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Social Security & Medicare: The ABC’s and D’s of Medicare

Most of us become eligible for Medicare benefits at age 65. It’s a system that serves many people very well, providing good health care coverage at a reasonable cost. However, it’s a system with its own vocabulary and rules, which can be confusing if you’re not familiar. Here is a brief introduction to the terms and some of the rules that govern what you will pay for this coverage:

Medicare Part A
This is hospital insurance, which covers inpatient hospital charges, skilled nursing facility charges, hospice and some home health care. Most people don’t pay a premium for Part A. In general, if you have worked and paid Medicare taxes for at least 40 calendar quarters, you don’t pay a premium for Part A.

Medicare Part B
This is medical Insurance, which covers preventive and medically necessary services. You pay a premium for Part B, which is deducted from your Social Security, Railroad Retirement or OPM pension. If you’re not receiving any of those benefits, you’ll get a bill for your premium. Basic Part B premiums are quite reasonable, but it’s important to know that they are subject to Income-Related Monthly Adjustment Amount, or IRMAA. If your income exceeds certain thresholds, your premium increases. You can see more detail on the chart below. It’s wise to be cognizant of IRMAA when planning your retirement income.

Medicare Part C
This is Medicare Advantage, which provides a managed-care approach to delivering Medicare-covered services. Most plans charge a premium, and you must continue to pay your premium for Part B. Medicare Advantage often provides additional coverage such as vision, dental, wellness and prescription drugs, and has an out-of-pocket annual maximum. The charges are structured differently from “Original Medicare,” and for some consumers, this type of coverage may be more cost-effective than paying for Part D and a supplemental policy. It’s important to study the plan carefully and consider your particular situation to determine which type of coverage works best for you.

Medicare Part D
Prescription Drug Coverage, generally used in conjunction with Part A and B, and also subject to IRMAA.

Medicare Supplement
This is commercial insurance designed to fill the gaps Medicare coverage leaves, such as co-pays, co-insurance and deductibles. It’s often called “Medi-gap.” The coverage levels are identified by letters (Plan A, Plan B etc.), and the levels of coverage are standardized by the federal government so that they are similar across the marketplace. These policies are sold by private companies, and rates vary by provider. IRMAA does not apply. You must have Medicare Part A and B to qualify for this coverage. Some senior organizations such as AARP offer assistance in evaluating supplement plans.

Income-Related Monthly Adjustment Amount, IRMAA
Your Medicare premiums will be adjusted based on your Modified Adjusted Gross Income, or MAGI, which includes your total AGI plus tax-exempt interest income, based on your prior year’s tax return. The IRS shares information with the Social Security Administration (SSA), so IRMAA happens automatically. If your income decreases during the year due to disaster, divorce, change in work conditions etc., you can let the SSA know and supply appropriate documentation, and your premium should be reduced accordingly.

The opinions voiced in this material are for general information only, and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.