What do employers need to consider regarding Social Security and Medicare? The Social Security program was created by the federal Social Security Act. It is a worker-employer-government insurance program, covering benefits for retirement, survivors, disability, and Medicare. Employers withhold two separate taxes from employees’ paychecks. One is the Social Security tax, and the other is the Medicare tax.

Medicare, which is funded through taxes, provides health insurance for people aged 65 or older and many people with disabilities. Medicare consists of Parts A (hospital insurance), B (medical insurance), C (Medicare Advantage plans from private insurers), and D (prescription drug plans).

The Social Security tax is also known as the Federal Insurance Contributions Act (FICA). Employers and employees each pay a FICA tax comprising a Social Security tax of 6.2 percent on the employee’s earnings up to the wage base ($160,200 in 2023, $168,600 in 2024), plus a Medicare tax of 1.45 percent on all earnings. The maximum possible Social Security tax is $9,932.40 in 2023 ($10,453.20 in 2024). The percentages are determined annually, and the latest rates can be located at https://www.ssa.gov/news/cola.

Additional Medicare Tax. There is an Additional Medicare Tax of 0.9 percent on earnings over $200,000 for individual taxpayers and $250,000 for married couples filing jointly; for married couples filing separately, the threshold amount is $125,000. There is also a 3.8 percent Medicare tax assessment on certain investment income for individuals earning over $200,000 and married couples who file jointly earning over $250,000.

It’s important that employees are informed about Social Security issues. The Social Security Administration (SSA) has created a website, called “my Social Security” and located at https://www.ssa.gov/myaccount, that is designed to provide individuals with valuable information starting in their working years and continuing throughout the time they receive Social Security benefits.

Employees who receive benefits or have Medicare can use their my Social Security online account to:

Employees who do not receive benefits can use the account to get their Social Security statement to review:

The SSA has a Benefits Calculator that employees can use to compare retirement benefit estimates based on a selected date, retirement age, and expected future income.

This and other tools, including calculators of spousal benefits, life expectancy, and the impact of continued earnings or other pensions, can be found at https://www.ssa.gov/benefits/calculators.

Historically, workers were eligible for full Social Security benefits at the age of 65. However, for workers born after 1937, this normal retirement age has been increased. As shown in the following table, the retirement age will increase in 2-month increments until it reaches the age of 67 for workers born in 1960 or later.

Proof of age. Qualification for Social Security and Medicare requires proof of age. The SSA prefers that individuals show proof of age by presenting a birth certificate or a religious record showing an individual’s age (made before the age of 5). Individuals who cannot present one of these preferred forms must provide at least two other documents that prove their age, including, for example:

Early retirement. Employees may begin receiving reduced Social Security retirement benefits after reaching the age of 62 and before reaching their normal or full retirement age. However, such individuals may see as much as a 30 percent reduction in benefits.

Delayed retirement. Employees who delay retirement beyond normal retirement age receive an additional retirement benefit credit. For those born in 1917 or later, the benefit increase is shown in the following table:

Receiving benefits while working. Individuals can work while they receive Social Security retirement (or survivors) benefits. While such individuals are working, their earnings will reduce their benefit amount only until they reach their full retirement age. After they reach their full retirement age, the SSA will recalculate their benefit amount to leave out the months they reduced or withheld benefits due to an individual’s excess earnings.

Generally, the SSA uses the following formula to determine how much an individual’s benefit must be reduced:

Taxation of benefits. Social Security beneficiaries who continue to work while receiving Social Security benefits may have to pay federal (and possibly state) income tax on up to 85 percent of Social Security benefits if total income exceeds certain limits. For more information, visit https://www.ssa.gov.

Employees receiving Social Security benefits should estimate how the combination of their benefits plus other earnings will affect their taxes at the beginning of each year.

Employees who become disabled for an extended period of time may qualify for Social Security disability insurance (SSDI) benefits. Individuals are considered disabled if they have a medically determinable physical or mental condition that prevents them from doing any substantial gainful activity (SGA), and the condition is expected to last or has lasted at least 12 months or is expected to result in death. To be eligible for SSDI, an individual must also have worked and paid sufficient Social Security taxes to be eligible for benefits. A disabled worker's widow or widower or disabled adult child may also qualify for SSDI. Disabled individuals whose work history doesn't qualify them for SSDI may qualify for Supplemental Security Income benefits.

SSDI benefits are based on the worker's lifetime average earnings covered by Social Security. Benefits may be reduced by workers' compensation payments and certain public disability benefits. SSDI beneficiaries also receive Medicare coverage. There is generally a 5-month waiting period for SSDI benefits and 24 months of disability entitlement before Medicare coverage begins.

The SSA has a Ticket to Work Program, a free and voluntary program designed to help Social Security beneficiaries keep their health coverage while they work, save money, and become financially independent. Most individuals who receive Social Security benefits because of a disability most likely qualify for the program. For more information on the Ticket to Work Program, visit https://www.ssa.gov.

Benefits. Traditional Medicare coverage is divided into two parts, Part A, hospitalization, and Part B, medical services. The Medicare Part C (Medicare Advantage) program offers a variety of coverages instead of traditional Part A and B benefits. While Medicare Parts A and B together provide fairly generous hospitalization and medical coverage with no restrictions on choosing providers, there are extensive deductibles and coinsurance requirements. In many cases, coverage is not as comprehensive as employer-sponsored insurance. Employees aged 65 and older may therefore prefer to remain insured by private plans rather than receive Medicare.

Secondary payer rules. If employees or their spouses are covered by both an employer plan and Medicare, most employer-sponsored health benefit plans are primary for the covered employee and their spouse regardless of age. Benefits must be paid by the “primary” plan before the secondary plan pays any benefits. Medicare, however, is primary for retirees and in the case of individuals with end-stage renal disease (ESRD), after 30 months.

These rules generally apply to employers with 20 or more employees. However, there are some exceptions. For example, if the employee is under the age of 65 and is covered by Medicare due to permanent and total disability, the employer's plan is primary only if it is a “large group plan” (defined as a plan where the employer had at least 100 employees during the prior calendar year).

An employer cannot offer, subsidize, or be involved in the arrangement of a Medicare supplement policy where the law makes Medicare the secondary payer. Even if the employer does not contribute to the premium for its plan, but merely collects it and forwards it to the appropriate individual's insurance company, the employer's group health plan remains primary to Medicare. The secondary payer rules make it illegal for a covered employer to provide any form of incentive for an employee to decline employer coverage where the employer coverage would be primary to Medicare. Examples of such incentives include an employer offer to pay for Medicare Part B premiums or pay premiums for a Medicare supplemental insurance policy for Medicare-eligible employees if the employee would decline coverage under the employer's plan.

Medigap. Many Medicare beneficiaries purchase so-called Medigap insurance to cover the holes in traditional Medicare Parts A and B coverage, including deductibles, copayments, and coinsurance. These plans may be purchased from private insurance companies, and the particular plans offered and the premiums charged may vary widely from company to company.

Medicare Part C. The “Medicare Advantage” program under Medicare Part C allows Medicare beneficiaries to elect a variety of coverage through private providers instead of the traditional Medicare fee-for-service program. The program offers:

Generally, individuals are eligible for a Medicare Advantage plan if they:

How to apply. Employees can apply for Medicare online at https://www.ssa.gov. Employees can apply for Medicare 3 months before their 65th birthday to ensure that Medicare coverage will begin promptly. Employees who delay enrollment in Medicare past the age of 65 may face a waiting period and higher premiums.

Medicare drug coverage. To receive Medicare drug coverage, individuals must join a plan run by an insurance company or other private company that is approved by Medicare. Costs and coverage may vary depending on the particular plan.

Individuals can receive drug coverage through:

Warning. Individuals who do not join a Medicare Prescription Drug Plan when they are first eligible will likely pay a late enrollment penalty, unless they have other creditable prescription drug coverage or qualify for the Extra Help program.

Information on Social Security and Medicare, including forms and booklets, is available through the Social Security Administration website at https://www.ssa.gov and the Medicare website at https://www.medicare.gov.