2015 Napa Williamsburg Special Topics Electronic

Planning Tips to Lower or Avoid Taxation of My Social SecurityBenefits.Financial advisors should be aware that advance planning will help clients minimizetaxation of Social Security benefits. It's best, in other words, not to put off planning untilthe client is at or near retirement so that the best possible strategies can be found. 1. Delay receiving Social Security retirement benefits until age 70 and begin drawing from taxable IRA accounts or taxable annuities after age 59-1/2. Benefit: Clients who wait past FRA until age 70 to receive Social Security benefits get an additional 8 percent per year in projected benefits (DRC). Drawing from a taxable IRA or taxable annuity as soon as possible can potentially help average out distributions to lower tax brackets from age 70 and will reduce the taxable IRA required minimum distribution (RMD) amount that begins at ate 70-1/2, thereby reducing the potential Social Security taxation. 2. Convert taxable IRAs to Roth IRAs before beginning to collect Social Security benefits. Benefit: Converting to a Roth IRA will eliminate or reduce the RMD from taxable IRAs. 3. As an asset allocation strategy, consider investing a portion of taxable IRAs in fixed-income instruments and a portion of after-tax investments in equities. Benefit: This can reduce current taxable income and thereby reduce potential taxation of Social Security benefits. 4. Sell significantly appreciated property before beginning to collect Social Security benefits. 5. For longer-term non-IRA investments with taxable earnings that are being reinvested, consider using tax-deferred annuities. Benefit: This suggestion also has a two-fold tax benefit. The growth in the annuity is tax-deferred, and the client can determine when withdrawals are made and taxes paid. This makes it possible to manage income in any given year and minimize the amount of Social Security benefits subject to taxation. 17

Earnings Limitation for Early Social Security Benefits (betweenage 62 and FRA)If you have earned income during this period, you will be subject to an earnings test thatmay cause your Social Security benefit to be reduced. If this happens, when you reachFRA, your Social Security benefit will be recalculated upward to account for thosemonths in which benefits are withheld.For this purpose, what income counts: If you work for someone else, only your wagescount toward Social Security's earnings limits. If you're self-employed, only your netearnings from self-employment are considered. For the earnings limits, we don't countincome such as other government benefits, investment earnings, interest, pensions,annuities, and capital gains. An employee's contribution to a pension or retirement planis counted, however, if the contribution amount is included in the employee's grosswages.If you work for wages, income counts when it's earned, not when it's paid. If you haveincome that you earned in one year, but the payment was made in the following year, itshouldn't be counted as earnings for the year you received it. Some examples areaccumulated sick or vacation pay and bonuses.If you're self-employed, income counts when you receive it - not when you earn it -unless it's paid in a year after you become entitled to Social Security and earned beforeyou became entitled.General Earnings TestIn 2015, a client who begins collecting Social Security benefits after age 62 and beforeFRA can earn income up to $15,720 without experiencing any reduction in benefits.Their Social Security benefit is reduced by $1 for every $2 of earned income beyond$15,720.Earnings Test During the First Partial YearEarned income prior to collecting benefits is not counted, and the earnings test is appliedon a monthly basis ($1,310 per month for 2015) for the remainder of the first year.These examples show how the rules would affect you: Let's say that you file for SocialSecurity benefits at age 62 in January 2015 and your payment will be $600 per month($7,200 for the year). During 2015, you plan to work and earn $20,800 ($5,080 abovethe $15,720 limit). SS would withhold $2,540 of your Social Security benefits ($1 forevery $2 you earn over the limit). To do this, SS would withhold all benefit paymentsfrom January 2015 through May 2015. Beginning in June 2015, you would receive your$600 benefit and this amount would be paid to you each month for the remainder of theyear. In 2016, you would receive the additional $460 that was withheld in May 2015 18

Or, let's say you weren't yet full retirement age at the beginning of the year, but reach it inNovember 2015. You earned $42,900 in the 10 months from January through October.During this period, SS would withhold $340 ($1 for every $3 you earn above the $41,880limit). To do this, SS would withhold your first check of the year. Beginning inFebruary 2015, you'll receive your $600 benefit, and this amount will be paid to you eachmonth for the remainder of the year. In 2016, SS would pay you the remaining $260 theywithheld in January 2015.Earnings Test in the Year FRA is ReachedThe earnings limit is increased to $41,800 before a reduction applies, and the reduction is$1 of Social Security benefit for every $3 of earned income over the limit. The limitapplies only to the months before reaching FRA. Starting with the month FRA isreached, the client can have unlimited earned income and still receive their full SocialSecurity benefit.The earnings test assumes that people who earn a high income and aren't really \"retired\"don't need as much Social Security income. To discourage them from claiming earlybenefits, part of their benefits are withheld if they earn more than the earnings testamount. The earnings test used to apply to everyone under age 70 (with higher amountafter FRA). In response to complaints that it discouraged older people from working, theSenior Citizens' Freedom to Work Act in 2000 eliminated the earnings test for anyoneover FRA. PLANNING TIP: The Affordable Care Act (ACA) has opened opportunities for people not yet at FRA whereby they do not need to be employed to have access to health insurance. Once someone is age 65, Medicare is the primary health care coverage vehicle, and the ACA specifically excludes Medicare from its jurisdiction.How Does the Cost of Living Adjustment Work?The Social Security Cost of Living Adjustment (COLA) is computed each year based onthe Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) fromthe third quarter of the prior year to the third quarter of the current year. This formulahas been used since 1982. The COLA is then applied to Social Security benefitsbeginning in the next calendar year.Retiring While Caring for a Minor ChildWhen you qualify for Social Security retirement benefits, your children, and potentiallyyour spouse may also qualify to receive benefits based on your record. There arequalifications that must be met, and the family maximum limitations outlined in the 19

\"Social Security Survivors Benefits\" section must also be met. More information can befound at www.ssa.gov/retire2/yourchildren.htm.Eligible children include a biological child, an adopted child, or a stepchild. A dependentgrandchild may also qualify.To receive benefits, the child must be unmarried and either: • under age 18 • age 18-19 and a full-time student in 12th grade or less, or • age 18 or older and disabled from a disability that started before age 22Qualified children can receive up to 50 percent of the worker's benefit. A spouse, of anyage, can also receive up to 50 percent of the worker's benefit if he or she is caring for achild younger than age 16 or a disabled child. Note that a spouse's benefit received as acaregiver is not reduced below 50 percent before FRA, as the standard spousal benefitwould be.The total family reimbursement benefit is limited to a family maximum of 150 percent to180 percent of the worker's retirement benefit. If the total family benefit exceeds themaximum allowed, the worker's benefit is not affected; only the spouse and children'sbenefits would be reduced. The amount of the reduction would be adjusted each yearbased on the total benefit. PLANNING TIP: Workers with qualifying children should file for Social Security retirement benefits at their FRA to enable their children and spouse to receive benefits based on their record. If they do not need their own benefits, they can suspend their benefits until age 70.How Can I Find Out What My Social Security Benefit Will Be?The SSA website has a benefit calculator that can be used to estimate the client's SocialSecurity benefit. The estimator can be used as long as the client has 40 QC and is notalready receiving Social Security benefits under his or her own or someone else's recordof if they are subject to the Windfall Elimination Provision (WEP).The Retirement Estimator uses your actual Social Security earnings record and is foundat www.socialsecurity.gov/estimator/.Paper statements showing your expected benefits, earning history, and other informationwere last issued in 2010. This information is now available at www.ssa.gov/myaccount/where anyone can get their personal Social Security statement online. First, create a \"mySocial Security\" account online. Once the account is created, the Social Securitystatement can be viewed online at any time. 20

PLANNING TIP: Mistakes in the earnings record are best corrected as soon as possible. Clients can use their earnings statements to verify the need for adjustments If the earnings record is not verified periodically, suggest that clients keep Form W-2 or other earnings records (such as Schedule K-1) for the length of their work life so they can verify earnings history should there be a question when they apply for Social Security benefits.How Are My Social Security Benefits Calculated?Although the SSA calculates this benefit, it is helpful for an advisor to know the basic ofhow the calculation works to understand how an additional year of earnings will affectthe client's projected benefit. There are also certain income allocation situations in whichthis background knowledge could be helpful.The actual computation to determine a person's Social Security benefit involves a two-step process. The first step is to compute the average indexed monthly earnings (AIME).The second step is to compute the primary insurance amount (PIA) based on the AIME.How Is AIME DeterminedFor each year in which a person has taxed Social Security earnings, those earnings areindexed to bring each of those prior year's earnings to near-current wage levels (basicallyadjusting for inflation). Each prior year's index is different and is computed by dividingthe national average wage index for the year the client attains age 60 by the average wageindex for each prior year. The index used for the year a person attains age 60 and eachyear after is 1.0. The resulting index factor is then multiplied by the person's actualearnings for that particular year to bring earnings up to the indexed earnings amount. Forexample, based on the table in Appendix C, if the client's earnings record for 1984 (CaseA) showed $15,514 of tax Social Security earnings, then it would need to be multipliedby an index factor of 2.7820 to calculate an inflation-adjusted earnings amount of$43,160 in 2015. This same calculation is done for all years.The highest 35 years indexed earnings are then added together and divided by 420, thenumber of months in a 35-year period, to arrive at AIME. If a person has less than a 35-year history when they reach age 60, the indexing is calculated as shown previously,added together, and then divided by the months in the number of years in the calculation.What is PIA?PIA is the monthly benefit a person would begin receiving at FRA. The benefits formulahas three tiers, separated by two \"bend points\" whose levels are determined for the yearin which a person attains age 62. They are called bend points because a graph of thebenefits calculation would have a bend in the line at these two points. Each year, thebend points are adjusted based on average wage indexes. 21

Examples from AIME Table in Appendix CPIA Calculation Case A PIA Case B PIA 2015 Bend $743.40 2011* Bend $674.1090% of AIME amount upTo the first bend Points Points $826 $749 FIRST BEND $826 $74932% of AIME amount $2,918 $933.76 $3,768 $1,205.76 Between the two bends $4,980 $4,517 SECOND BEND15 % of AIME amount n/a Excess over $569.55Over the second bendCalculated PIA $3,797 $1,677.16 $2,449.41**AIME amounts $3,744 $8,314PIA as % of AIME 44.8% 32.0% * Bend points used in the PIA calculations are from the year of initial eligibility.** Final PIA is $2,663.80 (32.0% of AIME) after adjustments for COLAs between 2011 and 2015.Using the AIME from the SSA website for Case A and Case B, the resulting PIA for eachwould be $1,677 and $2,664, respectively. The maximum monthly benefit for someoneat FRA in 2015 is $2,664. As this example illustrates, lower earners receive a greaterpercentage of their pre-retirement income then higher earners. The computed benefit as apercentage of the AIME for the lower earner (Case A) is 44.8 percent, whereas the higherearner (Case B) receives only 32.0 percent of the AIME as a monthly benefit. Thisillustrates the point that for higher wage earners, particularly those over the SocialSecurity wage base, Social Security will replace a much smaller percentage of wages.The PIA is indexed for inflation between the time the person reaches age 62 and the timehe or she hits FRA. If the client works past age 62 and earns more than he or she did inany one of his or her earlier top 35 years of earnings, the PIA will go up. If the personearned less than any of the top 35 years, the PIA would not decline.PLANNING TIP: Spouses who have the flexibility to allocate income betweenthem, such as self-employed couples or those involved in a closely held business,can use the bend points in the PIA formula and AIME to determine the bestallocation of income between them to maximize their benefit as a percentage ofincome. For example, they could choose to maximize one spouse's income at theSocial Security wage base, or alternatively, equalize both spouses under the wage 22

base to get the highest percentage of income replaced by the Social SecurityBenefit. See the example that follows.Example: Assume a couple operates a small business with a bottom line profit of$130,000 and the husband and wife can allocate that income any way they wish betweeneach other. We'll look at two scenarios:Scenario #1: Maximize one spouse at $117,000 each year and give the other spouse a wage of $13,000$13,000 salary Spouse 1 Spouse 2 TotalResults in AIM of $1,083 with a PIA of $820$117,000 salary $2,642 $3,462Results in AIM of $9,750 with a PIA of $2,772, but $820 $3,963Is maxed at 2014 max of $1,32l $2,642 $2,642 Total SS Benefit SS Benefit Using Spousal BenefitScenario #2: Equalize each spouse at $60,000 of salary each Spouse 1 Spouse 2 Total$65,000 salary $2,122 $2,122 $4,244Results in AIM of $5,417 with a PIA ofBased on each spouse's own Social Security benefit, it would appear Scenario #2 isbetter. However, if the lower-earning spouse in Scenario #1 elects a spousal benefit, thenScenario #1 comes close to Scenario #2 and would stand up to IRS scrutiny better if thelower-earning spouse is not very active in the business. Scenario #2 would be better ifyou have a young couple, and one spouse became disabled or died. Survivors benefitswould be much larger with Scenario #2 compared to Scenario #1.The resulting conclusion is that there is no one right answer, and each situation needs tobe examined independently to determine the best outcome.QUESTION:What happens if I retire and start collecting Social Security benefits but then go back towork later on? Can I stop taking benefits, then collect again when I am finished with thesecond career? Would my benefits increase because of my additional years worked, or ismy payment fixed (plus the COLA) once I start collecting the first time? 23

RESPONSE:The answer depends on whether you are under or over your FRA,. If you are under FRAand collecting reduced benefits, you don't need to do anything. Your benefit would bewithheld as appropriate and, when you reach FRA, your benefit would automatically berecomputed to remove the actuarial reduction from those withheld months (due to excessearnings before FRA).If you are over FRA when you initially apply, you may, at any time, ask to have yourbenefits suspended. Why would you want to do this? Even though you are not subject tothe earnings test and, therefore, would not have any benefits withheld, you may want toearn DRCs. Suspending your benefits would enable you to earn 8 percent DRCs up toage 70. The option to voluntarily suspend benefits in order to DRCs was authorized bythe Senior Citizens' Freedom to Work Act of 2000.It is always possible to increase your benefit by improving your earnings record, evenafter you've started receiving your benefit (or if you are delaying). You'll remember thatthe benefit is based on the highest 35 years of earnings. If you earn enough to knock offone our your zero or low-earning years, your benefit may go up by a few dollars. PLANNING TIP: Don't lose out on DRCs. The bottom line for anyone who would have all or most of his or her benefits withheld due to the earnings test: It's easier to wait until FRA or later to apply. For married workers, waiting also increases the survivor benefit, so even if the worker dies before collecting the increased benefit, his or her spouse will receive a higher benefit.Client Planning IdeasTiming of Application for Social Security BenefitsClients should apply at least four months before the date they wish to begin receivingSocial Security benefits. The SSA will only pay six months in arrears on benefits claims. PLANNING TIP: If a person is past their FRA and is submitting their initial application for Social Security retirement benefits, be sure and also claim the six months of retroactive benefits that are allowed.Strategies on When to Begin Social Security BenefitsThese strategies are based on statistics, averages, life expectancy tables, and returnassumptions. Each person's individual circumstance must be taken into account whenoffering advice or suggesting a particular strategy. Other factors to consider but notincluded here are personal health of the individual, family health history, financial need, 24

earnings potential from age 62 to FRA, marital status, and other retirement assets orincome sources.Decisions for IndividualsShould I start collecting benefits at age 62 or wait until FRA (assuming age 66)?A person who begins Social Security benefits at age 62 will receive 75 percent of theprojected benefit he or she would receive at FRA. The difference in benefit is permanent.The break-even point, when the total dollars received by waiting to age 66 begin toexceed total dollars received by beginning at age 62, is approximately age 77. Lifeexpectancy tables show that a person who has attained age 62 will live to be 85.5, and aperson who has attained age 66 will live to be 86.2. Keep in mind that the difference inbenefit is also compounded because future benefits grow by the COLA. That means thata client beginning Social Security benefits at age 62 is also giving up COLA increases onthe missing 25 percent. COLA increases have averaged 3.95 percent in the 38 yearssince it was made permanent in 1975. Using an inflation factor of 2 percent, a $250difference in monthly benefit today, at age 62, will grow to a $333 difference in monthlybenefit by age 95. Suggestion: Wait until FRA to begin Social Security benefits. Exceptions: If you are physically unable to work beyond age 62, you are in poor health, or you do not have other sources of income.Should I start at FRA (age 66) or wait until age 70?A person who continues to delay receiving Social Security benefits beyond FRA receivesan 8 percent per year increase in benefit that is not compounded; however, the COLAwould be applied and compound annually. Waiting to age 70 will hike the individual'sbenefit by 32 percent above what he or she would receive if they began at age 66. Thebreak-even point, when the total dollars received by waiting to age 70 begin to exceedtotal dollars received by beginning at age 66, is approximately age 81.Life expectancy tables show that a person who has attained age 66 will live to be age86.2, and a person who has attained age 70 will live to be 87. Suggestion: Wait until age 70 to begin Social Security benefits. This suggestion takes on added significance when consulting a married couple. See the section that follows and the section \"Social Security Survivors Benefits\". Exceptions: Because the break-even point is age 81, if most people in your family history do not live much beyond their early 80s, it may not be advantageous to wait. 25

Here are some additional items to keep in mind as you make this decision. • Claim and suspend • At any point prior to age 70, a person who has deferred their benefit can reinstate his or her benefit effective with any month because he or she suspended and received a lump-sum payment for the retroactive benefits. This allows the person to reevaluate his or her decision to suspend in light of unplanned events, such as extended illness or financial difficulty. This election is not available to survivors and must be made by the person that suspended (SSA POMS GN 02409.130). • For currently married couples, there is the added advantage that either member of the couple can live long enough to make the break-even analysis on delaying the retirement benefit past his or her FRA worthwhile. • If the individual has survivors (see the section \"Social Security Survivor Benefits\" for definitions), delaying retirement benefits past his or her FRA also increases survivors benefits. • If the individual has minor children, file and suspend will enable his or her retirement benefits to be paid to the children. PLANNING TIP: If you have suspended Social Security benefits at or after FRA and are on Medicare Part B, pay the premium out of your own pocket. The government will pay your Medicare Part B premium if you have suspended benefits, but then you will not get the 8 percent per year DRCs. Medicare Part B premium increases are limited to the increase in Social Security benefits if you are collecting benefits but not if you have suspended benefits. You will be subjecting yourself to potentially higher increases in the Medicare Part B premium by suspending benefits between FRA and age 70. This applies to singles under $85,000 of income and joint filers under $170,000 of income, Persons with incomes greater than those amounts are currently subject to much higher premiums for Medicare Part B. PLANNING TIPS: For single individuals that do not need the income, consider a file and suspend strategy that allows them both to lock in the larger monthly benefits later and hedge their bets with the ability to reinstate at any point with retroactive benefits.Here is an important risk consideration for any delay in receiving Social Securitybenefit payments: 26

After death, Social Security benefits are not retroactive. A sudden and untimely deathduring the delay in receiving Social Security retirement benefits leaves a survivingspouse or estate with no value in hand for the years Social Security was not taken. Claiming Strategies - Decisions for Couples Little Known (But Very Powerful) Strategies • Claim and suspend - file an application for Social Security benefits but suspend checks - allows SPOUSE to file for spousal benefits. Also builds a cash reserve. • Restricted application - allows WORKER to file only for spousal benefits even if own benefits would be higher. WORKER can wait to age 70 to draw own benefits and received Delayed Retirement Credits - 32% • ONLY AVAILABLE AT FULL RETIREMENT AGE When can or should my spouse begin taking the spousal benefit? A nonworking spouse can collect a spousal benefit (1/2 of the worker's benefit) based on the earnings of his or her working spouse when the worker applies for his or her own benefit (the worker does not need to start collection, he or she could defer the benefit). A working spouse can collect a spousal benefit when his or her spouse applies for benefits if half of the spouse's benefit is greater than his or her own benefit at his or attained age.QUESTION: Can my spousal benefit be reduced by the earnings test?RESPONSE: Yes, spousal benefits (and survivors benefits) are subject to theearnings test and are based on the earnings of the person receiving the benefits. Sospousal benefits would be affected by the spouse's earnings, and the worker's benefitswould be affected by the worker's earnings.Can or should my spouse begin receiving benefits before I do (using file andsuspend)?A worker who wishes to wait until age 70 to begin collecting benefits would disqualifyhis or her spouse from collecting spousal benefits until that time. Recognizing this, theSSA developed a method for the nonworking or lower-earning spouse to begin a spousalbenefit before his or her working spouse collects his or her own benefit at age 70. Fileand suspend allows the working spouse to file for Social Security benefits at FRA andthen immediately suspend receiving his or her own benefit so it can accumulate the DRC(additional 8 percent per year to age 70). Because he or she has filed, the nonworking or 27

lower-earning spouse can collect the spousal benefit on the worker's earnings record atthe worker's FRA value. Spousal benefits do not accrue additional DRCs if the clientwaits beyond FRA for the nonworking or lower-earning spouse. Spousal benefits also donot earn the worker's benefit increases from age 66 to age 70.Assuming the Social Security retirement benefit is not needed, the file and suspendoption should be used in most situations with a wage earner and a nonworking spouse. Itshould also usually be used when the lower-earning spouse's lifetime earnings aresignificantly less than the higher-earning spouse's.ISSUE: I have delayed applying for my own Social Security benefit (I will be turning66 in a few months) and tried to apply for a spousal benefit on my spouse' record (sheturned 66 last year and had been receiving her own benefit). The representative at theSocial Security office told me that I could not do this because I was eligible to receive myown benefit. What do you recommend in this situation? Is there a particular ruling orbulletin that I could reference with the people at the Social Security office?RESPONSE: Choosing between your own higher benefit and a lower spousalbenefit can be a confusing decision even for Social Security representatives who mightnot be familiar with all the regulation details. Here are the references that allow a highearner (or anyone) to claim their spousal benefit at FRA and delay their own benefit inorder to build DRCs.The \"Benefits for Your Spouse\" webpage (www.ssa.gov/retire2/yourspouse.htm) says, \"Ifyour spouse has reached full retirement age and is eligible for a spouse's benefit and hisor her own retirement benefit he or she has a choice, Your spouse can choose to receiveonly the spouse's benefit now and delay receiving retirement benefits until a later date. Ifretirement benefits are delayed a higher benefit may be received at a later date based onthe effect of delayed retirement credits.\"The Program Operations Manual System (POMS), which is the reference source used bySocial Security personnel, also supports the strategy. Section GN00204.004(B) says inpart: \"a spouse claimant at or past Full Retirement Age (FRA) has the right to restrict theapplication to exclude RIB\". (RIB is retirement income benefit). seehttp://secure.ssa.gov/apps10/poms.nsf/lnx/0200204004!opendocument.In addition, section GN00204.020(d)(1) says: \"A claimant may choose to limit or restrictthe scope of the application to exclude a class of benefits he/she may be eligible toreceive on one or more SSNs for any reason (except where deemed filing applies). Thereason may be to receive higher current benefits or to maximize the amount of benefitsover a period of time (see GN00204.042) including the effect of delayed retirementcredits (DRCs). Seehttps://secure.ssa.gov/apps//poms.nsf/lnx/0200204020!opendocument. 28

In October 2010, this was confirmed with the SSA Press Office, which emphasized thatwhen the client applies, he must make it clear that he is \"restricting\" his application to thespousal benefit only. If necessary, he should tell the Social Security representative thathe is not applying for his own benefit at this time. Otherwise, he may be told that hisown benefit is higher and that he must take it.ISSUE: Dave and Carol are basically the same age and have basically the same PIA,Can they both \"file and suspend\" their own benefits, then each apply for their respective\"spousal benefits\", allowing both to collect Social Security benefits while both delaystarting their own Social Security benefits, and earning DRCs.RESPONSE: According to Social Security, both spouses cannot claim \"spousalbenefits\" on the other's record simultaneously.Simply put, if Dave files and suspends, Carol can claim her spousal benefit. At FRA shemay restrict her application to her spousal benefit so that her own benefit earns DRCs.She is entitled to her spousal benefit because Dave has filed for (and suspended) his ownbenefit. But now Dave can't claim his spousal benefit because he has already filed for hisown benefit, even though it was voluntarily suspended.Married couple when only one has earnings:1. If one spouse has no earnings and (and no benefit of their own):The wage earner can file and suspend, and the non-wage earner would apply for thespousal benefit. The earliest this can be done is after the non-wage earner reaches age 62,and the wage earner is at FRA or later.Because this is the benefit that the non-wage earner will receive for the remainder of hisor her life (unless predeceased by the wage earner), it's necessary to decide whether totake the reduced spousal benefit at age 62 or the full spousal benefit at his or her FRA(see this discussion under \"Decisions for Individuals\").Regardless, when the wage earner starts collecting his or her higher deferred benefit (nolater than age 70), the spousal benefit is not adjusted. It continues to be based on thewage earner's FRA benefit, not the higher deferred benefit. 29

Non-Wage Earner Timeline Example Age 62 FRA Age 70____________________________________________________________________Higher wage earner with$2,000 FRA benefit File and suspend Begin $2,640 BenefitNon-wage earner Begin $700 spousal benefit OR Begin $1,000 spousal benefit at FRANon-wage earnerNote: Beginning at age 62 on your own earnings history is a 25-percent reduction fromFRA. Beginning at age 62 with a spousal benefit on your spouse's work history is a 30-percent reduction from what you would receive at FRA. See:http://ssa.gov/retirement/1943.html.Married couple when both have an earnings record:2. If the lower earner's earnings are significantly lower:If the lower earner's reduced or FRA benefit is less than the spousal benefit he or shewould receive from the higher earner's FRA benefit, then the lower earner should beginhis or her benefits at age 62. The higher earner should file and suspend at FRA. Thelower earner can potentially step up to a higher spousal benefit at that time or when thelower earner attains his or her FRA.Example: Don, the lower wage earner, has a projected monthly benefit at FRA of $600.Sue, the higher wage earner, has a projected monthly benefit at FRA of $2,000. Donbegins collecting his own benefit at age 62 and receives $450 per month ($600 X 75%).Sue files and suspends at FRA. When Don reaches FRA, he switches to spousal benefitsand receives an increase in monthly benefit of $400 (1/2 of spouse's FRA benefit of$2,000 less his own FRA benefit of $600). Don is then receiving a monthly benefit of$850 (his original reduced benefit of $450 plus the additional spousal benefit of $400).Sue begins her enhanced benefit of $2,640 per month at age 70. (COLA adjustmentshave been ignored here for ease of illustration.) 30

Significantly Lower Wage Earner Timeline Example Age 62 FRA Age 70______________________________________________________________________________________Higher wage earner with$2,000 FRA benefit File and suspend Begin $2,640 benefitLow wage earner with$600 FRA benefit Begin $450 benefit Add spousal benefit for a total $850 benefitORLow wage earner with$600 FRA benefit Begin $1,000 spousal benefit at FRA______________________________________________________________________________________3. If the lower earner's earnings are not significantly lower:The lower earner should begin his or her own benefit at age 62. The higher earner shouldbegin spousal benefits on the lower earner's record at FRA, waiting to apply for his or herown benefit until age 70.Example: Sally, the lower earner, has a projected monthly benefit at FRA of $1,400.Jim, the higher earner, has a projected monthly benefit at FRA of $2,000. Sally beginsher own benefit at age 62 and receives $1,050 per month ($1,400 x 75%). Jim files forspousal benefits on Sally's earnings at FRA and begins receiving a benefit of $700 permonth (1/2 of $1,400). Jim begins his enhanced age 70 benefit of $2,640 per month atage 70. Jim's enhanced benefit is not reduced because he waited until FRA to begin inthe spousal benefit. (COLA adjustments have been ignored here for ease of illustration.) Not Significantly Lower Wage Earner Timeline Example Age 62 FRA Age 70______________________________________________________________________Higher wage earner with File for $700 spousal Begin $2,640 benefit$2,000 FRA benefit benefitsLow wage earner with Begin $1,050 benefits$1,400 FRA benefitAn individual cannot file and suspend while collecting a spousal benefit. The client mustchoose one or the other. Situations #1 and #2 use file and suspend to provide the muchlower-earning spouse an increase in monthly benefit using the spousal benefit. Insituation #3, the higher-earning spouse waits to apply for his own benefit at age 70.Using file and suspend in situation #3 would not offer the lower-earning spouse anyincrease in monthly benefit and would also prevent the higher-earning spouse fromreceiving a spousal benefit. 31

Important note for the higher earner in situation #3: When the high earner reachesFRA, he would not file and suspend, but instead, would apply only for the spousalbenefit. This is an important, but often misunderstood, point. Once again, we willemphasize the need for the client to specify to the SSA that he or she is applying only forthe spousal benefit if he or she wants to earn DRCs after FRA.ISSUE: I am taking a spousal benefit. It is my understanding that I can later elect totake my own full benefit. Where can I find that rule in the Social Security benefit rulebook?RESPONSE; It is correct that someone receiving a spousal benefit can change to his orher own benefit - as long as the spousal benefit starts at your FRA or later. On the SSAwebsite, the \"Benefits for Your Spouse\" page (www.ssa.gov/retire2/yourspouse.htm)says:\"If your spouse has reached full retirement age and is eligible for a spouse's benefit andhis or her own retirement benefit, he or she has a choice. Your spouse can choose toreceive only the spouse's benefit now and delay receiving retirement benefits until a laterdate. If retirement benefits are delayed, a higher benefit may be received at a later datebased on the effect of delayed retirement credits.\"ISSUE: My husband is age 60. If he waits to collect spousal benefits until he is age 66,what will he receive? Will it be 50 percent of my reduced Social Security benefit at myage 62? Or 50 percent of my FRA PIA when he turns 66? I understand he would get 50percent, but I don't know what I am figuring that on if I have already begun receivingSocial Security benefits.RESPONSE: The amount of the spousal benefit depends on when he applies. It isbased on the worker's (in this case, the wife's) PIA. This is the benefit you would receivehad you waited until age 66 to apply. The benefit the worker (wife) is currently receivingis not relevant to the spousal formula.So, for example, let's say both husband and wife are age 62. The wife has a PIA of$2,230. This means that if she applies at age 66, her benefit will be $2,230 (not countingCOLAs). If she applies now, she'll receive a reduced benefit of $1,673. If her husbandwaits until age 66 to apply for his spousal benefit, he will get 50 percent of $2,230 or$1,115.Social Security and Same-sex CouplesThe Supreme Court's Windsor decision on June 26, 2012, struck down the portion ofDOMA (federal Defense of Marriage Act) that defined marriage as a \"union between aman and a woman\". Because of this, the SSA now can approve spouses' claims involvingsame-sex marriages. 32

The SSA has additional information for same-sex couples on their website atwww.socialsecurity.gov/same-sexcouples.DECISIONS FOR WIDOW(ER)S\"Life Insurance\" from Social SecurityMany people think of Social Security only as a retirement program. But some of theSocial Security taxes you pay go toward providing survivors insurance for workers andtheir families. In face, the value of the survivors insurance you have under SocialSecurity is probably more than the value of your individual life insurance.When you die, certain members of your family may be eligible for survivors benefits.These include widows, widowers (and divorced widows and widowers), children anddependent parents.How Do I Earn Survivors Insurance?As you work and pay Social Security taxes, you earn credits toward your Social Securitybenefits. The number of years you need to work for your family to be eligible for SocialSecurity survivors benefits depends on your age when you die. The younger you are, thefewer years you need to work. But no one needs more than 10 years of work to beeligible.Under a special rule, if you have worked for only one and one-half years in the threeyears just before your death, benefits can be paid to your children and your spouse who iscaring for the children.Who Can Get Survivors Benefits Based on Your Work? • Your widow or widower may be able to receive full benefits at full retirement age. The full retirement age for survivors is age 66 for the people born in 1945- 1956 and will gradually increase to age 67 for people born in 1962 or later. Reduced widow or widower benefits can be received as early as age 60. If your surviving spouse is disabled, benefits can begin as early as age 50. For more information on widows, widowers and other survivors, visit www.socialsecurity.gov/survivorplan. • Your widow or widower can receive benefits at any age if she or he takes care of your child who is receiving Social Security benefits and is younger than age 16 or disabled. • Your unmarried children who are younger than age 18 (or up to age 19 if they are attending elementary or secondary school full time) also can receive benefits. 33

Your children can get benefits at any age if they were disabled before age 22 and remain disabled. Under certain circumstances, benefits also can be paid to your stepchildren, grandchildren, step-grandchildren or adopted children. • Your dependent parents can receive benefits if they are age 62 or older. (For your parents to qualify as dependents, you would have had to provide at least one- half of their support.)Benefits for Surviving Divorced SpousesIf you have been divorced, your former wife or husband who is age 60 or older (50-59 ifdisabled) can get benefits if your marriage lasted at least 10 years. Your former spouse,however, does not have to meet the age or length-of-marriage rule if he or she is caringfor his/her child who is younger than age 16 or who is disabled and also entitled based onyour work. The child must be your former spouse's natural or legally adopted child.Benefits paid to you as a surviving divorced spouse who meets the age or disabilityrequirement as a widow or widower won't affect the benefit rates for other survivorsgetting benefits on the worker's record. However, if you are the surviving divorcedmother or father who has the worker's child under age 16 or disabled in your care, yourbenefit will affect the amount of the benefits of others on the worker's record.One-time Death PaymentThere is a one-time payment of $255 that can be made when you die if you have workedlong enough. This payment can be made only to your spouse or child if they meet certainrequirements. Survivors must apply for this payment within two years of the date ofdeath.How Do I Apply for Benefits?If you are not currently getting Social Security benefitsYou should apply for survivors benefits promptly because, in some cases, benefits will bepaid from the time you apply and not from the time the worker died.If you are already getting Social Security benefitsIf you are getting benefits as a wife or husband based on your spouse's work, when youreport the death to us, we will change your payments to survivors benefits. If we needmore information is needed, you will be contacted. 34

If you are getting benefits based on your own work, call or visit the SSA to see if you canget more money as a widow or widower. If so, you will receive a combination ofbenefits that equals the higher amount. You will need to complete an application toswitch to survivors benefits, and provide spouse's death certificate.Survivors Benefits for Widow(er)sA surviving widow(er) who is at or above FRA generally receives 100 percent of thehighest benefit received by the couple before the spouse's death. A surviving widow(er)who is under FRA and age 60 or over receives a reduced benefit of 71 percent to 99percent of the deceased spouse's benefit, but no less than what the widow(er) wasreceiving before the spouse dies,. A widow(er) can begin claiming a survivor benefit atage 60.What if I Work?If you work while getting Social Security survivors benefits and are younger than fullretirement age, your benefits may be reduced if your earnings exceed certain limits.There is no earnings limit beginning with the month you reach full retirement age.Also, your earnings will reduce only your benefits, not the benefits of other familymembers.Should a widow(er) take survivors benefits at age 60?Example: Let's look at four ways to begin benefits: • Option #1 - Begin survivors benefits at age 60 as allowed • Option #2 - Begin survivors benefits at FRA • Option #3 - Begin his or her own benefits at age 62 and switch to survivors benefits at FRA • Option #4 - Begin survivor benefits at age 60 and switch to his or her own benefits at age 70 35

Widow(er) Survivors Benefits Timeline Example Age 60 Age 62 Age 66 (FRA) Age 70________________________________________________________________________Option #1 Begin survivors benefits @ 30% reduction Begin full survivors benefitsOption #2Option #3 Begin reduced benefits Switch to survivors benefitsOption #4 Begin survivors benefits @ 30% reduction Begin deferred worker benefitObviously, taking one's own reduced benefit at age 62 and then switching to the survivorsbenefits at FRA (option #3) is always going to be better than waiting until FRA to beginthe survivors benefits (option #2). But how does option #3 compare to beginningsurvivors benefits at age 60 (option #1)? Starting to collect survivors benefits at age 60results in a 28.5 percent reduction (assuming age 66 is FRA) in benefits from the amountthat would be received at FRA. The decision is similar to collecting one's own benefit atage 62 or at FRA. The break-even point, when the total dollars received under option #3(taking one's own reduced benefit at age 62 and then switching to survivors benefits atFRA(assuming age 66) exceed total dollars received under option #1 (beginningsurvivors benefits at age 60), is approximately age 74.If the widow(er)'s own retirement benefit is larger than the survivor's benefits (or wouldbe if deferred to age 70), than another option might be to take the survivors benefits ateither age 60 (reduced) or FRA (full) and delay his or her other retirement benefit untilage 70.Remember that early benefits decisions are made independently for survivor andretirement benefits (that is, taking a survivor benefit early does not affect the amount ofthe retirement benefit).How do the options change if the widow(er) remarries?A widow(er)'s survivors benefits are only available if he or she remarries after the age of60, similar to spousal benefit based on earnings of an ex-spouse (see the \"Divorce\"section).If the widow(er) remarries prior to age 60, the couple would make decisions betweenspousal benefits and retirement benefits like any other married couple (see the sections\"Decisions for Individuals\" and \"Decisions for Couples\").If the widow(er) remarries after the age of 60, he or she could potentially choose thelarger of up to three different benefits, depending on his or her work history, maritalstatus, and when he or she remarried. 36

• A survivor benefit based on a deceased spouse's benefit• A spousal benefit based on his or her living spouses PIA at his or her FRA• His or her own retirement benefitA key piece of information in this decision is how his or her own retirement benefit atFRA compares to his or her survivor benefit (at the age 60 reduced amount and FRA fullamount) and his or her spousal benefit (at the age 62 reduced amount and FRA fullamount). Another key piece is the income differentials between the deceased and livingspouses.Option #1 - If his or her own retirement benefit is lower than the survivor or spousalbenefit, then he or she would likely take the reduced survivor benefit at age 60 and atFRA change to the full spousal benefit if it is higher. The survivor benefit is either 71.5percent (early) or 100 percent (full) of the deceased spouse's benefit versus a spousalbenefit of either 35 percent (early) or 50 percent (full) of the livings spouse's benefit. So,based on the income differentials between the deceased and living spouses, it should beclear which is more advantageous to take.Option #2 - If his or her own retirement benefit is higher than the others, he or she couldchoose between the survivor or spousal benefit, as in option #1, but delay his or her ownbenefit until age 70 to maximize the total benefits received.Filling in the expected benefits in the boxes that follow helps visualize the components inthe decision-making process. In this example, assume the deceased spouse's benefit was$1,000, and the living spouse's retirement benefit is $2,000, and the former widow(er)'sretirement benefit is $1,000. Age 60 Age 62 Age 66 (FRA) Age 70________________________________________________________________________Survivors 70 % of 100% of deceasedBenefit FRA amount Spouse Benefit $1,000 $700Spousal 70% of 50% of livingBenefit FRA amount Spouse benefit $700 $1,000Retirement 75 % of Full Retirement Deferred benefitBenefit FRA amount Benefit 132% of FRA $750 $1,000 $1,320________________________________________________________________________ 37

It becomes clear that to maximize lifetime benefits the widow(er) should take the reducedsurvivors benefit at age 60 ($700), then at FRA, file for a spousal benefit under the livingspouse's benefit )($1,000), and then finally file for his or her own retirement benefits atage 70 ($1,320). PLANNING TIP: Remind your clients and their parents who are widow(er)s to evaluate whether they should begin to collect social security at age 60 as survivors benefit. The SSA will not notify them of their eligibility for survivors benefits.Repay and ReapplyIt is possible to withdraw a Social Security application, using Form 521, repay all thebenefits received to date in one lump sum with no interest, and then start collecting againat a future date. This election must be used within 12 months of the first month in whichbenefits are received and may only be done once in a lifetime. The repay provisionapplies to all benefits received on the worker's earnings, including spousal and children'sbenefits. Why would someone wish to do this? Say a client began benefits at age 62 andthen found a \"dream job\" 9 months later and went back to work. Or, a client begancollecting benefits at FRA, then came into an inheritance. They would now like to delayuntil age 70 for Social Security so they can collect an additional 8 percent for each yearthey wait. A widow(er) might elect to repay and reapply if his or her spouse beganbenefits at age 62 due to poor health and then died a few months later. The widow(er)would be left with a lower survivor benefit for the rest of his or her life because his or herspouse began collecting benefits before FRA. If possible, he or she might consider usinglife insurance proceeds to cover living costs and repay and reapply at his or her own FRAto receive a much higher survivors benefit. PLANNING TIP: There may be some confusion on the repay and reapply option because prior to December 8, 2010, there was no 12-month or once-in-a- lifetime restriction, and many media articles promoted it as an interest-free loan. Although it is still a valuable tool, it is important to be aware of the limitations in advance so clients who would benefit from it can do so within the time limits.Benefit ReductionsThere are two benefit reductions that affect people who have not paid into the SocialSecurity system. The WEP potentially reduces the Social Security benefit received basedon the worker's own earnings history. The Government Pension Offset (GPO) potentiallyreduces a Social Security benefit received based on someone else's earning record (forexample, spousal or survivor benefits). 38

Social Security and DivorceWhat are your options if you're divorced? Not many people realize it's still possible tocollect spousal or survivor benefits based on your ex-spouse's work record. There are afew requirements, though: • You must be at least 62 years old, and the benefit you would receive based on your own work record must be less than the spousal benefit you'd receive,. • Your marriage must have lasted for at least 10 years. Whether your ex-spouse remarried has no bearing on your spousal benefit. • You must still be single, or if you married again, that marriage must also have ended before your start collecting. You could then choose to collect benefits based on either spouse's work history, whichever benefit is higher - but you can't collect on both. • You can still collect the spousal benefit if your ex-spouse hasn't applied for Social Security but is eligible for it. To do this, you must have been divorced for a least two years. PLANNING TIP: Remember that the marriage must have lasted at least 10 years for ex-spouse to collect benefits. If you are advising a soon-to-be-divorced lower earner whose marriage is in its ninth year, you might advise him or her to wait a bit longer with this timeline in mind. PLANNING TIP: A 50-something client who has been in a long marriage may want to wait until after age 60 to remarry in order to maintain as many Social Security options as possible.Divorcing a Social Security disability recipient or Social Security retirement recipient hasimplications if children from a prior marriage are involved. Stepchildren of a SocialSecurity disability or retirement recipient are eligible for the children's benefits if underage 18 and in school. The stepchild's disability benefit will end in the month followingthe month of the divorce finalization.ISSUE #1: I was a widow but have since remarried. I am 57 years old. I did not find outuntil after I got married that I would lose my survivors benefits if I married before age 60.I can divorce my current husband and claim my widow's benefit at age 60. After I beginreceiving my widow's benefit, I then intend to remarry my current husband. Will thisqualify me to receive benefits again? Am I misunderstanding something, or is this aloophole I have found? I and my late husband worked too hard and paid too much intoSocial Security not to receive what I have coming. I intend to do this unless there is areason that I should not.RESPONSE: It is true that you are eligible to receive survivors benefits based on yourdecease husband's work record if you are unmarried when you apply for survivors 39

benefits after age 60, or if you are married when you apply, but the marriage took placeafter you turned 60. The SSA is only concerned with whether you meet therequirements, not how you got there. If you are married when you apply and themarriage took place after age 60, you are eligible., Or, of course, if you are unmarriedwhen you apply, you'll be eligible for the benefit. Divorcing your current husband wouldallow you to regain eligibility for the survivors benefits that you otherwise would havelost by marrying before age 60. Most likely, your survivors benefits would be higherthan your spousal benefit from your current husband when you eventually remarry himbecause the spousal benefit is only half of PIA (or less, if under FRA). Here's a referencefor survivors benefits: www.ssa.gov/ww&os2.htm.ISSUE #2: I am divorced and have not remarried. I have reached FRA, and I'm going tocontinue to work full time for at least a few more years. My benefit based on myearnings record will be higher than my divorced spouse benefit. Can I apply for what Iwould receive as a divorced spouse now and then switch to my own benefit when I retire?I have received conflicting information.RESPONSE: There's a great deal of confusion about the \"claim now, claim more later\"strategy. That's when a high-earning worker files for his or her spousal benefit - or in thiscase, divorced spouse benefit - at FRA and then switches to his or her own benefit at age70. The SSA website states clearly that it can be done. If you do receive information tothe contrary, refer them to the web page \"Benefits for Your Divorced Spouse\". It says,\"If your divorced spouse is eligible for retirement benefits on his or her own record wewill pay that amount first. But if your divorced spouse has reached full retirement ageand eligible for spouse's benefit and his or her own retirement benefit, he or she has achoice. Your divorced spouse can choose to receive only the divorced spouse's benefitsnow and delay receiving retirement benefits until a later date,. If retirement benefits aredelayed, a higher benefit may be received at a later date based on the effect of delayedretirement credits.\" Source: www.ssa.gov/retire2/yourdivspouse.htm.Disabled Children?A child disabled before age 22 may begin receiving Social Security disability benefitsbased on the worker's earnings record, at any age, carrying through adulthood, as long ashe or she remains disabled and is unable to work.The Lump-Sum Death Benefit?A one-time $255 lump-sum death benefit is payable to a spouse or children under age 18who lived with a covered worker who died. The lump sum is not payable to an ex-spousewho might be otherwise eligible for other benefits. 40

Chapter 3 - Social Security Disability BenefitsHow Do I Qualify for Social Security Disability Benefit?When a client can't work due to a medical condition that is expected to last at least oneyear or result in death, he or she qualifies for Social Security disability benefits. Theapproval process for Social Security disability is subjective and can take a long time, so itis a good idea for a client to apply as soon as possible after the onset of a disability. Inthe application, the client will be asked questions about his or her work history as well asextensive medical information regarding the disabling condition. It is possible to appealif the application is denied. See SSA Publication No. 05-10041. Benefits will be paid upto 12 months retroactively.The client must meet both of two different earnings tests to qualify: a recent work testand a duration of work test.The recent work test is based on calendar year quarters according to the followinginformation:Rules for Work Needed for the \"Recent Work Test:If you become disabled Then you generally needIn or before the quarter you turn age 24 1.5 years of work during the 3-year period ending with the quarter your disability beginsIn the quarter after you turn age 24 but Work during half the time for the periodbefore the quarter you turn 31 beginning with the quarter after you turned 21 and ending with the quarter you became disabled Example: If you become disabled in the quarter you turned 27, then you would need 3 years of work out of the 6-year period ending with the quarter you became disabled.In the quarter you turn age 31 or later Work during 5 years out of the 10-year period ending with the quarter your disability began.Source: SSA Publication No. 05-10029 41

The duration of work test must meet the requirements of the following chartExamples of Work Needed for the \"Duration of Work\" TestIf you become disabled: Then you should generally need:Before Age 28 1.5 years of work Age 30 2 years Age 34 3 years Age 38 4 years Age 42 5 years Age 44 5.5 years Age 46 6 years Age 48 6.5 years Age 50 7 years Age 52 7.5 years Age 54 8 years Age 56 8.5 years Age 58 9 years Age 60 9.5 yearsSource: SSA Publication No. 05-10029What Are the Family Benefits?Other members of the family also qualify for benefits based on a disabled worker'sbenefit, subject to a family maximum. These family members qualify: Family Member % of Length of Benefit Worker'sSpouse age 62 or older Disability Earlier of length of worker's benefit or death of spouseSpouse of any age caring for a Benefit Earlier of length of worker's benefit or when youngestnatural child of the worker child reaches age 16under age 16 50% 50%Natural children of the workerunder age 18 50% Earlier of length of worker's benefit or when child reaches age 18Natural children of the workerdisabled under the age of 22 50% As long as they qualify as disabled for their entire lifeDisabled stepchild of the 50% As long as they qualify as disabled for their entire life,Worker disabled under the age unless the worker divorces child's natural parent, thenof 22 one month after the divorce is finalized 42

Unlike the case with survivors benefits, divorced spouses and dependent parents are noteligible for a disability benefit based on the disabled worker's benefit.The family maximum is 85 percent of the Worker's AIME but cannot be less than 100percent of the worker's PIA or more than 150 percent of the worker's PIAExample: A qualifying disabled worker has an AIME of $3,800 and a correspondingPIA of $1,689. The worker has a spouse and three eligible children. Each of the foureligible people can receive half of the worker's PIA or $845. That adds up to $3,380.However, under the family maximum, 85 percent of the worker's AIME is $3,230($3,800 x .85) and 150 percent of the worker's PIA is $2,533. The benefits for each ofthe four eligible people would be reduced equally to $633.25 ($2,533/4).Let's take the same worker with an eligible spouse and one eligible child. Both thespouse and the child could receive the full $845 because their total - $1,690 - is less thaneither of the family maximums of $3,380 or $2,533 computed previously.Taxation is the same for Social Security disability and retirement benefits. Disabilitybenefits are fully taxable to the extent of the current laws of Social Security taxation.PLANNING OPPORTUNITIESAllocating the Disability Benefit Among Family MembersA spouse of a disabled worker may not want to collect the spousal benefit if the couplehas two or more children, and the spouse is working. Collecting the spousal benefitcould subject the family to the family maximum, which would reduce his or her benefitas well as those of the children, and also subject the Social Security disability benefit toincome taxation. If the spousal benefit is forgone, each child may be eligible to receivemore under the family maximum formula. The Social Security disability benefits for thechildren would likely not be taxable because the children would probably have little or noincome from other sources. In addition, if the nondisabled spouse is still working, takingthe spousal benefit might subject his or her earnings to the earnings limitation if earningmore than $15,720.Returning to WorkThe SSA has various programs to encourage disabled workers to return to the workplaceon a test basis without losing their Social Security disability benefit. 43

Chapter 4 - Social Security Survivors BenefitsHow Do I Qualify for Survivors Benefits?Survivors benefits are available as long as the deceased worker earned the requirednumber of Social Security credits. In most cases, the required number of Social Securitycredits is 10 years, but those who die younger than age 32 have a lower Social Securitycredit threshold. The benefit amount is computed based on average lifetime earnings inmuch the same way as the Social Security retirement benefit. Your online SocialSecurity statement shows an estimate of what the widow(er) and qualifying childrenwould receive upon the client's death. The following people can receive Social Securitysurvivors benefits on the earnings of a deceased worker: • A widow(er) • A surviving divorced spouse • Unmarried children • Dependent parentsWhat Are the Family Benefits?A widow(er) can receive full benefits at FRA or reduced benefits as early as age 60. Themarriage must have lasted at least 9 months to qualify for this benefit. A survivingdivorced spouse, as well as the current spouse, can receive widow(er) benefits as long asthe former marriage lasted at least 10 years, and the divorced spouse did not remarrybefore age 60. The benefits paid to a divorced spouse are not included in computationsfor the family maximum (see the text that follows) unless the divorced spouse was caringfor a dependent child of the deceased under age 16 at the time of the worker's death,. Awidow(er) can qualify for benefits at any age if he or she is caring for a child youngerthan age 16 or a disabled child.Unmarried children who are younger than 18 can receive Social Security survivorsbenefits on the deceased worker's record. Stepchildren, step-grandchildren, or adoptedchildren also qualify if hey were dependents of the deceased. Dependent parents of thedeceased qualify if they are age 62 or older, and the deceased was providing more thanhalf of their support.The benefit amounts than can be received as a percentage of the deceased's PIA are asfollows (subject to the family maximum computation). 44

Family Member % of Deceased's PIAA Widow(er) or surviving divorced spouse at or above 100%FRAA widow(er) or surviving divorced spouse between age 71.5% to 99%60 and FRAA widow(er) or surviving divorced spouse at any age 75%caring for a child under age 16Unmarried children 75%Dependent parents 75% each if two parents, 82.5% if one parentFamily Maximum Computation for Survivors BenefitsThe computation of the family maximum allowed to a deceased worker's family is similarto the computation of the PIA for a retiree. This same formula would be used to computethe family maximum for a retiree's family if beneficiaries in addition to the retiree andspouse were collecting from the worker's earnings history. The formula for computingthe family maximum in this section has three bend points. Each year, the bend points areadjusted based on average wage indexes.The four-tiered family maximum formula for the family worker who dies in 2015 is asfollows:Family Maximum 2011 Bend Points Case A Case BCalculation $1,584 $1,584150% of PIA amount up to 150% of first $1,056 $1,273 The first bend $177 $1,273FIRST BEND $1,056272% of PIA amount between 272% of next $468 $3,034 $620 The first and second bends $1,656SECOND BEND $1,524 $1,148134% of PIA amount between the 134% of next $463 $4,625 The second and third bends $2,643THIRD BEND $1,987175% of PIA amount over 175 of excess over $1,987 The third bendTotal Family MaximumPIA amountsExample: As we see in Case A , the deceased worker's PIA is $1,656. The familymaximum amount for all eligible beneficiaries is the $3,034 (as shown above).A surviving spouse who is younger than 60 and caring for a child under age 16 wouldreceive $1,242 (75% of $1,656), as would each child under age 18. Once three or more 45

people begin collecting benefits on this deceased worker, those survivors will hit thefamily maximum. At that point, the benefits for each person are reduced proportionately.How Are Social Security Survivors Benefits Taxed?Taxation is the same for Social Security survivors benefits as it is for Social Securityretirement benefits. They are fully taxable to the extent of the current laws regardingSocial Security taxationPlanning OpportunitiesPlanning for Spousal Income NeedsDepending on the age of the parents and children, there will be a gap in the survivorsbenefits provided by Social Security. Addressing potential areas of risk is a crucial areaof financial planning. Discuss with clients the impact of this \"gap\" in Social Securitysurvivors benefits on their financial goals as a part of their comprehensive financial plan.Discuss the availability of alternatives for funding income needs during this gap period,such as adequate investments of life insurance. Spouse Survivors Benefit Timeline ExampleAge 30 Age 42 Age 60________________________________________________________________________Working spouse dies Youngest child turns 16Spouse receives a survivor Earliest spouse can receivebenefit @ 75% of PIA additional survivors benefits, unless disabled \"Gap\" periodAllocating the Survivor Benefits Among Family MembersA spouse of a deceased worker may not want to collect the spousal benefit if thesurviving spouse has two or more children and is working. Doing so would subject thefamily to the family maximum, which would reduce the spouse's benefit as well as thoseof the children. It would also subject the spouse's survivors benefits to income taxation.If the spousal benefit is forgone, each child may be eligible to receive more under thefamily maximum formula. The Social Security survivors benefits for the children wouldlikely not be taxable because the children would probably have little or no income fromother sources. In addition, if the surviving spouse is still working, taking the spousalbenefit might subject the surviving spouse to the giveback rules if earning more than$15,720. 46

Death of Two Parents with Minor ChildrenThe Social Security survivors benefits received by eligible surviving minor children ifboth parents die together would be based on the larger of the two parents' earningsrecords and would be subject to the family maximum formula.CLIENT ISSUE: I was hoping you might be able to help me with a situation I have. Iam age 62 and work full time. My husband passed away, and I am entitled to his benefit,which is lower than my expected benefits. My question is this: Even though I amworking and would be penalized for receiving Social Security, doesn't it still make sensefor me to obtain the benefit from my deceased husband? Doesn't that benefit go awayonce I reach my full retirement age?ADVISOR RESPONSE: Yes, I believe it makes sense for you to take your survivorsbenefit, even though it will be reduced for your age and some of it will be withheld forworking. Your primary benefit - the one you will be receiving into old age - is the onebased on your work record, so the longer you delay collecting it, to FRA or later, thehigher it will be. The survivors benefit will bring in some extra income now, and you'dbetter grab it, because yes, it will go away when you claim your own.CLIENT ISSUE: I am age 66 and have a PIA of $2,000. My wife Jane is 45. We havea 10-year-old son. My understanding is that if I die, Jane is eligible for survivors benefitsbecause she's raising our son who's younger than age 16. I also believe she would receivethe full $2,000 benefit on my death. However, when she is 52, our son will be 17, andshe will no longer be eligible for survivors benefits. Let's assume for a second that herbenefit had grown to $2,200 during this period. When she is 60, what benefit can sheapply for/ Is it 71.5 percent of the initial $2,000 number, or does she get to pick up whereshe left off?ADVISOR RESPONSE: A survivor who is caring for the worker's child under 16receives 75 percent of the worker's PIA of $2,000. This is technically called a \"mother'sor father's benefit\". So if your PIA is $2,000, Jane would receive $1,500 until her sonturns 16. She would then receive nothing until she applies for her survivors benefits.The amount would depend on when she applies, ranging from 71.5 percent to 100percent, or between $1,430 and $2,000, not counting COLAs. 47

Chapter 5 - Supplemental Security Income (SSI)Supplemental Security Income (SSI) OverviewWhat is SSI?SSI stands for Supplemental Security Income. Social Security administers this program.We pay monthly benefits to people with limited income and resources who are disabled,blind, or age 65 or older. Blind or disabled children may also get SSI.How is SSI Different from Social Security Benefits?Many people who are eligible for SSI may also be entitled to Social Security benefits. Infact application for SSI is also an application for Social Security benefits. However, SSIand Social Security are different in may ways. • Social Security benefits may be paid to you and certain members of your family if you are \"insured\" meaning you worked long enough and paid Social Security taxes. Unlike Social Security benefits, SSI benefits are not based on your prior work or a family member's prior work. • SSI is financed by general funds of the U.S. Treasury--personal income taxes, corporate and other taxes. Social Security taxes collected under the Federal Insurance Contributions Act (FICA) or the Self Employment Contributions Act (SECA) do not fund the SSI program. • In most States, SSI beneficiaries also can get medical assistance (Medicaid)- to pay for hospital stays, doctor bills, prescription drugs, and other health costs. • Many States also provide a supplemental payment to certain SSI beneficiaries • SSI beneficiaries may also be eligible for food assistance in every State except California. In some States, an application for SSI also serves as an application for food assistance. • SSI benefits are paid on the first of the month. • To get SSI, you must be disabled, blind, or at least 65 years old and have \"limited\" income and resources. In addition, to get SSI you must also: • be a legal resident of the United States; and 48

• not be absent from the country for a full calendar month or more or for 30 consecutive days or more; and • be either a U.S. citizen or national, or in one of certain categories of qualified non-citizens.How is SSI Like Social Security Benefits? • Both programs pay monthly benefits • The medical standards for disability are generally the same in both programs for individuals age 18 or older. For children from birth to age 18 there is a separate definition of disability under SSI. The medical standard is based on the severity of your disability and financial need is not considered at this step in the eligibility process. • SSA administers both programs. 49

II.MEDICARE 50

Chapter 1 - An Overview of MedicareTraditional or original, Medicare is a program of health insurance provided for those age65 and older or, if younger, those entitled to Social Security disability benefits. Medicareis a federal government program administered through the Centers for Medicare andMedical Services (CMS). It is funded through a combination of payroll taxes and generalrevenues of the Federal Government.Older, as well as disabled Americans are eligible for Medicare coverage regardless ofincome or assets.Traditional Medicare is a basic program of health insurance. It includes annualdeductibles and copayments, as well as benefit limits on certain types of health careprocedures and equipment.Medicare was never designed to pay all the health care costs incurred by participants.For example, Medicare is prohibited by statute from paying for custodial care except forhospice services. Services covered must be \"reasonable and necessary for the diagnosisor treatment of illness or injury or to improve the functioning of a malformed bodymember\". Traditional Medicare also does not cover routine vision and hearing care.One major shortcoming of Medicare is that it has no annual out-of-pocket limits. In otherwords, no limit exists on the amount of the participant's share of the cost he or she maybe required to pay during the year. These and other gaps in Medicare coverage can befilledby Medicare Supplement of \"Medigap\" plans sold by private insurance companiesbut regulated by the CMS and the states in which they are sold.As an alternative to choosing traditional Medicare, participants may elect MedicareAdvantage (MA) plan (also referred to as a Medicare Part C plan). MA offers a varietyof plans, including managed care options (also referred to as coordinated care options).Ma was added to allow private insurers, under the guidelines and authority of the CMS,to package equivalent or better benefits in various plans.Medicare coverage begins on the first day of the month the applicant turns age 65. For anapplicant born on the first of the month, coverage will begin the month prior to the monthin which he or she turns age 65. Unlike the Social Security program, which offers areduced early benefit at age 62, there is no early Medicare benefit unless the applicant isdisabled.Eligibility for Medicare is tied to an individual's eligibility for Social Security benefits -40 quarters of work credits are required to be fully insured. Those without 40 quarters ofwork credit, however, may be fully insured based on their spouse's work history. If anindividual is not eligible for Social Security, he or she is not eligible for Medicare. Forthat reason, go to www.ssa.gov for more information on eligibility, especially as it relatesto eligibility for both programs based on the work record of a spouse. Divorced spouses 51

can qualify for both Social Security and Medicare based on the work record of their ex-spouse.For more information on eligibility and enrollment on the Medicare website, go towww.medicare.gov.Basic Benefit StructureTraditional Medicare is a fee for service plan; that is, as long as a health care provideraccepts Medicare, the participant may use its services. Unlike a managed care plan,participants do not need pre-approval before setting an appointment, nor do they need toworry whether or not the health care provider is part of a network.Note: Medicare Advantage plans generally require pre-approval to see a specialist.Traditional Medicare is composed of three parts: Part What It CoversMedicare Part A: Hospital Insurance Inpatient care in a hospital, skilled nursingMedicare Part B: Medical Insurance facility, hospice, and home health care Covers doctor services and outpatient care,Medicare Part D: Prescription Drug Insurance some preventive services, and medical equipment (wheel chairs, walkers, and so) Prescription drug programs offered through private insurance companies. Plans must be approved by the Centers for Medicare and Medicaid ServicesMedicare Part C plans, or MA plans, offer a variety of plans, including managed careoptions. Private insurers and health care organizations contract with the CMS to offer theplans. Plans offered include health maintenance organizations and preferred providerorganizations. Also available are special needs plans for the chronically ill and a privatefee for service option. Participants electing MA plans are still enrolled in Medicare andpay the Medicare Part B premium (and Medicare Part A if there is not a sufficient workhistory). The health care services are provided through the private plan, and MA plancompany is paid a fee from the CMS for providing coverage. MA plan participants donot need to purchase a Medigap plan. Many, but not all, MA plans offer a prescriptiondrug feature (known as MA-PD plans), which makes it unnecessary for the patient tochoose Medicare Part D plan.Medicare A, B and D coverage includes all 50 States. Since MA plans are localnetworks, they generally do not cover expenses while \"out of network\" unless it is anemergency. Another disadvantage of MA plans may occur when the participant moves toanother State since the private insurer of the MA plan may not offer a MA plan in thatState. Neither Medicare or MA plans provide foreign travel coverage. It isrecommended that supplemental coverage be obtained when traveling abroad. 52

The Affordable Care Act and MedicareMedicare is not a part of the health insurance marketplaces created under the AffordableCare Act (ACA) and seniors do not need to shop for coverage in these marketplaces.Medicare is considered health insurance under the ACA, so people currently covered byMedicare Part A, or Part A and Part B, do not need to buy more health insurance. Thosecovered under Part B only are not considered to have the minimum essential coveragerequired under the ACA and without additional coverage may have to pay a penalty.Medicare benefits under the ACA have expanded to include free preventative benefits,cancer screenings, and an annual wellness visit. There are also additional savings if youare in the prescription drug doughnut hole. In addition, Prescription Part D coverage isnow subject to a similar sliding scale premium as Part B, causing those with higherincomes to pay more (means testing).Who Can Get Medicare? • People age 65 or older - You are a U. S. citizen or legal resident and you've lived in the U. S. for at least 5 consecutive years. - Do not have to be collecting Social Security Benefits but must be eligible for benefits • Those receiving Social Security disability benefits for at least 24 months (exception: Amyotrophic Lateral Sclerosis, ALS) • Those with permanent kidney failure (end-stage renal disease) 53

Chapter 2 - Traditional Medicare EnrollmentEnrollment in Medicare is administered through Social Security Administration (SSA).There is no local Medicare office to go to; rather, if issues regarding coverage orenrollment come up, a participant may need to go to his or her local Social Securityoffice for resolution.An eligible individual becomes entitled to coverage after the application process iscomplete. An application for coverage may be filed as early as the third month before themonth in which the applicant turns age 65 (for example, if the individual's birth month isMay, he or she may file as early as February 1). In the past, when the full retirement age(FRA) for the Social Security program was 65, application for Social Security benefitsand enrollment in Medicare took place simultaneously. Now, with the FRA at age 66,and waiting to apply for their full Social Security benefits, they must remember to enrollin Medicare.Traditional Medicare consists of Part A (hospital insurance) and Part B (medicalinsurance). Together they provide participants with basic protection against high healthcare costs. They are, however, several differences between the two parts as provided inthe following table. Category Medicare Part A Medicare Part B (Hospital Insurance) (Medical Insurance)EnrollmentCost Enrollment is mandatory if an individual is Enrollment is voluntary receiving Social Security payments.Funding An individual cannot decline Medicare Part For new enrollees, the monthly A coverage unless he or she gives up Social premium in 2015 is $104.90, but it Security benefits. increases if the individual's or There is no cost, regardless of income or couple's income is higher than assets, for individuals with sufficient work certain thresholds. credit or those who are eligible due to a spouse's work history, A penalty is added if the individual delays enrollment beyond his or her If an individual has no quarters of coverage initial enrollment period. and is covered by a spouse's work history, he or she will pay $407 per month in 2015 Medicare Part B is financed through for coverage under Medicare Part A. For the monthly premiums paid by those with some work history, but less than participants and from general 40 quarters, the monthly premium is revenues of the federal government. reduced. Medicare Part A is financed solely through tax on employers and employees.CLIENT ISSUE: If my wife has never worked outside our home and she turns 65before I do, can she get Medicare at age 65, or does she have to wait until I turn age 65and I am on Medicare? 54

ADVISOR RESPONSE: If you are at least age 62 and have worked for at least 10 yearsin Medicare-covered employment, your spouse can get Medicare Parts A and B at age 65.If you have worked at least 10 years in Medicare-covered employment but are not yet age62 when your spouse turns age 65, he or she will not be eligible for premium-freeMedicare Part A until your 62nd birthday. In this case, your spouse should still apply forMedicare Part B at age 65 so that he or she can avoid paying a higher Part B premium.However, if you are still working and your spouse is covered under your group healthplan, he or she could delay enrollment in Part B without paying higher premiums.Automatic Enrollment and the Initial Enrollment PeriodIf an individual is already receiving Social Security retirement payments or disabilitybenefits, he or she is automatically enrolled in Parts A and B. This also applies to awidow(er) receiving survivor benefits. According to Medicare, individuals will receivetheir Medicare information (including the claim number) in the third month prior to theirbirth month. This automatic enrollment occurs even though Medicare Part B isvoluntary. PLANNING TIP: If a client wishes to decline Medicare Part B, he or she must sign and return the form that will be included in the material mailed to them.The FRA at which a Social Security participant is entitled to his or her full monthlybenefit has been slowly increasing over the years. This means many Medicare Eligibleindividuals will not be receiving Social Security payments when they turn age 65 and willnot be automatically enrolled in Medicare Part A or Part B. These individuals will haveto proactively enroll in Medicare during the initial enrollment period (IEP).Part B Late Enrollment PenaltyIf you don't sign up for Part B when you're first eligible or if you drop Part B and then getit later, you may have to pay a late enrollment penalty for as long as you have Medicare.Your monthly premium for Part B may go up 10% for each full 12-month period that youcould have had Part B, but didn't sign up for it. The penalty lasts as long as the individualcontinues coverage under Medicare Part B. PLANNING TIP: The IEP is 7 months long and must not be missed. It begins the third month before the month in which a client turns age 65, includes the birth month, and extends to the end of the third month following the birth month.Other Enrollment PeriodsIf an individual is not eligible for automatic enrollment and fails to sign up during theIEP, three alternative enrollment options are available: the special enrollment period(SEP), the general enrollment period (GEP), and a period for international volunteers.Note that if the individual has delayed enrollment in Medicare Part B without having 55

other coverage and therefore must use the GEP, a penalty will be added to his or hermonthly premium. 1. The SEP is available if an individual did not enroll during the IEP because he or she was covered by a group health plan at work. The individual may sign up for Part A, Part B, or both anytime that he or she or his or her spouse (or a family member, if the individual is disabled) is working and the individual is covered by a group health plan through his or her employer or union based on that employment. Alternatively, the individual may sign up during the eight month period that begins the month after his or her employment ends or his or her group health plan coverage ends, whichever is first. If the individual signs up for Medicare Part A, Part B, or both while covered under a group health plan, that plan may be the primary payer of the individual's covered health care expenses with Medicare as the secondary payer.CLIENT ISSUE: I am 70 years old, currently working and covered by my company'shealth plan. I have decided to work part-time rather than full-time beginning on May 1.That means my husband (he is age 71) and I will lose my employer's health care coverageat the end of next month, April 30. When should I enroll in Medicare Part B.ADVISOR RESPONSE: You can enroll now and delay the start date until the first dayof any of the following three months. In this case, you can indicate that you wantcoverage to begin on May 1. PLANNING TIP: Note that \"group health plan at work\" does not include Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage, which is not, by definition, coverage based on current employment. If a client is covered by COBRA, he or she should sign up during his or her IEP and not wait until the COBRA coverage period ends.If a client with COBRA coverage does not enroll during the IEP, he or she must waituntil the GEP. This may create a gap in coverage. If COBRA coverage ends inNovember and the IEP has passed, the client will have to use the GEP to sign up forMedicare Part B. Although the GEP runs from January 1 - March 31, coverage does notbegin until July 1. This leaves seven months (December of the prior year- June of thecurrent year) in which the client will have no Medicare Part B coverage. A few insurancecompanies sell insurance for this type of gap period, but it can be expensive, provideslimited coverage, and is not guaranteed, so the client must answer health questions duringthe application process and can be turned down for coverage. 2. The GEP runs from January 1-March 31 each year. Coverage begins July 1. Unless an individual qualifies for the SEP, the cost of the Medicare Part B premium will go up 10 percent for each full 12-month period he or she could have but chose not to enroll during IEP. 56

3. There is a special enrollment period for international volunteers, that is, those volunteering outside the United States who are covered by health insurance. If an individual delays coverage under these circumstances under Medicare Part B, he or she may sign up anytime during the six months following the month in which he or she stopped volunteering outside the United States.Choosing Between Traditional Medicare (A, B and D) and Medicare C (MA)Generally speaking, an individual that enrolls in the Medicare A, B and D or,alternatively Medicare C (MA) (the two are mutually exclusive) has the opportunity toswitch coverage between the two alternatives in the first year of participation withoutsubjecting themselves to a penalty or medical underwriting. In addition, if one changesfrom a Medicare \"C\" plan to a Medicare B plan after the first year, they are subject toMedicare B \"GAP\" or supplemental coverage (Medicare B only covers 80% of doctor'scosts). In addition, a participant can change from Medicare Plan (A,B,D) to MedicareAdvantage (C), or vice versa, at any point in the future during the annual enrollmentperiod. However, the participant would be subject to medical underwriting.Same-Sex Married CouplesThe Supreme Court's Windsor decision on June 26, 2013, struck down the portion ofDOMA (Federal Defense of Marriage Act) that defined marriage as a \"union between aman and a woman\". Because of this, the SSA now can approve spouses' claims involvingsame-sex marriages. 57

Summary of Client Planning Advisor Recommendation for MedicareIf the Client is... EnrollmentReceiving a Social Security benefit Automatic enrollment in Medicare Part A and Part B.Not covered by a group plan If Medicare Part B is not desired, he or she must opt out.Working and covered by a group plan Enroll during the initial enrollment period (IEP).Not qualified with enough hours If he or she misses the IEP, use the general enrollment periodPart of a same-sex couple (GEP) and pay the 10 percent penalty and potentially have a gap in coverage. Enroll during the IEP and delay coverage start. If he or she misses the IEP, use the special enrollment period (SEP) Any time while he or she is still working and covered by group health plan, OR within eight months of either stopping work or losing coverage, whichever happens first. If he or she misses the SEP, use the GEP, pay the 10 percent penalty, and potentially have a gap in coverage Determine if they can qualify under a spouse's work record If not, purchase Medicare Part A coverage. Determine the status of the recognition of their relationship with the SSA.ISSUE: Does a self-employed individual who works beyond 65, and has private healthinsurance coverage, have the option to delay the start of Medicare coverage until he orshe retires, and otherwise continue with their current medical insurance until retirementand then enroll in Medicare.RESPONSE: Yes, but the self employed individual will be considered as a late enrolleeand subject to the late enrollment penalty. 58

Chapter 3 - Traditional Medicare-Covered Health Care ExpensesA health care service, procedure, or equipment must be a covered expense under theMedicare rules before all or a portion of the cost will be paid. Some health care expensesare not recognized as covered and will not be paid for by Medicare.The Medicare Act provides that payment will be made for \"services and items\" that • Are reasonable and necessary for the diagnosis or treatment of illness or injury, or • will improve the functioning of a malformed body member.Before discussing what Medicare Parts A and B cover, it is just as important tounderstand what is not covered so Medicare participants understand what other healthcare costs they will have to budget for. Medicare Parts A and Parts B will not cover thefollowing items: • Custodial or long-term care • Routine dental, hearing, or vision care • Dentures • Cosmetic surgery • Acupuncture • Hearing aids • Exams for fitted hearing aidsOf these expenses, the lack of coverage for all but a limited amount of custodial care canresult in the largest cost to a Medicare participant. The act specifically prohibits payment\"where such expenses are for custodial care (except, in the case of hospice care, as isotherwise permitted...)\". For most Medicare participants, some form of custodial carewill be needed before their death. It is important for clients to understand that thisexpense is not covered by Medicare. Although custodial care is not defined in the statute,it is defined at www.medicare.gov as helping meet \"personal needs\" such as activities ofdaily living (for example, dressing, bathing, and using the bathroom).For additional information on preventive services, go to www.medicare.gov, click on\"What Medicare Covers\", and from the drop down menu, select \"Preventive Services\". PLANNING TIP: Opening an online Medicare account at www.medicare.gov is an excellent way for a client to keep track of the preventive services to which he 59

or she is entitled. In the upper right hand corner of the website, the client canclick on \"MyMedicare.gov Login\". On the landing page, he or she can create anaccount once the account is set up, a list of the preventive services for which he orshe is eligible is provided.Medicare Part A (Hospital Insurance) Covered Expenses Services CommentInpatient Hospital (Unless otherwise noted, publications in this table can be found at www.medicare.gov.Home health Includes a semi-private room, meals, general nursing, drugs that are part of the impatient treatment, and other hospitalHospice Care services and supplies. The participant must be an inpatient; he or she may be admitted to an overnight stay at a hospitalSkilled nursing facility care as an outpatient in which case the stay will be paid underReligious nonmedical health care Medicare Part B. This will affect the participant's out-of-institution pocket costs. Limited to medically necessary part-time or intermittent skilled nursing care or physical, speech, or occupational therapy. Coverage is available for only 100 visits per \"spell of illness\" and only if the services are provided within 14 days of a prior hospital stay or stay in a skilled nursing facility (SNF). The spell of illness begins with the first day in which the participant receives home health services. It ends after the 60th consecutive day in which the participant is neither in a hospital nor a skilled nursing facility patient. Available for participants with a terminal illness as certified by a doctor. The participant must have a life expectancy of six months or less. Medicare does not cover the cost of the stay at a facility unless it is determined to be necessary for pain and symptom management that cannot be addressed at home. Covered if medically necessary following a three-day minimum inpatient hospital stay for a related illness or injury (see previous discussion regarding inpatient hospital services). Applicable to those whose religious beliefs do not include medical care but who otherwise qualify under Medicare for a hospital or SNF stay. Medicare will pay for only the nonmedical, nonreligious health care items and services (such as room and board).Medicare Part B (Medical Insurance) Covered ExpensesIn general, Medicare Part B covers medically necessary services, such as doctors'services, tests, outpatient care, home health services, durable medical equipment (forexample, wheelchairs or walkers), and a number of other medical services.The following are considered preventive services:• Abdominal aortic aneurysm screening• Bone mass measurement 60

• Cardiovascular screenings • Colorectal cancer screenings • Diabetes screening and self-management training • Flu shots • Glaucoma tests • Hepatitis B shots • HIV screening • Mammogram screenings • Medical nutrition • Pap tests and pelvic exams (includes clinical breast exam) • Physical exams (one-time \"Welcome to Medicare\" exam and annual wellness exam) • Pneumococcal shot • Prostate cancer screening • Smoking cessation counselingMedicare's Preventive Services, available atwww.medicare.gov/Publications/Pubs/pdf/10110.pdf and CMS Publication No 11420.Are You Up-To-Date on Your Preventive Services?www.medicare.gov/Publications/Pus/pdf/11420.pdfHome Health CareHome health care as covered by Medicare has received growing interest in the past fewyears. The vast majority of participants would prefer to stay at home and receive neededcare rather than enter a SNF. The Medicare and Medicaid programs save money when aparticipant elects to stay home rather than request placement in a nursing home SeveralMedicare and Medicaid demonstration programs are under way around the country thatare focused on keeping participants in the community for as long as possible. 61

Note that home health care is not the same as custodial services performed in the home.Custodial services expenses are not covered by Medicare; however, most long-term careinsurance policies do cover such expenses.Durable Medical EquipmentCoverage is available under Medicare Part B for durable medical equipment (DME),prosthetics, orthotics, and supplies. DME includes wheelchairs, hospital beds, walkers,canes, oxygen systems, and dialysis systems. The equipment may be rented, purchased,or leased. DME is subject to the 20 percent participant copayment. In general, aphysician must order the equipment in order for the DME to be a Medicare coveredexpense. 62

Chapter 4 - Traditional Medicare Payment and Premium StructureThe previous chapter described what health care costs are covered by Medicare. Aparticipant's health care costs covered by Medicare, however, are not all fully paid for byMedicare. The cost is shared with the participant through the imposition of deductibles,coinsurance, and copayments.Traditional Medicare Parts A and B have their own separate payment structure. Anyamount paid out-of-pocket by a participant for a covered Medicare Part A health careexpense does not apply toward, for example, the Medicare Part B annual deductible.Each participant qualifies individually for Medicare and pays his or her own deductibles,coinsurance, and copayments; there is no family coverage as there is under group healthplans provided through an employer.In addition, Medicare Part A and B each have their own premium structure. Mostparticipants pay no monthly premium for Medicare Part A coverage, but Medicare PartB requires all participants to pay a monthly premium. High-income participants pay ahigher monthly premium, and low income participants receive assistance paying thepremium.Medicare has no out-of-pocket limitations. Absent a Medicare Supplement plan,participants are at risk for having to pay high coinsurance and copayment amounts forcovered health care expenses. Medicare Supplement plans provide some protection.Defining TermsCPA planners should understand the following Medicare terms:Assignment. A provider will accept Medicare approved amounts as being paid if full. Most health care providers accept assignment.Coinsurance. A percentage of the amount a participant must pay toward the cost of a covered expense. Medicare Part B has both an annual deductible ($147 in 2015) and coinsurance. After the annual deductible is paid by the participant, he or she, must, in general, pay 20 percent of the cost of any covered expense incurred (certain exceptions apply for certain preventive services).Copayment. A fixed dollar amount a participant is responsible for paying toward the cost of a covered expense. After the 60th day, Medicare Part A requires a copayment of $315 per day (in 2015) for days 61-90 (or a total of $9,450).Deductible. The amount paid by a participant before a covered expense is paid by Medicare. For example, Medicare Part A includes a deductible of $1,260 (in 2015) for an inpatient hospital stay. After the participant pays the first $1,260, Medicare pays 100 percent of the covered expense for a stay of up to 60 days in the hospital for each benefit period. 63

Medicare approved amount. The amount set by the Centers for Medicare and Medicaid (CMS) that will pay for a service, procedure, or medical equipment.Medicare Part B excess charge. The additional amount charged that can be passed on to a participant if a provider does not accept assignment. The excess charge, however, is limited to no more than 15 percent of the Medicare approved amount.CLIENT ISSUE: I recently incurred a $400 expense for a service provided underMedicare Part B. How much will my part of the bill be?ANSWER: If the Medicare approved amount is $400 for a service provided underMedicare Part B, you will pay 20 percent of the bill, or $80; Medicare will pay thebalance, or $320 (400 - $80). If the $147 (in 2015) annual deductible has not been met,you will pay $147 plus 20 percent of $253 ($400 - $147), or $51. Medicare will pay$400 - $147 - $51, or $202.Benefit PeriodsNote that the deductibles for an inpatient hospital stay and a stay at a skilled nursingfacility (SNF) apply to each benefit period. In other words, the deductible is not based ona time period (for example, an annual deductible) but, rather, the timing of the servicereceived. Another term for benefit period is \"spell of illness\". The benefit period isdefined the same for both the inpatient hospital stay and the stay at a SNF. A benefitperiod begins on the first day of the stay and ends after 60 consecutive days in which theparticipant has not received inpatient care at a hospital or skilled care in a SNF.Each new benefit period carries with it new deductibles. Still, it may be more beneficialfor a participant to have 2 benefit periods rather than 1. In the case of a participant withan extended stay in a hospital (more than 60 days) during the benefit period, he or shewill pay $315 per day (the copayment in 2015) should it be necessary to reenter thehospital before the beginning of a new benefit period. On the other hand, although thenew benefit period will carry with it a toll charge in the form of the Medicare Part A$1,260 deductible, there will be no copayments due until day 61. Any subsequent stay ofmore than 4 days in the new benefit period will offset the cost of the new deductible of$1,260 ($315 x 4). In that case, it may make sense for the participant to delay reenteringthe hospital, if possible, through use of home care. Of course, this should be done onlyafter consultation with a doctor.CLIENT ISSUE: My mother spent 5 days in the hospital in January due to a broken leg.She had a stroke in August and is back in the hospital for an extended stay. Will she haveto pay the Medicare Part A deductible of $1,260 again?ANSWER: Yes, Because your mother was out of the hospital for more than 60 days, herre-admittance counts as a new benefit period. She will have to pay the deductible again.On the other hand, the 60-day benefit period during which the hospital costs are fully 64

paid by Medicare will not be affected by her 5 day stay in January. For the new benefitperiod, she is entitled to the full 60 days.Medicare Part A Hospital InsurancePayment StructureInpatient Hospital StaysThe following table provides the deductibles and copayments that apply to inpatienthospital stays. Days in Hospital Deductibles and Copayments (In 2015)1-60 $1,260 deductible each benefit period, which is increased each year. (Note: It is possible for a participant to have multiple benefit periods61-90 during a 12-month period.90+ $315 per day copayment (0.25 x $1,260) each benefit periodAfter all lifetime reserve days $630 copayment per day (0.5 x $1,260) using lifetime reserve daysused (Each participant has up to 60 lifetime reserve days.) All costs are paid by participants. Each Medicare Part A beneficiaries entitled to up to 60 lifetime reserve days when a hospital stay goes beyond 150 days. (Once used, they are no longer available. By purchasing a Medicare Supplement plan, beneficiaries can add another 365 days of hospital stay coverage.CLIENT ISSUE: My spouse spent 200 days in a hospital. How much of that cost willwe have to pay? She used up her 60 lifetime reserve days during a previous stay severalyears ago.ADVISOR'S RESPONSE: Your share of the cost, using 2014 figures, will be asfollows:Days You will Pay 1-60 The benefit period deductible $ 1,216 61-90 $304 per day times 30 days $ 9,120 91-150 $608 per day for 60 days $36,480151-200 The hospital daily charge of $1,100 $55,000The total you will pay equals $101,816 ($1,216 + $9,120 + $36,480 + $55,000)Note: Most Medicare Supplement plans will cover these costs plus provide coverage foran additional 365 days in the hospital.Inpatient mental health care in a psychiatric hospital is limited to 190 days in a lifetime. 65

Skilled Nursing FacilityDays in Skilled Nursing Facility Copayments (in 2015)1 - 20* $0 each benefit period21 - 100 $157.50 per day for each benefit period or a101 + maximum of $12,600 All costs (participant pays entire amount)* If the participant leaves the skilled nursing facility after coverage begins but is readmitted within 30 days, the second period will also be covered.Hospice CareIn general, there are no deductibles or copayments for hospice care. However, theparticipant is responsible for copayments and coinsurance as follows:• A copayment of up to $5 per outpatient prescription drugs for pain and symptom management.• Coinsurance of 5 percent of the Medicare-approved amount for inpatient respite care. (Respite care gives a caregiver time off to get some rest while a patient receives care from a paid caregiver.)Medicare pays for the services provided by the hospice team of health care professionals;it does not pay for room and board for the participant except under limited circumstances.For example, the medical team may decide that the participant needs short-term inpatientcare or a stay is needed in a facility for respite care.Hospice services are paid for whether the participant is in traditional Medicare or aMedicare Advantage (MA) plan.Other Medicare Part A Copayments and CoinsuranceMiscellaneous Medicare Part A copayments and coinsurance include the following:• A participant must pay the hospital for the first three units of blood received• For home care, a participant pays $0 for the services and 20 percent of the cost for durable medical equipment (DME).For quality information on hospitals in a client's geographic area, go towww.hospitalcompare.hhs.gov/hospital-search.aspx 66