Commentary: Many employers are providing employees with financial wellness benefits to improve their personal balance sheets. The objective, similar to physical wellness programs, is assisting employees to achieve well-managed financial lives so they will be more focused and productive at work. However, these programs may not be effective if they are not relevant to the demographic or career stage. One often overlooked topic is the transition to Medicare for those ages 65 and older.
Many think of Medicare as their retirement health plan. While true for most, as more baby boomers work past the traditional retirement age of 65, understanding how Medicare interacts with workplace health benefits becomes crucial for economic well-being. Getting the Medicare equation wrong can create significant additional costs for those over age 65. Employers can help their employees by providing information and resources about how Medicare works. Advisers can add significant value by being aware of the rules and providing education.
Medicare is a government-run health insurance system for Americans over age 65 and the disabled of any age. Medicare is funded through employee and employer payroll contributions during working years, and covers a portion of health care costs primarily for individuals aged 65 and over. Medicare is split into four separate segments, called Parts A, B, C, and D. Each segment of Medicare covers different portions of the potential health care costs that retirees may face.
Medicare Part D provides prescription drug coverage. In order to sign up for Part D, retirees must be enrolled in either Part A or Part B. Enrollment into a Part D plan may be deferred with no penalty for individuals who are covered under another health care plan with creditable prescription drug coverage. (Prescription drug coverage is creditable if it is expected to pay, on average, at least as much as Part D standard coverage would pay.)
Medicare Part C, also known as Medicare Advantage, is another way to get the benefits and services covered under Parts A and B. Part C plans are approved by Medicare but are administered through private insurance companies that have contracts with Medicare to provide coverage. Some of these plans provide coverage for prescription drugs, which means a Part D policy is not necessary.
Important timing issues
Knowing when to sign up can make a big difference. An individual who is 65 years old and employed at an employer with 20 or fewer employees must sign up for Medicare Part B within the initial enrollment period, a seven-month window, which begins three months before their 65th birthday, even if the employee is covered by the employer’s health insurance. For 20 or fewer employees, Medicare takes over as primary payer when employees turn 65. Depending on employer size, failure to enroll in Medicare at the right time could leave an over-65 employee uninsured – and they might not even know it.
Employees at larger organizations also have timing concerns. Individuals who continue to work past age 65 and are covered under an employer’s health plan will have a special enrollment period for eight months after the earlier of the date their employment or employer coverage ends.
If an individual misses either enrollment window, their Part B premiums permanently increase in each 12-month period that passes without enrollment. These increases can add up significantly. Getting enrollment timing right can add up to savings over time.
What will Medicare cover
Employees covered under an employer-sponsored plan may not realize Medicare can be expected to cover only about 60% of medical costs. Eyeglasses, dental care, hearing aids, and long-term care are big-ticket items that Medicare does not cover at all. Premiums begin at $104 per month for basic Medicare and may be more, depending on income. Women (as a group) have more to worry about than men (as a group). Statistically, women live longer and are at greater risk of outliving savings. Education about the different Medicare supplemental options can help pre-retirees pick the most cost-effective plan.
What will it cost?
Inflation plays a big part in determining how these costs are calculated. Medicare Part B premiums increased by 10% per year on average from 2003 through 2008, and by over 14% in 2010. Based on an Employee Benefit Research Institute study, a woman can expect to spend anywhere from $83,000 to $131,000 (excluding the cost of long-term care) on premiums and out-of-pocket expenses over the course of her retirement. One way to help cover these costs is a health savings account. At 65, HSA savings can be used tax-free on expenses such as Medicare premiums and long-term care insurance, as well as other out-of-pocket medical expenses. Employers who offer HSA-eligible health insurance plans may consider offering education specifically addressing spending strategies in retirement.
Medicare mistakes can be a serious drain on retiree finances. Employers and advisers who help retirees get off on the right foot before they exit the workforce will be providing a valuable benefit.
Cindy Lapoff is a legal and regulatory consultant with Manning & Napier.
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