Understanding Medicare and your coverage options

Once you reach age 65, Medicare will help cover some of your healthcare costs in retirement. But like Social Security, choosing the right Medicare option can be difficult. The video above has a quick overview of the basics and helps explain how to pick a Medicare coverage option.

Medicare options: An overview

Medicare Part A

You usually don’t pay a monthly premium for Medicare Part A coverage if you or your spouse paid Medicare taxes while working. This is sometimes called “premium-free Part A.”

Medicare Part B

Premiums for Medicare Part B vary depending on your household income. Remember, deadlines are one of the most important things to know and can impact your cost. If you don’t enroll when you’re first eligible, premiums will increase 10% for each full 12 months until you do enroll.

If your yearly income in 2019 (for what you pay in 2021) was:

File individual tax returnFile joint tax returnFile married & separate tax returmYou pay each month (in 2021)
$88,000 or less$176,000 or less$85,000 or less$148.50
Above $88,001 up to $111,000Above $176,001 up to $222,000N/A$207.90
Above $111,001 up to $138,000Above $222,001 up to $276,000N/A$297.00
Above $138,001 up to $165,000Above $276,001 up to $330,000N/A$386.10
Above $165,001 up to $500,000Above $330,001 to $750,000above $85,000 and less than $415,000$475.20
$500,000 or above$750,000 and above$415,000 and above$505.90

Medicare Part C

Known as Medicare Advantage, plans are provided by private companies and can vary quite a bit from one plan to another. By law, they must at least be equivalent to regular Parts A and B coverage. But some Medicare Advantage plans provide greater coverage than Parts A and B.

Carefully compare how each Medicare Advantage plan stacks up to the costs and benefits of original Medicare. The Medicare Plan Finder at medicare.gov can help.

Medicare Part D

Cost for Medicare Part D will depend on which plan you choose, and it may incur an additional charge depending upon your income.

If your filing status and yearly income in 2019 was:

File individual tax returnFile joint tax returnYou pay each month (in 2020)
$88,000 or less$176,000 or lessYour plan premium
Above $88,001 up to $111,000Above $176,001 up to $222,000$12.30 + your plan premium
Above $111,001 up to $138,000Above $222,001 up to $276,000$31.80 + your plan premium
Above $138,001 up to $165,000Above $276,001 up to $330,000$51.20 + your plan premium
Above $165,001 and up to $500,000Above $330,001 up to $750,000$70.70 + your plan premium
$500,000 or above$750,000 and above$77.10 + your plan premium

Do you need separate Medicare Part D prescription drug coverage?

Part D coverage can also be purchased through a stand-alone prescription drug plan offered by an outside provider, but costs will vary based on the plan you choose. You can change your plan during the Annual Coordinated Election Period (October 15 to December 7 each year). You may have to pay a penalty if you don’t apply for coverage when first eligible.

Medicare donut hole (the Part D coverage gap)

One thing you need to consider with Part D is what’s called the “donut hole.”

This diagram illustrates how this coverage gap affects most Part D programs. This means that after total retail costs for your prescriptions reach $4,130 (for 2021), you’ll have to pay the full amount until you’ve reached the out-of-pocket spending limit (up to $6,550 in 2021).

Graphic showing the donut hole coverage gap in Medicare Part D coverage.

You get these savings if you buy your prescriptions at a pharmacy or order them through the mail. Some plans may offer higher savings in the coverage gap. The discount will come off the price that your plan has set with the pharmacy for that specific drug.

Although you’ll pay no more than 25% of the price for the brand-name drug in 2021, 75% of the price—what you pay plus the 70% manufacturer discount payment—will count as out-of-pocket costs, which will help you get out of the coverage gap.

These items aren’t counted toward your out-of-pocket spending:

  • What the drug plan pays toward the drug cost (5% of the price in 2021)
  • What the drug plan pays toward the dispensing fee (75% of the fee in 2021)

For more information, visit medicare.gov.

Creating a plan and signing up for in Medicare

Once you have reviewed how Medicare works and you understand your options, it’s time to create a plan to pay for out-of-pocket health care costs during retirement and enroll in Medicare.

How to sign up for Medicare

When you’re ready to enroll, you’ll need to work with the Social Security Administration, which handles Medicare eligibility and enrollment. You may contact the Social Security Administration at 800-772-1213 to enroll or to ask questions about your eligibility. You can also enroll online at medicare.gov.

As a reminder, you’re eligible for Medicare when you turn 65. You don’t have to be retired or collecting Social Security to sign up, and you can do so during any of these enrollment periods:

Initial enrollment periodAge 65 (3 months before through 3 months after)
General enrollment periodJanuary 1 through March 31 each year
Open enrollment periodOctober 15 through December 7 each year
Special enrollment periodExtending up to 8 months after your group coverage ends

If you need to change your Medicare coverage

There are certain times of year when you can change your existing Medicare coverage. For most people, you can change your coverage during the annual enrollment period from October 15 through December 7.

Under certain circumstances you may qualify for a Special Enrollment Period (SEP). These circumstances include:

  • You retire any time after age 65 and will no longer be covered by your (or your working spouse’s) employer-sponsored plan
  • You move
  • You qualify for extra help with Medicare prescription drug costs
  • You’re eligible for Medicaid
  • You’re getting care in an institution, such as a skilled nursing facility or long-term care hospital

How do you sign up for Medicare if you’re still working?

If you or your spouse is still working and has insurance through your employer, contact your benefits administrator to find out how your insurance works with Medicare. Each situation is individual to the kind of health insurance you have.

Picking an option and enrolling in Medicare can be confusing and stressful. But you’re well on your way—just take it one step at a time.

Ready to get started?

  • Looking for estimates? Start visualizing retirement with your own info by visiting our planning tools and calculators.
  • Have a Principal retirement account from your employer? Log in to principal.com to access personalized planning, sign up for our quarterly newsletter and more. First time logging in? Get started here.
  • Interested in starting an individual retirement account (IRA) or consolidating other accounts into your existing one? Call 800-247-8000, ext. 2503 between 7 a.m. and 9 p.m. CT. Not familiar with IRAs? Here’s a refresher.
  • Got a financial professional? They can help you figure out your next steps. If you’d like to meet with one face-to-face, we’ll help you find one.

Source for both tables: https://www.medicare.gov/your-medicare-costs/medicare-costs-at-a-glance

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