Sunday, February 3, 2008

2-Q's--Withdrawal of Application & Medicare Premium Surcharge

Questions from Stephen:

I just have 2 questions I would like for you to address.
Question No.1 -- Fred can wait until age 66 to take full benefits. Instead, he elects reduced benefits at age 62. 100% of those monthly receipts will be accumulated in a savings account. Then at age 66, if Fred survives, they will be repaid, without interest, and then the new benefit at 100% will begin. I asked the SSA if this works. They responded "If you have begun to receive Social Security retirement benefits and decide to stop your benefits, submit Form SSA-521, Request for Withdrawal of Application" . Clearly then, a taxpayer can withdraw and reinstate. And, ignoring the possible adverse tax consequences, it seems like a decision that makes total sense. I just find it a little hard to believe because it violates my "free lunch" rule. If there are no bad tax consequences, then effectively the recipient gets an interest-free loan which can be repaid , or not repaid. And if repaid, 100% of benefits begin at age 66.It would of course be tragic to assume lower benefits can become higher benefits if, for some reason, that option were not available.

Question No. 2 -- Assume Fred has normalized annual income that would not cause the premium surcharge for Medicare premiums to be invoked. But, in 2005 there is a land sale that causes income to balloon, which in turn triggers the surcharge. It's a one-time only event.My understanding is that the SSA has procedures for re-evaluating premiums that result from extraordinary events. I have their "Request for Reconsideration" Form, but it leaves much to be desired. So, my questions is... do seniors who have one-time bumps in income get relief ? Or do they face having the surcharge for, I assume, a 12-month period.

Stephen

ANSWERS:

Question 1-- In reviewing the POMS and Regulations for withdrawal of applications, I cannot find any provision that requires interest to be added to the benefits being refunded. However, giving back all that principal of 47 months of benefits means that you will be losing the interest from the capital once you give it back, not to mention the capital itself. Is it really worth giving back $70,000 in capital to get an extra $500 a month (assuming as an example you get a reduced benefit of $1500 vs. an unreduced benefit of $2000)? The break-even point would be over 11 years. So yes, your strategy would get you interest if you didn't touch the benefits before 66, but why not keep the money in the bank. If you die before 77 you will have lost any advantage, as well as the use of the money that you may very well like to put to use. SSA has a great calculator to figure the break-even age for deciding whether to take benefits earlier or later. http://www.socialsecurity.gov/OACT/quickcalc/when2retire.html

If you decide to follow this stategy make sure that when you withdraw the retirement benefits application you restrict the withdrawal so that you do NOT withdraw your Medicare entiltlement. Otherwise you will have to pay back all Medicare benefits received.

Question 2-- You are talking about the the new Medicare Part B premium rules that started in 2007. Under this new law, Part B premiums are increased for people earning over certain thresholds in the year 2 years before the applicable year. They are re-calculated from year to year. One time bumps in income will result in the higher Part B premium. The exceptions you are referring to apply when there has been a life-changing event that causes a lower income in a later year. The rule allows for 7 kinds of these events, which the government refers to as LCE's (Life-Changing Events- am the only one who gets the chills hearing this acronym?) So your friend's premiums for 2007 are based on his 2005 income, unless due to a Life-Changing Event his 2006 income dropped.

The 7 events are:

Death of Spouse (HI 01120.010)
Marriage (HI 01120.015)
Divorce or annulment (HI 01120.020)
Work Reduction (HI 01120.025)
Work Stoppage (HI 01120.030)
Reduction in income due to loss of income-producing property (HI 01120.035)
Reduction in or loss of certain forms of pension income (HI 01120.040).

The links are to SSA's Programs Operations Manual Systems- the so-called POMS.

Stanley A. Tomkiel, III

1 comment:

Stephen said...

Stanley, thanks so much for your thoughtful reply. You asked if it were really worth giving back $70,000 to get an extra $500 a month. My response is maybe. It would have to be evaluated at that point. A surviving spouse who lived say to age 90 would clearly feel the impact, particularly a younger one. And these days, age 90 is common.
Another factor is, if early retirement is not needed, but social security is deferred, any benefits that could have been taken before FRA are totally forfeited if death comes before then. The person opting to begin early with an eye to repayment ensures that there will be no forfeiture if death happens early. And that sounds like a cheap insurance policy to me.