The Interconnected Medicare and Social Security Decision
Social Security claiming strategies are some of the most common topics we discuss with clients while building a financial plan. That decision cannot be made in isolation though. The implications of applying for Social Security retirement benefits can have a direct and meaningful impact on your financial health due to its link with Medicare enrollment.
Medicare is the federal health insurance program for people 65 and older, certain disabled individuals regardless of age, and people with End-Stage Renal Disease (ESRD). Individuals who wish to defer Medicare enrollment beyond age 65 must defer receiving their Social Security retirement benefits and must have creditable health care coverage through their employer or their spouse’s employer. For those planning to work beyond age 65, this is very easy to accomplish since one can remain on their employer’s insurance plan and won’t necessarily need the Social Security income due to a paycheck still coming in.
For those considering the Social Security claiming strategy of “file and suspend”, this becomes a little more complicated. After filing for benefits (whether you suspend or not), a person has triggered at least Medicare Part A. Others like Parts B & D, can still be deferred though, which would save some costs and taxes. If someone is still covered by an employer plan and now under Medicare too, it would need to be determined if the employer’s insurance will be primary or secondary to Medicare. That will explain which coverage will pay first in the event of a claim. However, if a person’s primary objective is to defer Medicare enrollment in its entirety, then Social Security must be delayed as well, including the file and suspend strategy.
The ability to contribute to Health Savings Accounts (HSA) is also impacted by the Medicare enrollment decision. HSAs allow individuals and their employers to contribute pre-tax dollars to this savings account if enrolled in a high-deductible health plan (HDHP). Distributions are also exempt from taxation as long as they are used for qualifying medical expenses. Enrollment in any portion of Medicare stops one’s ability to contribute to an HSA, so the importance of these contributions are yet another factor to consider when deciding to enroll in Medicare.
There are a lot of decisions to be made as someone approaches retirement age. Since physical and financial well-being are of utmost importance to most retirees, the choices surrounding Social Security and Medicare enrollment should not be taken lightly because they will have a lifelong impact on one’s retirement. Please seek professional advice before making these vital decisions.
You can learn more by reading about our Social Security Planning services or our Social Security FAQs section.