The Wall Street Journal-20080216-Encore -A Special Report-- Ask Encore- Tackling Questions On Medicare Options- Military Pay and IRAs

Return to: The_Wall_Street_Journal-20080216

Encore (A Special Report); Ask Encore: Tackling Questions On Medicare Options, Military Pay and IRAs

Full Text (858  words)

I'm turning 65 and am in a high-deductible health plan with a health savings account where I work. I would like to remain in my employer's plan and continue contributing to my HSA. May I postpone enrolling for Medicare A and B until I retire? If I can postpone, will I be able to enroll in A and B without penalty when I retire? My work plan doesn't require me to enroll in Medicare Parts A and B upon turning 65.

KIRK A. CRESSMAN

Savannah, Ga.

For many people still working at 65 in a job with comprehensive health coverage, it has long been common and cost-effective to delay enrolling in Medicare Part B, which covers doctor visits and outpatient care and carries a monthly fee. You can generally enroll with no financial penalty when your corporate coverage ends. But until recently, there was little reason to delay enrollment in Medicare Part A, which covers hospital care, because it's usually free to workers and their spouses.

But in your situation, holding off on Part A as well could make sense: People enrolled in Medicare can't contribute to an HSA, which allows individuals with high-deductible health-insurance plans to use pretax money to cover medical costs and carry over unused funds to future years. But if you are 65 and don't enroll in Medicare, "Medicare eligibility doesn't preclude an individual's eligibility to contribute to an HSA," says Internal Revenue Service spokeswoman Nancy Mathis.

Not everyone can say no to Medicare Part A, however, says Kia Green, a spokeswoman for the Social Security Administration, which handles enrollment in Medicare and Social Security. If you aren't yet receiving Social Security retirement benefits, you can delay enrollment in Medicare Parts A and B simply by not filing an application for that coverage.

But if you're 65 or older and you're already receiving or have filed for Social Security, you can't delay enrollment in Medicare Part A because "the benefits are tied together," Ms. Green says. In that case, to withdraw from Medicare Part A, you also would have to withdraw from Social Security and repay all the benefits received to date.

---

I am an 85-year-old veteran of World War II. I believe I read that at some years during the war we didn't pay Social Security. Can we now receive credit for those years and increase our benefits?

JACK TURNER

Denver

From 1940 through 1956, people who served in the military didn't pay Social Security tax on their pay. Nonetheless, many of them qualified to have military pay added to their earnings records for Social Security purposes when they filed for retirement or disability benefits. Depending on their career earnings, that adjustment may or may not have resulted in a larger Social Security check.

In your case, any adjustment should have been made when you first applied for Social Security and would have been reflected in the initial "notice of award" letter you received. If you don't still have that letter, says Social Security spokeswoman Kia Green, you can contact the agency to see whether you received credit.

One caveat: In most cases, Social Security won't add in military pay for people receiving a military pension based on the same years of service. For more information, see the agency's publication 05-10017, "Military Service and Social Security" (online at ssa.gov/pubs/10017.html).

---

I'm retired and elected to receive Social Security at age 62. I have no 2007 earnings from ordinary work sources. However, I exercised vested stock options during the year that provided additional income. The IRS treats this gain as ordinary income, subjecting it to withholding for FICA, Medicare, and federal and local income taxes. As such, can I make a contribution to a regular or Roth IRA based on these earnings? If so, can a contribution also be made to a spousal IRA or Roth IRA based on those earnings?

Separately, the Social Security Administration informed me that this income doesn't impact the earnings limit for those receiving benefits prior to normal retirement age because the income is based on work performed during prior years.

DAVID J. ROSENBERG

Shelter Island, N.Y.

You should have received a Form W-2 from the company that shows your stock-option income in Box 1, where wages would normally show up, says Kaye Thomas, a tax attorney in Lisle, Ill., who has written books about options and IRAs. Assuming it's there and not also in Box 11 -- which relates to certain deferred-compensation plans -- that income qualifies as compensation that can be used to support contributions to the IRAs you mention, Mr. Thomas says.

That rule is spelled out on page 8 of Internal Revenue Service Publication 590, "Individual Retirement Arrangements," available online at irs.gov.

Mr. Thomas suggests you also check that your employer has filed or will file Form SSA-131 with the Social Security Administration, identifying your option income as a "special wage payment" that wouldn't count toward the Social Security earnings test. That reporting is discussed in IRS Publication 957, also available online.

---

Encore welcomes your questions at [email protected]. Ms. Damato is a news editor for The Wall Street Journal in South Brunswick, N.J.