Q&A: How Medicare, COBRA interact

Dear Liz: You recently wrote about how Medicare coverage interacts with employer coverage. My husband will retire next year at age 65. His company has over 20 employees, so it’s considered a large company plan that won’t require him to sign up for Medicare. Is it better for him to elect family COBRA coverage for 36 months and defer Medicare coverage, since his company healthcare plan will be superior to Medicare? Can he elect Medicare coverage once COBRA terminates? Coverage matters more than costs.

Answer: He shouldn’t put off signing up for Medicare, because COBRA won’t insulate him from penalties.

The previous column mentioned that Medicare Part A, which covers hospital visits, is usually premium-free, but people generally pay premiums for Medicare Part B, which covers doctor’s visits, and Medicare Part D, which covers prescription drugs.

Failing to sign up when you’re first eligible for Part B and Part D typically means incurring permanent penalties that can be substantial. You can avoid the penalties if you’re covered by a large employer health insurance plan — but that plan must be as a result of current employment, either yours or your spouse’s. Once your husband retires, his employment is no longer current, so he should sign up for Medicare to avoid penalties.

If you or any other dependents need coverage, he may end up paying for additional insurance through COBRA on top of what he pays for Medicare. He can have both COBRA and Medicare for himself if his Medicare benefits become effective on or before the day he elects COBRA coverage. If he starts Medicare after he signs up for COBRA, his COBRA benefits would cease but coverage for you and any dependent children could be extended for up to 36 months. Another option to consider would be to cover you and any dependents using a plan from an Affordable Care Act marketplace. You may want to discuss your options with an insurance agent before deciding.

In fact, getting expert opinions is a must, because Medicare rules and health insurance in general can be so complex. Anyone nearing 65 also would be smart to discuss their individual situations with their company’s human resources department and then confirm the information with Medicare before deciding when and how to sign up.

Q&A: This forgotten account shouldn’t turn into a spending spree

Dear Liz: I just got a message about thousands of dollars I have in a 401(k) account from a job I had over 10 years ago. They are asking me what I want to do with the money, roll it over into an IRA or cash it out. What should I do?

Answer: Don’t cash it out.

Unexpected money can feel like a windfall, and it’s natural to dream about potential splurges you could afford. But this cash didn’t fall out of the sky. This is money you earned and that could grow substantially if you make the right moves now. If you cashed it out, you’d lose a substantial chunk to taxes and penalties, plus you’d lose all the future tax-deferred growth that money could earn.

Your best option probably would be to transfer the money directly into your current employer’s retirement plan, if you have one and it allows such transfers. Employer plans may offer lower-cost access to investments than you’d get with an IRA, plus consolidating the old plan into the new means one less account to monitor. Also, employer plans may offer more protection from creditors, depending on where you live.

Rolling the money directly into an IRA is another good option. You’ll need to open an account, preferably at a discount brokerage that keeps costs low. An IRA would give you access to more investment options, but beginning investors might just want to opt for a target date retirement fund or a robo-advisory service that invests using computer algorithms. With either option, the mix of investments and the risk over time would be professionally managed.

Whichever you choose, make sure the old plan sends the money directly to your chosen option, rather than sending you a check. If a check is sent to you, 20% of the money would be withheld for taxes and you’d have to come up with that amount out of your own pocket within 60 days or that portion would be considered a withdrawal that’s taxed and penalized.

Q&A: How to protect a child’s education savings from greedy adults

Dear Liz: I understand that money for children’s college education can be put in a bank account with a parent as the trustee under the theory (I suppose) that the child might make bad decisions. In my case, money that I had worked hard for was put into a custodial account and then used by my parents for “necessary” household expenses. My family was not impoverished. This was a dreadful memory for years, and I’m not the only one. Social Security money for a relative, a child, was lost in a divorce. In another case, money was given to a parent for education, but was used in a failed real estate deal, with the children never realizing the money was meant for them. How can money be invested for a child’s education without it being available to an adult for “necessities”?

Answer: When parents take money that belongs to their children, they may not think of it as stealing. But that’s exactly what it is, legally and, of course, morally. There are clear rules for custodial accounts and trusts that should prevent such self-dealing, but often the child’s only recourse would be to sue the parents. That could make for some awkward Thanksgiving dinners.

There wasn’t much you could have done as a child to prevent the theft. But if you ever want to give money to another child, think carefully about the integrity and ability of the person you’re putting in charge of the money.

First pay attention to how they handle their own money. Someone who’s deeply in debt or living paycheck to paycheck may not have the skills to be a good steward.

Then ask yourself, “Could I see this person taking the money if they were really hard up for cash or could otherwise justify it to themselves?”

Then pay attention to your gut reaction. If you believe the person has integrity, that doesn’t mean something bad can’t happen, but you’ve certainly reduced the odds. If you have questions, or you don’t know the person well, you may have other options.

For college expenses, you can open a 529 college savings plan, name the child as the beneficiary and continue controlling the account yourself until the money is paid out for college.

This approach can have potentially large financial aid implications if you’re not the parent, so you may need to delay distributions until after the child files his or her last financial aid form. Sites such as SavingForCollege.com have more information about how these plans interact with financial aid.

A 529 plan probably will be the best option in most situations. Otherwise, you can consult a lawyer about setting up a trust and naming a trustee other than the parents. Trust distributions also can affect financial aid, so you may need to time those carefully.

Q&A: Working past 70

Dear Liz: If I continue to work after 70, will Social Security taxes still be deducted from my check? I understand my benefits will cap out at 70, so why would I need to still pay into the fund?

Answer: Because Social Security is insurance, not a bank account.

And it may not be true that your benefit maxes out at 70, if you continue to work. It’s true that delayed retirement credits no longer increase your benefit if you delay starting Social Security past age 70. But as long as you continue working, you’re potentially growing your benefit.

Your Social Security check is based on your 35 highest-earning years, adjusted for inflation. If you make more in a current year than you made in one of those previous highest-earning years, the current year will be substituted for the earlier one. That in turn can increase your benefit. This can happen at any age, including after you start benefits.

You might not see much increase, of course, or any increase at all if you’ve earned a high income for a long time. If you exceeded the maximum income limits subject to Social Security taxation every year for 35 years, your benefit wouldn’t increase with additional work. (In 2019, for example, the maximum income limit is $132,900; you don’t pay Social Security tax on earnings above that level, although you continue to pay Medicare tax.)

On the other hand, your benefits won’t be stopped once you collect as much from the system as you paid in. You will continue receiving benefits for as long as you live, even if that amount far exceeds what you’ve paid in taxes. That’s insurance worth paying for.

Q&A: This nurse needs a Social Security checkup. Here’s how to check yours

Dear Liz: I’m a certified nurse midwife who is salaried. When we are fully staffed, I work 55 hours a week on average. If we cover extra shifts, we are paid a lump sum rather than hourly. (If we were paid hourly, it would work out to far less than minimum wage.) We are paid twice a month, but my pay stub shows that I only work 70 hours per pay period. I work almost that many hours in a single week! When I work extra shifts, it is reported on my check under “miscellaneous” with the lump sum listed. I asked our administrators about this and they just told me it wasn’t a big deal, but I’m not convinced that’s true. Do the hours reported on my paycheck affect my Social Security income later? I just don’t want to lose out on Social Security benefits when I work my butt off!

Answer: The hours you work don’t affect your future Social Security benefit, but your earnings do. At least they should. Your employer is supposed to report your full salary to Social Security, and to deduct the appropriate amount of Social Security tax from your paychecks. If your pay is underreported, your future benefits could be shortchanged.

Here’s a quick way to check if your earnings are being reported properly. On your paycheck, there should be a line that says either “Social Security,” “OASDI” or “FICA.” If the line says Social Security or FICA, the amount listed should be 6.2% of the money you earned for the pay period, up to a maximum annual amount of $8,239.80 for 2019. (There’s a ceiling on the amount of wages subject to Social Security taxes, which this year is $132,900.)

Some employers don’t break out Social Security taxes from Medicare taxes, and include them both in a line for FICA, which stands for Federal Insurance Contributions Act. The FICA amount should be your Social Security tax (6.2% of your earnings up to $132,900) plus 1.45% for Medicare. (There’s no cap, so all earnings are subject to the Medicare tax.)

If the tax amounts shown don’t include that “miscellaneous” lump sum, please call the IRS at 1-800-829-1040 to report the situation.

Q&A: Triggering the windfall elimination provision

Dear Liz: After working and paying into Social Security for more than 40 years, I took a city job at age 60. This job does not pay into Social Security and will afford me a small pension upon retirement in a few years (I’m now 64). Will this pension amount be deducted from my Social Security payments?

Answer: Normally, people who get pensions from jobs that didn’t pay into Social Security face the “windfall elimination provision,” which can reduce any Social Security benefits they may have earned. If, however, you have 30 or more years of “substantial earnings” from a job that paid into Social Security, then this provision does not apply. The amount that counts as “substantial earnings” varies by year; in 2019, it’s $24,675.

Q&A: Medicare vs. spouse’s health plan

Dear Liz: I am planning to retire in a few months at 65. My husband, who is five years younger, works for a corporation that provides excellent health insurance. When I sign up for Medicare, will I still be able to stay on my husband’s health insurance? Which insurance will be listed first for coverage?

Answer: The rules are different depending on whether your husband’s insurance is considered a large employer plan or a small employer plan.

If the plan covers 20 or fewer employees, his employer can boot you off the plan or make it secondary to Medicare. If the plan covers more than 20 employees, though, the employer typically can’t treat you differently from younger employees and spouses and must allow you to stay on the plan, which would remain your primary insurance with Medicare as the secondary insurer.

Medicare penalties are another issue to consider. Medicare Part A, which covers hospital visits, is usually premium-free, but people generally pay premiums for Medicare Part B, which covers doctor’s visits, and Medicare Part D, which covers prescription drugs. If you don’t sign up for Medicare Part B and Part D when you’re first eligible, you could face permanent penalties that would raise your monthly premiums for life.

These penalties don’t apply if you put off signing up for Part B and Part D because you’re covered by a large employer health insurance plan from current employment, either yours or your spouse’s. Once that employment or coverage ends, though, you’ll need to sign up for Part B and Part D promptly or the penalties kick in.

Notice the use of the words “typically,” “normally” and “generally” in the paragraphs above. Medicare’s rules and exceptions can be tricky to navigate. Talk to the benefits manager at your husband’s company so you know where you stand, and what parts of Medicare to sign up for as you turn 65.

Tuesday’s need-to-know money news

Today’s top story: Buy a real car now before they become extinct. Also in the news: How Shea Couleé of ‘Drag Race’ fashions her finances, 8 credit card strategies, and 3 things to do when you get a salary increase.

Buy a Real Car Now Before They Become Extinct
Sedans are disappearing.

Money/Makers Q&A: How Shea Couleé of ‘Drag Race’ Fashions Her Finances
Drag isn’t cheap.

8 Credit Card Strategies — And Some Surprises, Too
Strategic uses to improve your life.

3 Things to Do When You Get a Salary Increase
Celebrate, then plan.

Q&A: Death doesn’t take a financial holiday. Here’s a cautionary tale

Dear Liz: My daughter has two children, ages 2 and 4. Recently the children’s father took his own life. He was 27. The job he worked as long as I knew him paid him in cash, so he didn’t pay into Social Security. Does this mean the children cannot receive survivor benefits from Social Security?

Answer: If the father never worked at a job that paid into Social Security, your grandchildren — and your daughter — won’t qualify for the survivor benefits they could have received had he been paid legally rather than under the table.

Their one hope is if he had a previous job that did pay into Social Security.

At 27, he would have needed at least six quarters of coverage to trigger survivor benefits, says Bill Meyer, founder of Social Security Solutions, a claiming strategies site.

The older a person is, the more quarters are needed to qualify for benefits, but no one needs more than 40 quarters. The amount of earnings required for a quarter of coverage is $1,360 in 2019. Once you earn $5,440, you’ve earned your four quarters for the year.

If the father had earned those six quarters, his death would trigger survivor benefits for his children that typically last until age 18 (or until 19, if they are still in high school full time). Your daughter also would be entitled to benefits until the younger child turned 16, because she’s caring for the deceased person’s minor children.

It’s possible this young man was paid under the table because he was not able to work legally in the U.S. If that’s the case, he and his family wouldn’t qualify for Social Security benefits even if payroll taxes had been deducted. If he opted for cash because he or his employer didn’t want to pay taxes, though, that was a choice that had expensive repercussions for the people he left behind.

Q&A: Pension payout planning

Dear Liz: My husband and I each receive a pension from the companies where we worked. If my husband dies first, will his company continue to pay me his pension and vice versa?

Answer: That depends on how you chose to receive your benefits. Typically people are offered a choice of payouts: a “single life” option that ends at the pensioner’s death, and “joint and survivor” options that continue payments after the pensioner dies. A 50% joint and survivor option would pay half the monthly amount after the pensioner’s death, while a 100% option would continue the payments without reduction.

The option that continues payments without reduction, however, often offers the smallest monthly payment to start. The “single life” option pays the largest monthly amount, but the fact that the payments end at the first death can leave the survivor in a bad way.