Did you know that the total projected lifetime health care costs (excluding long-term care) for the average 65-year-old couple retiring this year are expected to be $295,000 in today’s dollars? This figure highlights how important it is for advisors to guide clients through potential health care expenses in retirement.

With this in mind, I’ve put together this financial advisor’s guide to Medicare planning. It will help you answer the many questions your clients will surely have about Medicare, including who is eligible and what services are covered.

What Does Medicare Cover?

Let’s start by defining the letters that make up the Medicare alphabet soup and what they mean in terms of coverage. 

• Part A: Generally covers inpatient hospital services

• Part B: Usually covers doctor visits, outpatient services, and durable medical equipment

• Part C: Known as Medicare Advantage and is an alternative to original Medicare Parts A and B plus D (This plan typically offers drug coverage, plus vision and dental care. Individuals must first enroll in original Medicare to be eligible for Part C Medicare Advantage. The cost of the plan may be the same as original Medicare, but there could be additional charges depending on the plan selected.)

• Part D: Prescription coverage

Now that we've covered the building blocks, let's move on to eligibility and enrollment.

Who Is Eligible for Medicare?

Individuals who are 65 or older are eligible for Medicare. Medicare requires enrollment at particular triggering events and at specific times throughout the year. If your clients are receiving retirement benefits under the social security program, they will be enrolled automatically in Medicare Part B at age 65. If they are covered under a larger group health plan (20 or more employees), they can opt out of Part B and Part D coverage without a penalty.

A specific triggering event (e.g., when a Medicare-eligible client loses group employer coverage) requires that the client enroll during the special enrollment period. Enrolling within eight months of a triggering event will help avoid Part B penalties but may not prevent coverage gaps. It is best practice to start the enrollment process at least three months before a triggering event occurs to avoid gaps in coverage or the risk of missing a penalty deadline.

A key factor in determining a Medicare penalty is whether an individual has “creditable coverage.” Let’s take a closer look.

What Is Creditable Coverage?

If you have clients who are 65 or older, their COBRA coverage, group employer plan for businesses with fewer than 20 employees, and retiree health plans may not be considered creditable coverage for Medicare Part B. This means they would not avoid the Part B enrollment penalty. Medicare would be the primary payer for health services, while these plans are secondary. These plans, however, may qualify as creditable coverage to avoid the Part D enrollment penalty. Here's a breakdown of those penalties:

• Part B: Individuals pay a surcharge of 10 percent of their Part B standard premium for each 12-month period they fail to enroll.

• Part D: The penalty is 1 percent of the “national base beneficiary premium” per month. In 2021, the national base beneficiary premium is 33.06 per month. This 1 percent penalty is applied to the total number of months an individual is without creditable coverage. This surcharge is added to the Part D premiums.

Clients who are approaching age 65 should verify that their current insurance is considered creditable coverage for Medicare purposes to avoid these permanent surcharges.

What Is Supplemental Coverage?

For those covered under original Medicare Parts A and B plus D, they might consider purchasing Medigap coverage. Medigap, also known as Medicare Supplement Insurance, offers supplemental coverage for expenses that traditional Medicare doesn’t cover. These include vision, dental, medical coverage during international travel, and copays.

Medigap plans (e.g., Plans A through D or Plans G, K, L, M, and N) are federally mandated to provide specific core coverage and are regulated under state law to offer additional supplemental coverage. The coverages and costs will vary between plans. Please note: Effective January 1, 2020, Medigap plans C and F are generally no longer available for new enrollees.

Who Pays First?

The coordination of claim payments between Medicare and other health insurance coverage can directly affect a client’s health care costs. Your Guide to Who Pays First outlines the coordination of benefits for Medicare-eligible individuals. Let’s review some common scenarios and how Medicare coordinates payments.

Employer health plans. If an employer has fewer than 20 employees, Medicare may be the primary payer and the employer coverage is secondary. So, clients who are 65 and covered under a smaller employer plan through their spouses’ employer or those who are still working and covered under this type of employer plan should verify with the provider whether or not the plan is creditable to avoid a penalty for Part B and/or Part D. If the plan is not considered creditable coverage for either Part B and/or Part D, they should enroll in Medicare.

If the employer has 20 or more employees, the employer plan is the primary payer and Medicare is the secondary payer.

TRICARE. If your clients are 65 and inactive duty military covered under TRICARE, Medicare is the primary payer for Medicare-covered services and TRICARE is generally secondary (unless services are received in a military hospital).

There are special rules for TRICARE-insured military members if they are enrolled in specific plan types. Generally, if a client is retired, he or she should enroll in Part B to remain eligible for TRICARE (including drug coverage).

Federal employee health benefits (FEHB) plan. For a 65-year-old client who is covered under an FEHB plan and is an active employee, the FEHB plan is the primary payer and Medicare is secondary. Once the client is no longer an active employee, the FEHB plan for Part B is not considered creditable coverage; then, Medicare is the primary payer. On the other hand, FEHB may be creditable coverage to avoid the Part D prescription plan penalty, plus serve as the client’s supplemental gap plan.

Retiree employer health plan. Medicare is the primary payer and the retiree health plan is secondary when a client is 65 and covered under a retiree employer health plan.

Once a client is no longer an active employee, the retiree health plan for Part B is not considered creditable coverage; thus, Medicare is the primary payer. This plan may be creditable coverage to avoid the Part D prescription plan penalty and may serve as a client’s supplemental gap plan.

What About Health Savings Accounts?

Once clients enroll in any part of Medicare, including Part A, they can no longer contribute to a health savings account. If clients are considering collecting social security benefits, in general, they should stop making contributions six months before enrolling in Medicare to avoid a potential health savings account contribution penalty.

What Is the Cost for Medicare?

Medicare premiums are means tested: the higher the client’s modified adjusted gross income (MAGI), the higher his or her monthly premium costs. Clients with a higher MAGI pay a surcharge, known as the income-related monthly adjustment amount (IRMAA).

In the case of IRMAA for Medicare, your client’s MAGI is generally his or her adjusted gross income, which includes all taxable income (e.g., retirement account distributions, capital gains, and interest), plus dividends from tax-free bonds, interest from savings bonds used to pay higher education tuition and fees, and foreign earned income excluded from gross income. For 2021, the premium cost will be based on a client’s 2019 MAGI.

Hold harmless rule. This rule protects current social security beneficiaries from increasing Medicare costs in a year where there is no or a very low cost-of-living adjustment. When this rule applies, the cost of any increase in premiums for Medicare are absorbed by a smaller group of recipients: new enrollees and current beneficiaries subject to IRMAA.

• In 2021, the standard Part B cost is $148.50 per person per month. The top Part B IRMAA threshold for a married couple filing jointly is a MAGI of $750,000 or greater. The monthly premium, including the IRMAA surcharge per person, for these enrollees is estimated to be $504.90 per month.

• In 2021, the top Part D IRMAA threshold for a married couple filing jointly is a MAGI of $750,000 or greater. In addition to the monthly premium, an IRMAA surcharge per person for enrollees is $77.10 per month. 

Your clients can appeal the IRMAA surcharge amount for specific life-changing events, which include death, divorce, loss of pension, loss of income-producing property, work stoppage, or an error in the determination records. Further information on the appeal process is available on the U.S. Department of Health & Human Services website.

Be a Resource

This financial advisor's guide to Medicare planning is a great starting point to help answer many of the questions your clients will have about Medicare and meeting their health care costs in retirement. As they navigate what can be a confusing time, your knowledge will help make this part of their financial journey far less daunting.

Editor's note: This post was originally published in February 2018, but we've updated it to bring you more relevant and timely information.