Social Security Benefits Increase for 2014

The Social Security Administration (SSA) announced a benefit increase of 1.5% for 2014.  Social Security benefits are indexed for inflation.  Average retirement benefits will increase by $19 a month to $1,294.  Fortunately, given the small increase, Medicare Part B premiums do not increase in 2014 and consume the increased benefit.

The inflation standard used by the SSA is CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers.  Notice that these are wage earners and there are no retirees in this index.  Retired persons spend more on health care, and those costs have been rising faster than overall inflation.  So over time, retirees who depend on Social Security benefits will suffer a lower standard of living because of the mismatch between the CPI-W and the cost of actual goods and services consumed by retired persons.  Furthermore, discussions for scaling back the cost of the Social Security program have considered replacing CPI-W with so-called “chained CPI.”  Chained CPI grows at a slower pace than CPI-W because it presumes that when prices increase, people will purchase less expensive items by substituting items of lesser quality.  If adopted, chained CPI will further erode retirees’ standard of living.  Therefore, it is imperative for people who wish for a comfortable retirement to save and invest for their future, rather than relying upon Social Security benefits to be the primary source of their retirement income.

Separately, the Social Security wage base, upon which the Social Security tax of 6.2% is imposed, rises from $113,700 in 2013 to $117,000 in 2014.  This is an increase of 2.9%.  The inflation increase for the taxable wage base uses a different index than CPI-W.  The 2014 increase is based upon the national average wage index for 2012 ($44,321.67) as related to the index for 1992 ($22,935.42), then multiplied by the 1994 Social Security wage base of $60,600.00.  The computation is as follows:  $44,321.67 / $22,935.42 X $60,600.00 = $117,106.78; rounded to the nearest multiple of $300.00 or $117,000.00.  See http://www.ssa.gov/oact/cola/cbbdet.html.

Medicare Open Enrollment Period Ends December 7, 2013

With the current confusion regarding health insurance marketplace exchanges, it is important for Americans turning age 65 to remember to enroll in Medicare.  Medicare is not purchased through the Affordable Care Act's individual exchanges, but rather with the Federal government at www.medicare.gov.

Your initial Medicare enrollment period begins three months before the month you turn age 65 and ends three months after the month you turn age 65.  If you are still working for an employer with 20 or more employees, and are covered by health insurance, you may delay enrollment until you stop working.  If you do not enroll on time, your Medicare premiums will be higher by 10% times the number of years you are late in signing up.

If you are already enrolled in Medicare, you do not need to re-enroll, nor do you have to worry about the ACA's health insurance exchanges.  However, during Medicare's annual open enrollment period, you can make changes your Medicare plans.  Medicare's open enrollment began on October 15, 2013 and ends on December 7, 2013.

Medicare is federal health insurance for those age 65 and older.  If you apply for Social Security benefits early, at age 62, it does not make Medicare available to you any earlier than age 65.  Medicare is a self-only policy and does not include family members.  There is no pre-existing condition exclusion.  Medicare insurance consists of several parts, and it is important to enroll in all of the parts for which you desire coverage.
 

·       Part A:  coverage for hospital stays, home health services, and hospice care.

·       Part B:  coverage for doctor services, outpatient care, and medical equipment.

·       Part C:  known as Medicare Advantage, are policies from insurance companies rather than from the Federal government, that provide Part A and B coverage, and often Part D.

·       Part D:  prescription drug coverage, offered through private stand-alone drug plans or by Medicare Advantage plans.

·       Medigap:  private supplemental insurance that covers many of traditional Medicare's (Parts A & B) out-of-pocket expenses.  Medigap is inappropriate for Medicare Advantage plans.

You are not charged premiums for Part A if you or your spouse are eligible for Social Security benefits, otherwise the premiums will be $426.00 per month in 2014.

Premiums are charged for Parts B and D.  The amount of the 2014 premiums vary and are based upon the amount of your adjusted gross income reported on your Federal income tax return for 2012, according to the following table.

If your yearly income in 2012 was			You pay Part B premiums in 2014 of	You pay Part D premiums in 2014 of
File individual tax return	File joint tax return	File married & separate tax return
$85,000 or less	$170,000 or less	$85,000 or less	$104.90	Your plan premium
above $85,000 up to $107,000	above $170,000 up to $214,000	Not applicable	$146.90	$12.10 + your plan premium
above $107,000 up to $160,000	above $214,000 up to $320,000	Not applicable	$209.80	$31.10 + your plan premium
above $160,000 up to $214,000	above $320,000 up to $428,000	above $85,000 and up to $129,000	$272.70	$50.20 + your plan premium
above $214,000	above $428,000	above $129,000	$335.70	$69.30 + your plan premium

Deducting HSA Contributions Made by Someone Else

A Health Savings Account (HSA) is a special financial account to which deductible contributions can be made.  The deduction is an adjustment to arrive at adjusted gross income (AGI), meaning that the account owner does not have to itemize deductions to claim the benefit.  HSA distributions used to pay medical expenses, or to reimburse medical expenses paid by the account owner, are not subject to income tax.  HSA payments of non-medical expenses are subject to income tax plus a 20% penalty.  If the account owner is 65 or older, the penalty disappears but non-qualifying payments remain taxable.

An HSA is only permitted when established in connection with high-deductible health insurance plans (HDHP).  An HDHP, which covers you but not your family, is a plan which has an annual deductible of at least $1,250 in 2013 or 2014, and limits total out-of-pocket expenses to $6,250 in 2013 and $6,350 in 2014.  In the case of family coverage, the plan must have an annual deductible of at least $2,500 in 2013 or 2014 and limit total out-of-pocket expenses to $12,500 in 2013 and $12,700 for 2014.

Contributions for a tax year may be made as late as April 15^th of the subsequent year.  Contributions may not exceed the following amounts: 

	2013	2014
Individual Plan	$3,250	$3,300
Family Plan	$6,450	$6,550
Age 55 catch-up	$1,000	$1,000

An interesting planning idea is that contributions to the account owner’s HSA can be made by anyone.  If a contribution is made by the employer, the contribution is excluded from wages.  If the contribution is made by a parent, the contribution is a gift to the child and the contribution is deductible by the child.  See IRS Publication 969, pages 2 & 4.  In the case of where parents might want to financially assist their children by paying modest amounts of out-of-pocket medical expenses, the parent should consider making a contribution to their child’s HSA instead of directly paying the medical expense.  The child can then use the HSA money to pay the expense.  This enables the child to receive an income tax deduction that would otherwise go to waste if the parent paid the medical expense directly to the service provider.  Reducing the child’s AGI could also open up other tax benefits that are limited by the amount of AGI.

 

This planning idea applies to the following fact pattern:  the child has an HSA in connection with a HDHP, the child is not a tax dependent of the parent, the amount of medical expense to be paid is modest and fits within the parent’s gift tax annual exclusion amount (whereas the direct payment of medical expenses is not counted as a gift for gift tax purposes), and the gift to the HSA, when aggregated with all other contributions, does not exceed the HSA maximum for the year.