What Estate Planners Need to Know About Medicare
“What Estate Planners Need to Know about Medicare,” that’s the subject of today’s ACTEC Trust and Estate Talk.
This is Travis Hayes, ACTEC Fellow from Naples, Florida. In an earlier podcast we talked about (What Estate Planners Need to Know About Social Security, Medicare, and Self-Employment Tax), what estate planners need to know about Social Security, Medicare, and self-employment tax. Today, we will be focusing entirely on Medicare, what is covered, what is not, and the cost. To give us more information on this topic you will be hearing today from ACTEC Fellow Greg Gadarian from Tucson, Arizona. Welcome Greg.
The takeaways that we are going to address today are: what does Medicare cover? What are the costs of Medicare? What happens if you forget to enroll for Medicare, which is the late enrollment penalties, and what about disability? In the last podcast where I focused on Social Security and the self-employment taxes, I talked somewhat about disability. And, disability is not only the disability of the person who is actually applying for the benefits, the wage earner, but it also applies to disabled members of the wage earner’s family. But that is going to be in a couple of minutes; I will talk about that coverage.
Medicare is…well, we have been hearing a lot about it with the election campaign. Bernie Sanders has proposed Medicare for all, and Medicare is the, in essence, universal health care coverage for people in the United States who are over age 65 or disabled and otherwise eligible for Medicare or Social Security through their own employment or many times through the employment of their parents. So, we will talk about that. Age 65 is the key date where everybody is automatically eligible for Medicare. And, there are three primary parts of Medicare. Part A is the hospital coverage. Part B is the doctor’s costs, and Part D is the drug costs. There is a Part C program, but that really deals with HMOs. We see HMOs quite a bit in the West. I do not see it that much in the East, but HMOs basically provide all of the needed services, and there are some costs associated with it—co-pays and so forth. But let us look at the basic programs.
Medicare Part A
Medicare Part A is “free for most everybody,” unless you do not have your 40 quarters. We have to work for 10 years, build up benefits for 40 quarters, and be eligible to have this program free. What I found a few years ago — I had a client whose child had never worked, had no benefits whatsoever. We could still buy our way into Medicare. I think it is about – Medicare Part A – it was $458 for the coverage every month. You cannot buy other insurance for that cheap of a price. So, that was actually a good deal. If you have closer to, that was if you had no Medicare quarters at all, you need 40 quarters; and if you have 30 quarters, it is about $258 a month. You can pay the premiums; otherwise, it is free.
Now, there are some penalties for people that do not qualify for the 40 quarters but enroll late. So, there will be some penalties there, but most people actually do qualify. We will see certain professions do not qualify. For example, church, farmers, people that have rental real estate. And, by -the-way, let me digress for one moment. The Medicare tax is a 2.9 percent tax on all of our wages and all of our self-employment income. Unlike Social Security which phases out at about a $132,000 where we are paying a tax, Medicare, there is no cap. So, if you are the highest-paid basketball player or football player making $30 million a year, you will pay this 2.9 percent Medicare tax on all of those monies. In addition, there is the Affordable Care surtax which is 0.9 percent, which is paid by everybody on wages or self-employment income above $200,000 if you are single, $250,000 if you are married. So that is what the program is. We have A, B, C, and D.
Medicare Part B
There are penalties for enrolling late for B. B—you have to actually enroll. A—you are automatically enrolled for the most part. Social Security calls you up and says we are enrolling you into Medicare Part A, and the only way you can stay out of B, and B is the physicians, is by being in a program through employment or being married to someone who has a program through their employment. We find, very often, and this is where we can provide good advice to our clients. We will have clients that are retired at age 62, have a private program that is a Cadillac program, just has every benefit and perk in the world, and they do not sign up for Medicare Part B when the opportunity comes.
Well, there is a penalty, and the penalty is 10 percent of your monthly premium for every year that you fail. And that is for the rest of your life. So, if the premiums and the highest premiums are about $500 a month; the premiums we pay for Part B are based on our income. The lowest is for those people that make below $175,000,if they are married, they may be paying about a $150 as far as their premium costs. The highest is above $500 a month if your income is above $750,000. So, if you have a delay of two years, take $500 a month, multiply it by 10 percent for each year, 20 percent penalty every month, that is another $100 you pay in your premiums for the rest of your life to pay for missing that deadline. And usually it is the higher income people that miss that deadline because they have got that wonderful private plan and they can’t see getting away from that to go buy the government plan.
What other things does it cover? It does not cover long-term care. It will cover some rehab. For example, if you have knee surgery, like I did, and I needed rehab for—I was one day in rehab. So, it covers that rehab. It will cover up to 30 days of rehab, but it does not, otherwise, cover long-term care at all.
Medicare Part D
We talked about the late enrollment penalties for B; there is also a late enrollment penalty for D, which is the drug portion of Medicare. If you sign up late, there is 1 percent per month times whatever the premiums would be; what is actually, they are using an average, and it runs about $33 a month is what that premium is. So, it would be 1 percent of that per month for your not having that coverage. But if you have private coverage, there you are going to be okay, in the sense that it is, again, through an employer’s program.
Let me digress for a minute. What we are doing here is the government was penalizing people, and it is much like what the penalty was under the Affordable Care Act. If you did not enroll and buy private insurance, we had these private mandates where you ended up paying a penalty. And the theory was those people were going to wait until they got sick, show up at the emergency room knowing that they are going to get free medical care, and so the Affordable Care Act was forcing them to pay premiums. This is the same thing. I do not know that anyone has ever mentioned this before, but if you don’t enroll when you are supposed to and pay what you are supposed to, there is going to be a penalty. No one ever correlated that, but it is the exact same theory that is out there. So, we see these penalties there.
Medicare and Disability Requirements
Now, let me talk to the other side—disability. Disability of the worker will allow the worker to get the Medicare before age 65. So, if a worker becomes disabled at age 40, and disability is defined as that you will not be able to work for 12 months or you have a disability that will ultimately result in your death. So that is what qualifies you. But you do not qualify for two years until you have gotten your Social Security benefits. So, you apply for Social Security based on disability, and two years from that date you are eligible for Medicare and the premiums are based on the same system, is that it is all based on your income for Medicare Part B and for Medicare Part D. As I said, in theory, Medicare Part A is free, but that is because you already paid for it with your premiums.
So, let us go to the other side of disability. When I was talking about Social Security, I referenced having disabled children or disabled grandchildren that were dependent upon you for their support. So, if you have a child who became disabled before age 22 and that disability is permanent or will result in their death, they will be eligible for Social Security, and two years after they are eligible for Social Security, they will be eligible for Medicare.
Now, let me take a step back. They will be eligible for Social Security when their parent either starts getting Social Security on his own or her own or that parent becomes disabled or that parent dies. Two years after that activation date that child is eligible for Medicare themselves. And so, their premiums are probably nothing, because they do not have any income. Same types of rules could actually apply for the grandchild. A grandparent could adopt a grandchild and that grandchild would be eligible for Social Security and for Medicare, or there could be a grandchild that the grandparent provided 50 percent of their support and lived in the same household. So, what people oftentimes forget about when they are deciding should I do something like run my business through a subchapter S corporation to avoid paying Medicare taxes and Social Security taxes, is that those taxes buy a lot more than Social Security and Medicare just for yourself and your spouse. They are also buying stuff or buying those programs for your children — disabled children; and I think that is really the highlights, is that the coverage is there for anyone over 65 or disabled. Costs are based on what our income is. It is usually the higher income people that get into trouble by not enrolling in Part B when they are supposed to. And then, as we said, disability is covered whether it is the participant worker or their children.
Thank you, Greg, for educating us today on Medicare for our estate planning clients.
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