, his PIA is calculated as follows:

90% x $826 = $743.4032% x ($4,980 - $826) 1,329.2815% x ($8,000 - $4,980) 453.00

PIA $2,525.68

Social Security 101: Primary Insurance Amount Formula

Early Retirement.

Maximum Family Benefit. A similar bend point calculation results in a maximum family benefit per beneficiary. Benefits are scaled back accordingly for all dependents, but not the beneficiary.

Social Security 101: PIA is adjusted downwards for….

Reduction forYear of Birth FRA Age 62 RetirementBefore 1938 65 20%1938 65 & 2 months 20.9%1939 65 & 4 months 21.7%

1940 65 & 6 months 22.5% 1941 65 & 8 months 23.4% 1942 65 & 10 months 24.2%

1943 – 1954 66 25%1955 66 & 2 months 25.9%1956 66 & 4 months 26.7%1957 66 & 6 months 27.5%

1958 66 & 8 months 28.4%1959 66 & 10 months 29.2%1960 and after 67 30%

Social Security 101: Early Retirement is a Moving Target

Delayed Retirement Credits.

COLA – Cost of Living Adjustment (1.7% for 2015)

Future Earnings, up to maximum for worker’s index year. As long as a worker continues to earn wages, the SS benefit is recalculated annually even after the worker is receiving benefits.

Social Security 101: PIA is adjusted upwards for….

Delayed Retirement Credits (paid up until age 70)

Year of Birth DRC Per Year1937 - 1938 6.5%1939 – 1940 7.0%1941 – 1942 7.5%1943 & later 8.0%

Social Security 101: Delayed Retirement Credits

A worker (before FRA) will have to repay benefits if he/she earns more than $15,720 in 2015.◦ Payback $1 for every $2 earned this year over $15,720.◦ W-2, Schedule C and Schedule F earnings.

In the year of FR, $1 of benefits will be lost for every $3 earned over $41,880 before the worker’s birthday month. After this month passes, the worker can earn as much as desired with no impact of reduced SS benefits.

This law applies to individuals receiving dependent’s and survivor benefits as well.

Social Security 101: How to Lose Benefits > Excess Earnings

Social security benefits may be income taxed Income = MAGI (AGI + Tax-Exempt Int.) + ½ of

SS Ben.

Filing Status Income % of SS TaxableMFJ Below $32,000 100% tax-free

$32,000-$44,000 Up to 50%

Over $44,000 Up to 85%Everyone Else Below $25,000 100% tax-free

$25,000-$34,000 Up to 50% Over $34,000 Up to 85%

Social Security 101: How to Lose Benefits > Taxation of SS Benefits

So, if a taxpayer is in 25% bracket & is in range where additional 50% of SS benefits are being taxed, an additional dollar of income on front page of 1040 is taxed at 38%. At 85% tier, the rate goes up to 46%.

Lesson learned: If you can, try to manage the income flow on front page of the 1040.◦ Works best for ages 65 – 70

You can elect federal withholding on SS Benefits No more checks after March 1, 2013!

Social Security 101: Points on Social Security and Taxation

If I take a reduced benefit at age 62, that reduced benefit adjusts to a full benefit when I reach Full Retirement Age.◦ FALSE!!◦ The only time a reduced benefit adjusts to a full benefit is when you change

records – your individual record to a spousal record, for example.

My benefit is based on….my highest 3 earnings years…my last 10 earnings years… or some variation thereof.◦ FALSE!◦ Average of 35 highest years, adjusted for inflation.

I can pay back my benefits at any time, and start over at a higher (less reduced) benefit.◦ FALSE! (But used to be true. )◦ Limited to 12 months after beginning social security benefits◦ Form SSA-521◦ One-time election

Trip-Ups for Our Clients

ON YOUR RECORD - WEP◦ If any part of your government pension is based

on work not covered by Social Security, you may be affected by the Windfall Elimination Provision.

ON YOUR SPOUSE’S RECORD - GPO◦ If you receive a government pension based on

work not covered by Social Security, your spouse’s/widower’s benefits may be reduced.

Social Security 201: Regarding Government Pensions

Regular Rules WEP Rules90% of first $826 40% of first $826

32% of next $4154 32% of next $4154

15% of remainder 15% of remainder

Social Security 201: Windfall Elimination Provision & PIA Computation

$ of First FactorYears of Coverage in PIA Formula

30 or more 90%29 85%28 80%27 75%26 70%25 65%24 60%23 55%22 50%21 45%20 or less 40%

Social Security 201: Exception to the Windfall Elimination Provision

Impacts spouse’s benefits only◦ 2/3rds of amount of Government pension will be used to

reduce the Social Security spouse’s benefit If government worker had 40 quarters with social

security as well, GPO does not apply. Example

◦ $900 of Government pension & $500 of potential Social Security Spousal Benefits

◦ 2/3 x $900 = $600, amount to reduce spousal benefit by◦ $600 > $500 spousal benefit, so no spousal benefit paid

by Social Security.

Social Security 201: Government Pension Offset

◦If want to wait past FRA to collect benefit, singles should file for retirement benefits and immediately suspend.

◦Suspension of benefits will permit the accumulation of delayed retirement credits.

◦Suspension also provides the option, if needed in an emergency, to take all suspended benefits in a one-time lump-sum payment. DRCs are lost.

Additional Social Security Facts: For Singles….

File and Suspend◦ Lesson: cannot do before FRA

Claim Now, Claim More Later Combination of F&S + CNCML

Social Security 201: Maximizing Benefits for Marries…..

For Who?Family with one paid (Joe) and one non-paid (Sally)

spouseAt What Age?

At least full retirement ageHow Does It Work?

After Joe reaches FRA & Sally reaches age 62, Joe applies for social security and suspend benefits.

HE CANNOT DO THIS BEFORE REACHING FRA.Sally applies for benefits, receiving a reduced benefit

based on Joe’s PIA and her age.Joe takes benefits (with DRCs) at age 70. Upon Joe’s death, Sally receives 100% of Joe’s

unreduced benefits.

File & Suspend

For Who?Family with one highly-paid (Joe) and one less-highly-

paid (Sally) spouseAt What Age?

One or both spouses must be FRA or older.How Does It Work?

Joe claims benefits at FRA or later. Sally (at FRA or later) claims spousal benefit on Joe’s

open record, leaving her record untouched.SHE CANNOT DO THIS BEFORE RETIREMENT AGE.At Sally’s age 70, she can claim her own benefit, and

reap the rewards of delayed retirement credits. The family unit has this higher benefit until first spouse

passes away.

Claim Now, Claim More Later

For Who?Family where both Joe and Sally qualify for

benefits on their own record, AND are close in age.

At What Age?Both spouses must be FRA or older.

How Does It Work?Joe claims and suspends benefits at FRA or later. Sally (at FRA or later) claims spousal benefit on

Joe’s open record, leaving her record untouched.When Joe and Sally reach age 70 respectively,

each can claim benefits on their own record.

Combination of F&S + CNCML

Must consider work records, ages, health, cash flow.

If you apply for SS benefits before FRA, the SSA automatically calculates your benefit, giving you the highest benefit. You cannot chose whose record/s is (are) utilized.

If you claim on or after FRA, you can choose which record you want to claim on.

Take-Aways on Married Planning

In most cases, spouses need to be married for a full year to collect spousal benefits.

Both spouses in a couple cannot file and suspend in order to trigger spousal benefits on each other.

If you suspend SS benefits at/after FRA and are on Medicare Part B, pay the premium out of your own pocket – do not forget or it could be costly!

Take-Aways on Married Planning

Spousal retirement benefits provide a maximum 50% of the other spouse’s Primary Insurance Amount (PIA).

A Surviving Spouse’s benefit provides a maximum benefit of 100% of the deceased worker’s retirement benefit.Therefore, reduced benefits get passed on to surviving spouse.

KEY TO MARRIED PLANNING

If a widow, widower or surviving divorced spouse remarries BEFORE HE/SHE REACHES AGE 60 (Age 50 if disabled), they cannot receive benefits as a surviving spouse while remarried.

If a widow, widower or surviving divorced spouse remarries AFTER HE/SHE REACHES AGE 60 (Age 50 if disabled), they will continue to qualify for benefits on the deceased’s/divorced spouse’s record.

AND REMARRIAGE? NOT SO FAST…

Example:◦ Jane has worker benefit of $1,100/month at FRA and

spousal benefit from former spouse of $1,000/month. ◦ If Jane claims benefit before FRA, she gets no spousal

benefit, only her own (reduced) benefit (actually, the higher of…).

◦ Jane could take IRA distributions until FRA. At FRA, she elects spousal benefits, and delays her own worker benefits until age 70.

◦ She would get $1,000/month for 4 years (COLA-adjusted) and switch to her own benefit, now $1,452/month (plus COLA) at 70.

Social Security 201: Maximizing Benefits for Divorcees……

The SSA does not recognize Powers of Attorney

In lieu, recipients should appoint a “representative payee” to receive funds on their behalf from the SSA.

This representative can step in and represent the recipient when they lose the ability to care for themselves.

And for all SS Recipients…

Check your/your client’s record:◦ Log on to www.ssa.gov & register◦ Four-page annual notice we used to receive by mail annually will

now be sent to us every five years (40, 45, 50, etc.)◦ Check to make sure all earnings are credited; if not, better to

resolve sooner rather than later. Benefit Reductions expected in 2034

◦ Per 2014 SS Trustees Report◦ Beginning in 2034, will be able to pay 77% of benefit◦ Considerations for planning

Calculators◦ Log on to www.ssa.gov; use their calculators◦ Other calculators include Social Security Income Planner & Social

Security Solutions◦ Follow Laurence Kotlikoff

Final Comments on Social Security

And Then There’s Medicare….

Medicare Part A – Hospital, some skilled nursing home care, home health services & hospice care

Medicare Part B – Doctor/Outpatient coverage Medicare Part C – “Medicare Advantage Plans”

(usually includes prescription drug coverage)◦ HMOs◦ PPOs◦ Private Fee for Service Plans◦ Special Needs Plans◦ Medical Savings Accounts

Medicare Part D – Prescription Drugs (optional)

The basics – The Parts

Medicare Part A + Medicare Part B◦ Medicare Part D optional

Medicare Part C – usually has prescription drug coverage, verify

Retiree Health Insurance?◦ Verify any requirements it has for your Medicare

elections

Your choices:

1. Decide how you want to get your coverage

-”Original Medicare” > Parts A & B -Medicare Advantage Plan, Part C > usually includes Part D

2. Decide if you need to add drug coverage-Part D

3. Decide if you need to add supplemental coverage

-No Supplement available with Part C

Decision Process

If retired at Age 65:◦ AGE 65◦ You may sign up for Medicare Parts A, B & D in the

seven-month period beginning 3 months before month you turn 65, and ending 3 months after month you turn age 65

◦ If you didn’t sign up when first eligible, you can sign up during General Enrollment Period between 1/1 and 3/31 each year. Your coverage will start 7/1. You may have to pay a higher premium for late enrollment.

◦ If you are receiving social security benefits when you turn 65, you will automatically be signed up for Parts A/B.

So When Do I Go On Medicare?

If not retired at Age 65:◦ If you are:

Still working and have health insurance coverage offered by your employer who has 20 or more employees; or

Are covered under your spouse’s plan, You may apply for Medicare when you retire.

◦ You have an 8-month enrollment period after employment/employer health insurance ends to enroll in Medicare, beginning with month after employment ends.

◦ If you didn’t sign up when first eligible, you can sign up during General Enrollment Period between 1/1 and 3/31 each year. Your coverage will start 7/1. You may have to pay a higher premium for late enrollment.

So When Do I Go On Medicare?

Important StuffALWAYS CALL MEDICARE TO CHECK IN 3 MONTHS BEFORE YOU TURN 65, REGARDLESS OF YOUR EMPLOYMENT STATUS

COBRA AND RETIREE HEALTH PLANS ARE NOT “QUALIFYING COVERAGE”. YOU ARE NOT ELIGIBLE FOR A SPECIAL ENROLLMENT PERIOD WHEN THAT COVERAGE ENDS.

So When Do I Go On Medicare?

Medicare Part A – Generally no premium Medicare Part B – $104.90 per month * Medicare Part C – Could be additional to

Part B Medicare Part D – about $30/month *

* means-tested

Premium Costs

2013 2013 2013 2015MAGI MAGI MAGI MonthlySingle MFJ MFS Premium

To $85,001 $170,001 $85,001 $104.90

To $107,000 $214,000 N/A $146.90

To $160,000 $320,000 N/A $209.80

To $214,000 $428,000 $129,000 $272.70

Over $214,000 $428,000 $129,999 $335.70

Rats, an asterisk..Part B

2013 2013 2013 2015MAGI MAGI MAGI MonthlySingle MFJ MFS Premium

To $85,001 $170,001 $85,001 your plan

premium

To $107,000 $214,000 N/A YPP + $12.10

To $160,000 $320,000 N/A YPP + $31.10

To $214,000 $428,000 $129,000 YPP + $50.20

Over $214,000 $428,000 $129,999 YPP + $69.30

Rats, an asterisk..Part D

Medicare Part B + Retiree Health/Medigap premiums could be a rude awakening versus employee health insurance premiums our clients were used to

Most clients do not understand exposure related to uncovered expenses >◦ Long-Term Care ($60,000/year on up)◦ Hearing Aids (could be $5,000)◦ Other expenses Medicare does not cover◦ Expenses of doctors who do not take Medicare

First Medicare Mistake – Not Preparing Our Clients For Medical Costs During Retirement

Qualify for Medicare Part A if:◦ Have at least 40 quarters of credits◦ Your spouse has at least 40 quarters of credits◦ Otherwise, you can pay for premiums

Qualify for Medicare Parts B & D if:◦ You are age 65 or older◦ You are a U.S. Citizen or legal resident who has

lived in the U.S. for at least five years

Medicare Mistakes – Assuming You Don’t Qualify

Medicare Part A – None if eligible for premium-free benefits

Medicare Part B – 10% of premium for each full 12 month-period you could have been enrolled in Part B but were not

Medicare Part D – 1% of National Base Beneficiary Premium ($33.13 in 2015) times number of full, uncovered months you were eligible but not enrolled is added to your monthly premium

REMEMBER, TIMELY IS AGE 65, NOT WHEN YOU RECEIVE CASH SS BENEFITS!!!

Medicare Mistakes – Penalty for Not Enrolling Timely

You don’t know when you MIGHT need prescription drugs, and they can be extremely expensive (ie. New cancer drugs)

Solution: Pick plan with lowest premium, so you at least get some coverage at the least cost.

Medicare Mistakes – Not Signing Up For Part D Because You Do Not Take Prescription Drugs

If you are lucky enough to have Retiree Health Insurance, read the fine print.

Most Retiree Health Insurance plans dance with Medicare Part B. If you don’t sign up for Part B, the Retiree Health Insurance policy will not pay.

Understand what Retiree Health Insurance says about prescription drugs; are they covered, or do you need Part D?

Some retiree health plans terminate for surviving spouse if he/she remarries – yikes!

Medicare Mistakes – Medicare Part B and Retiree Health Insurance

Part A◦ Deductible - $1,216 in 2015◦ Hospital Coinsurance:

Day 61 through 90 - $304/day Day 91 and beyond - $608 per each “ lifetime reserve day” after day 90

for each benefit period (up to 60 days over your lifetime) in 2015. Beyond Lifetime Reserve Days – 100%

◦ Private Duty Nurse, Television/Phone in Room, Private Room (unless medically necessary) – 100%

Part B◦ Deductible - $147 in 2015◦ Coinsurance – 20% of covered expenses

Part D◦ Deductible - $325◦ Initial Benefit Limit - $2,970◦ Catastrophic Out of Pocket Limit - $4,750

2015 Medicare Basics

Long-Term Care Routine dental or eye care Dentures Cosmetic surgery Acupuncture Hearing aids and exams for fitting them Routine foot care Most travel outside of U.S. (Unless it’s a

medical emergency)

What Medicare Does Not Cover

It will cover some long-term care, but not a continuous, extended stay.

It does not cover routine eye exams, or eye glasses (unless necessary due to glaucoma).

It does not cover hearing aids, and they ain’t cheap.

It MAY cover health care outside of U.S.◦ Lesson: Check what Medicare and your Retiree

Health/Medigap policy covers before you head for your foreign retirement adventures!

Medicare Mistakes – Assuming Medicare Covers What It Does Not

Not if you elect Medicare Part C; they do not dance together

Not if you have retiree health insurance (though might want to compare your plan to Medigap policy if you pay 100% of retiree health policy premiums)

Covers copayments, coinsurance, deductibles of Medicare Part A and B

Standardized by state Guaranteed renewable

So, Is A Medigap Policy In Your Future?

Open enrollment period starts in month you turn 65 or qualify for Medicare Part B, whichever is later

Open enrollment period runs for 6 months During this time, you may obtain coverage

even if you have a pre-existing condition; premiums are not increased accordingly

You can purchase Medigap Insurance after open enrollment period, but you may be denied based on your health (or your pre-existing condition may not be covered for 6 months)

Medigap Also has its own Open Enrollment

Plans A, B, C, D, F, G, K, L, M, N Differ on what is covered:

◦ Part A coinsurance & hospital costs up to an additional 365 days after Medicare benefits are used up

◦ Part B coinsurance or copayment◦ Blood (first 3 pints)◦ Part A hospice care coinsurance or copayment◦ Skilled nursing facility care coinsurance◦ Parts A & B deductible◦ Part B excess charges◦ Foreign travel exchange (up to plan limits)◦ Out of Pocket Limit

Various Flavors of Medigap

Depends on plan you select, when you enroll and state in which you reside

Could be as low as $1,000/year in Texas, high as $4,000/year for 65-year old

Important to understand what you’re insuring (where your real risk is) and choose policy that most closely covers the risk you are unwilling to self-insure

Also consider provider, and service record

Medigap Premiums

www.medicare.gov Choosing A Medigap Policy by Centers for

Medicare & Medicaid Services 2013 Guide to Social Security by Mercer 2013 Social Security & Medicare Facts by

National Underwriter http://www.tdi.texas.gov/pubs/consumer/med

sup.html (Medicare Supplement Insurance handbook and Rate Guide)

A good insurance broker who knows this industry!

Great Resources

Once you are signed up for Medicare, you can renew/change plans during open enrollment every October 15 – December 7.

If you are enrolled in a Medicare Advantage Plan or Part D prescription drug plan, you will receive an Annual Notice of Change detailing how things will change (or not) in the upcoming year during the open enrollment window. It is required reading.

If things are changing not to your liking, the 10/15 – 12/7 window is the ONLY time you have to change plans until next year.

Medicare Mistakes – Not Doing Ongoing Due Diligence

Hopefully you understand some pitfalls around Social Security and Medicare now.

www.ssa.gov and www.medicare.gov are tremendous resources.

Finding an insurance agent who can walk your clients through the options and sell them a Medigap Plan is an invaluable service.

Happy Planning and Happy Retirement!

Summary