How Paying For Health Care Changes in Retirement

February 27, 2017

For most American workers who retire at age 65 or later, managing the costs of medical care becomes a bit more complicated. There may be more paperwork to juggle as reimbursements for costs could come from different sources. Here’s a breakdown of what’s typical:

Medicare

Most American workers and small business owners will be eligible for Medicare, the federal health insurance program for people age 65 and older. Medicare has four parts: Part A is Hospital Insurance, Part B is Medical Insurance, Part C includes Medicare Advantage Plans (HMO/PPO type plans which provide hospital and medical insurance together) and Part D is Prescription Drug coverage. See this article on understanding how Medicare works. Things to keep in mind include:

• As you near age 65, you’ll need to decide if you want the original Medicare or a Medicare Advantage Plan and if you want prescription drug coverage.
• Generally, the initial sign up for Medicare begins three months before you turn 65 and continues for three months after the month you are 65.
• If you don’t sign up for Part B during your initial enrollment period, you may have to pay a late enrollment penalty.

Medigap

A Medical Supplemental Insurance (Medigap) policy helps pay some of the health care costs not covered by original Medicare, such as co-pays, deductibles and co-insurance. Medigap policies are sold by private companies. Keep in mind:

• Medigap policies generally don’t cover long-term care, vision or dental care.
• You can’t be enrolled in a Medicare Advantage program and a Medigap policy at the same time.
• Medigap policies sold after January 1, 2006 cannot include prescription drug coverage. If you want that, you’ll need to sign up for it separately.

Retiree Health Plan

Employers are not required to provide health coverage to retired employees, and most don’t. If you are lucky enough to be one of the 16–25 percent of Americans who receive retiree health benefits from a former employer or union or receive military or other veterans’ benefits, how your coverage works in conjunction with Medicare depends on your company or organization’s plan. Generally, if you are retired and have coverage from both Medicare and a retiree health plan, Medicare pays first for your medical bills and your group health plan is the secondary payer. Keep in mind:

• Get a copy of your plan’s benefits description and read it carefully. Make sure you understand how your plan is integrated with Medicare.
• Employers can change benefits or premiums for your retiree health program or even cancel coverage.
• Your retiree plan may not pay unless you enroll when eligible in both Medicare Part A and Part B.
• Find out before retiring if/how your retiree plan covers your spouse and any dependents (if you have them).

Health Savings Accounts

For those employees who have balances at retirement in their health savings accounts (HSA), they are a highly tax-advantaged source of funds to pay health care expenses in retirement that are not reimbursed by Medicare or other insurance. HSA funds are triple tax-free if used for qualifying medical expenses: they are contributed pre-tax, grow tax-free and are withdrawn tax-free. During your savings years, there are good reasons to consider maxing out your HSA before other retirement accounts. Keep in mind:

• Tax-free withdrawals from HSAs can help you manage your overall tax rate in retirement and could help you meet thresholds for lower marginal and capital gains tax rates on other income.
• If you have built large balances in your HSA and don’t need all the funds to pay for medical expenses, you can withdraw funds after age 65 without penalty. (Withdrawals are included in your taxable income like retirement plan distributions.)
• HSAs do not have required minimum distributions.
• You may use HSA funds to pay for tax-qualified long term care insurance premiums.

Deducting Medical Expenses

Those taxpayers who face significant unreimbursed medical expenses can deduct some of those expenses. The IRS allows taxpayers to deduct qualified medical expenses which exceed 10 percent of your adjusted gross income for the tax year. For example, if you have a household income of $50,000, you would be able to deduct medical expenses in excess of $5,000. Keep in mind:

• You must itemize your deductions on your tax return.
• Expenses such as prescription drugs, dental care, vision, mental health care, glasses, hearing aids and preventative health care are included.
• Payments for medical insurance, such as long term care insurance (see below), are generally included.

Long Term Care Insurance

LongTermCare.gov defines long-term care insurance as insurance which covers “long-term services and supports, including personal and custodial care in a variety of settings such as your home, a community organization, or other facility.” Medicare does not cover long term care. Keep in mind:

• The best time to purchase long term care insurance is in your fifties.
• If you don’t have an HSA, the amount of long term care premiums you can deduct from your taxes, subject to the 10 percent floor, increases with age.
• You can generally pay for LTC premiums from your HSA account, subject to the same annual age-based limits.
• For very low income retirees without assets, Medicaid may pay for some of the costs of long term care depending on the state, but most retirees will have to fund the costs of long term care themselves should they need it.

 

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