Three critical catches clients face when claiming Social Security early
by Marcia Mantell, RMA®, NSSA®
Ms. Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business development, marketing & communications, and education company supporting the financial services industry, advisors, and their clients. She’s the author of “What’s the Deal with Social Security for Women?”, “What’s the Deal with Retirement Planning for Women?”, and blogs at BoomerRetirementBriefs.com. She is also a guest contributor to The Street’s Retirement Daily and Jean Chatzky’s Hermoney.com.At first glance, it can seem strange that clients enroll in Medicare on Social Security’s website. Medicare has a robust website in its own right, chock-full of important information and expansive tools that clients need to estimate costs of the various parts of Medicare.
There is a link to “enroll in Medicare” on Medicare’s homepage. Click on it, and surprisingly, it takes you to the Social Security website.
As if these programs weren’t confusing enough, clients nearing age 65 discover Social Security and Medicare are closely integrated in unexpected ways. Pulling back the sheets, you’ll find there is some rationale for this odd couple.
Some Technical Details Are Important
The confusion stems from the fact that Medicare is part of the Social Security Act. They are both laws of the land, but are also intricately interconnected—like a marriage or a dancing duo. Social Security, enacted in 1935, is a powerful law that allows for taxation on wages, and then, payments to beneficiaries. To manage the inflow and outflow of money for millions of seniors, an administrative arm of the government was established: The Social Security Administration (SSA).
Today, there are some 60,000 workers in 10 field offices across the country who help get benefits paid to 64 million Americans.
Thirty years after the Social Security Act, President Johnson signed Medicare into law in 1965. It is another program mainly for seniors with a tax-on-wages component. Specifically, the FICA tax collected for Medicare is for “HI” – hospitalization insurance, better known as Medicare Part A. In order to avoid duplication, and to efficiently administer a huge program for millions of seniors, it was logical to combine the administrative requirements of Medicare under Social Security.
Social Security’s Role with Medicare
As a practical matter, the SSA plays specific roles in the administration of the Medicare program. It determines Medicare Part B premium amounts that each client will pay each year. Social Security is already linked with the IRS for payroll information, so they can also capture Modified Adjusted Gross Income (MAGI) information. When MAGI exceeds certain thresholds, higher Part B premiums are assessed. These so-called Income-Related Monthly Adjustment Amounts (IRMAA) can apply to high income clients throughout retirement.
The SSA also manages Part B premium collections once clients have enrolled in both programs. Part B premiums are automatically deducted from Social Security benefit checks each month and routed to Medicare.
And, the SSA sends annual “determination” letters to each beneficiary who is enrolled in Social Security and/or Medicare. This letter usually arrives in early December. It informs each person how much they will be receiving in Social Security benefits and how much they will be paying for Medicare Part B premiums, including any IRMAA surcharges.
Clarity Is Sorely Missing
Medicare and Social Security are ultimately joined at the hip for each client, but not necessarily from the beginning. The order in which a client enrolls in each program affects the other program. If they enroll in Medicare first, at age 65, there is no immediate implication to Social Security benefits. However, if a client enrolls in Social Security at least four months before turning 65, the implications to their Medicare enrollment are immediate.
Unless clients have done extensive research, they have no idea these two important programs are so closely integrated. None of this is clear. And, unfortunately, missteps can cost clients in their wallets.
Retiring Early Is Not Uncommon
If you think about life in 1935 when Social Security became law, it will help you understand the original logic, and then the evolutionary changes. Then, in 1965, Medicare was tacked on to the Social Security Act. When a worker retired, he typically claimed Social Security and enrolled in Medicare, often, all on the same day. When the laws were enacted, that was the common “base case.” It’s simple. No mistakes. No penalties.
But today, many clients start Social Security as early as age 62. From the most current data at the Social Security Administration, at the end of 2018:
• 27% of men claimed Social Security at 62; and,
• nearly one-third of women did the same (31%).
Even before COVID-19 and the steady loss of jobs, a surprisingly large number of people claimed Social Security by age 65:
• 40% of men; and,
• 44% of women.
Add in today’s realities:
a significant percentage of older workers are losing their jobs due to COVID-19; or, many near-retirees are choosing to retire early because they are in a vulnerable age group. The percentage of those unemployed for either situation, as of September 2020 (BLS.gov data), remains significant:
• 16.2% of men ages 55 to 64 have been unemployed for 15 weeks or longer vs. 15.6% of women in the same age group.
• 6.4% of men who are 65 and older have been unemployed 15 weeks or longer vs. 8% of women in the same age group.
Between March and September, 2020, the unemployment rate for men 55 and older roughly doubled: from 3.4% to 6.3%; and more than doubled for women from 3.3% to 7.2%.
Financial Advisors should be preparing for more clients to retire earlier than planned. And, they may decide to start Social Security before 65.
3 Critical Catches for Getting Medicare Right When Claiming Social Security Early
Let’s look at three critical catches for clients who retire before 65, and start Social Security at least 4 months prior to turning 65. These situations illustrate how Social Security and Medicare are interconnected and the requirements each client needs to understand.
Situation #1: Assume a client retired and claimed Social Security at 64. He has no access to any large employer group health insurance and has not purchased any other health insurance.
Since this client claimed Social Security before age 65, Medicare Part A—part of the dancing duo of Social Security and Medicare—automatically turns on the first day of the month he turns 65. Surprise! Part B starts up automatically as well.
And now, unexpectedly, his reduced Social Security payment is now further reduced by the Part B premium and any applicable IRMAA.
For clients who are truly retired, this is generally not a problem. They receive a Welcome Kit from Medicare along with their Medicare card. No penalties. No issues.
However, they are not fully on Medicare yet. They need to proactively buy a Part D prescription drug plan during their initial enrollment period (3 months before the month of their 65th birthday to 3 months after). No one over 65 can go more than 63 days without “creditable” (or Medicare-standard) drug coverage, so it’s critical to enroll on time. And, they have just 6 months to select and enroll in a Medigap or Medicare Advantage Plan of their choice.
Situation #2: Now, let’s say you have a client who retired and claimed Social Security at 64. Assume she had access to health insurance—either her State’s Healthcare Exchange or COBRA continuation insurance. What happens as she reaches her 65th birthday month?
She will be automatically enrolled in Medicare Parts A and B! Her reduced Social Security will be further reduced for Part B premiums.
She’ll want to keep Medicare Part B and properly coordinate, and likely stop, her Marketplace Exchange insurance or COBRA. She will not want to pay additional premiums for coverage she can’t use. And, as noted previously, Part A cannot be decoupled from Social Security.
She must proactively apply for Part D and Medigap or Medicare Advantage within the required time periods. (Noted in Situation #1.)
Situation #3: Things get much more challenging in the situation where a client has retired early (or who did not work) and claimed Social Security more than 4 months before age 65, but continues to have access to a large employer’s group health insurance plan from their spouse or partner. Will this client be automatically enrolled in Medicare? Yes. And, this may be a problem.
Again, Part A comes attached to Social Security, so it will start the month of his 65th birthday. Part B also automatically starts.
However, the client has the option to decline Part B because he has coverage from a large employer’s plan. Specific instructions for how to decline Part B are outlined in the Medicare Welcome kit. If he declines Part B now, he must remember to proactively enroll in Part B at a later date. It’s imperative that he coordinates coverage at the point when his spouse/partner is retiring and ending the large employer health insurance coverage.
However, if he keeps part B and the company plan, he’s paying for both plans. That might work fine—he’s using Part B as a supplemental insurance plan. But it may not be ideal and could be a budget issue.
Importantly, the client also must pay attention to any Health Savings Account (HSA) he may be contributing to. When clients are enrolled in any part of Medicare, even if it’s just Part A, they must also stop any contributions into their HSA. By law, one cannot make tax-advantaged contributions to an HSA unless they have a HDHP – High Deductible Health Plan. Medicare is not a HDHP.
And, There’s More!
You may have noted that Part B can be delayed if the retired client has access to large employer group health insurance. A “large employer” is defined as one with 20 or more eligible employees on the payroll. However, if a client works for a small employer, say 9 or 10 employees, they should NOT decline Part B when they turn 65.
Why? Because the Medicare law spells out specifically which insurance plan pays “primary” (they pay bills first, and approximately 80% of the cost) and which insurance plan pays “secondary” (they pay the remaining small balance due) when an individual has two health insurance plans. Small employer health insurance plans almost always switch to paying secondary once a worker or worker’s spouse/partner turns 65. Yet another catch to watch out for.
Sounds Crazy, Right? But Financial Advisors Can Help
It is challenging for clients to get all of this just right. Making a mistake with Medicare enrollment, even accidently, creates lifetime premium payment penalties:
• Part B enrollment penalty is 10% per 12-month period that they should have been enrolled, no cap.
• Part D comes with a 1% per month penalty assessed on the months when a client should have been enrolled, no cap.
It is not up to Financial Advisors to figure any of this out for their clients. But clients will be grateful if you can give them a heads up about the integration between Social Security and Medicare. Problems start when clients turn on Social Security before 65. Unbeknownst to most, that one decision triggers a host of potential issues for their Medicare benefits.
There are several steps Financial Advisors can add to their annual retirement planning meetings with clients to help alleviate the angst and anxiety that comes with trying to figure out Medicare and Social Security:
1) Start Medicare and Social Security conversations by age 60 with every client.
2) Share a few key facts about some hidden dangers with Medicare when retiring early and claiming Social Security before 65.
3) Have a list of resources to suggest to clients. They’ll need to read and explore their personal situation and options, and it takes a good amount of time to understand these programs.
4) Make sure clients sign up for their mySocialSecurity account before applying for either Social Security or Medicare.
5) Invite a Social Security/Medicare expert to present at a webinar event that you host. They’ll provide great content about how these programs are interrelated and answer the many questions you and your clients may have.
The best option for me was to hire an advocate who looks after all these social security matters. I consulted a lot with my local office, but then my strength left me in this and I decided to entrust this matter to a lawyer.