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What is Medicare-Covered Employment and How Does It Affect My Wages?

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Just the Essentials...

  • Law requires that employers deduct a Medicare tax of 1.45 percent from wages paid.

  • At the same time, law requires employers to match this 1.45 percent Medicare tax for each employee.

  • For employees whose annual wages total $200,000 or more, employers deduct an additional .09 percent Medicare tax surcharge.

  • In order to measure Medicare-covered employment, Social Security counts each three-month period of paying the Medicare tax as a unit.

  • Often referred to as quarters of coverage (QCs), a total of 40 covered quarters grants premium-free Part A.

What is Medicare covered employment? - Medical Coverage

The concept of Medicare-covered employment relates to the way in which taxes fund Medicare. Largely, funds come from taxes on individual wages that are also matched by their employers. So, what are Medicare qualified government wages?

But what is considered covered employment for Medicare qualified government wages? While many people work for 20 years or more, the key figure for Medicare-covered employment is 10 years, or 40 quarters while paying Social Security and Medicare taxes according to Section 218.

Each covered quarter requires a minimum income of $1,470. However, no matter how much income, you cannot earn more than 4 quarters in a year.

At the point of 40 covered quarters, eligible people can get Part A premium-free. Alternatively, those who earn 39 or less of these covered quarters pay a partial or full premium for Medicare Part A.

To make sure you have affordable Medicare coverage; enter your zip code above to compare plans in your state for free.

Covered Employment Yields Medicare Covered Retirement

What is Medicare covered employment? - Employee Benefits Package

Paying the full Medicare withholding tax through FICA deductions creates an entitlement to Medicare after a sufficient number of years. The full taxation means Medicare-covered employment, but the degree of benefit depends on the length of employment.

If someone works for 10 or more years covered by Medicare, then they can get Medicare Part A with zero premium.

Paying income taxes during working years results in saving thousands of dollars each year on Part A premiums alone.

Working between 30 and 39 quarters of coverage (QCs), or roughly 7.5 to 9.5 years, means the Part A premium reduces to about half.

At the other end of the spectrum, earning 0 to 29 of these Medicare-covered quarters of employment means full price for Medicare Part A premiums.

With that said, there exists the possibility of earning additional QCs after starting Medicare to make up the last few needed to reduce Part A’s premium.

Congress Designed a Worker-Paid System

What is Medicare covered employment?

Paycheck deductions from each worker Medicare benefits when becoming eligible. Overall, the Center for Medicare and Medicaid Services (CMS) administers Medicare A and B with large numbers of contractors to handle the records involved in hundreds of billions of dollars in claims, reimbursements, and payments.

The two Medicare Trusts provide sources of funding:

  • The Hospital Insurance Trust or HI Trust gets most of its funds from worker deductions matched by employers. Generally, this trust fund pays for Part A benefits and the Administration costs associated with inpatient hospital care.
  • The Supplemental Medicare Trust or SMI Trust gets most of its funding from Congress, Part B and Part D premiums paid by individuals, as well as the interest earned on trust fund investments. The SMI Trust pays for Part B and D benefits, skilled nursing, hospice, and durable medical equipment, prosthetics, orthotics, and supplies related to these categories.

Employers Collect Taxes

The funding system for the social safety net for older Americans largely relies upon wage deductions.

With regard to Medicare, the taxes that all employers must collect on wages paid to employees include:

  • Social Security Taxes, which start at $1, but limit deductions from annual wages under $142,800 in 2021,
  • Medicare Taxes, which also start at $1, but have no annual earning cap,
  • Additional Medicare Surcharges that withhold an additional 0.9% of earnings beyond $200,000 for the year, but no cap or ceiling exists for these surcharges.

Medicare-Covered Employment Creates Entitlement

What is Medicare covered employment? - Social Security Benefits

Essentially, Medicare-covered employment is the heart of the funding system designed by Congress when they authorized Medicare in 1965.

Although mostly associated with seniors, persons under age 65 who receive disability benefits from Social Security or the Railroad Retirement Board get Medicare automatically after 24 months.

Just as importantly, people suffering end-stage renal disease, or ALS (Lou Gehrig’s disease) can get Medicare at any age within a short time of diagnosis.

Sliding Scale for Medicare Part A Premiums

The Medicare-covered quarters directly affect the price of premiums for Medicare Part A hospital insurance.

In 2021, the number of covered quarters has three categories affecting Part A premiums:

  • Less than 30 covered quarters results in a $471  monthly premium for Part A
  • At least thirty, but less than 40 covered quarters means $259 per month for Part A
  • 40 covered quarters affords individuals a $0 premium for Part A

Self-Employed Medicare Covered Employment

What is Medicare covered employment?

Self-employed persons can pay into the FICA system through the taxes paid quarterly as self-employed workers. The self-employed tax (SE tax) adds the employer and employee shares of the Medicare tax.

The self-employment rules require that a self-employed person must pay 2.9 percent on all wages without a cap to meet the requirement for  Medicare-covered quarters.

If the earned income is $200,000 or more, then one must also pay an additional 0.9 percent Medicare tax on any earnings above that amount..

Federal and State Employees

What is Medicare covered employment?

Federal employees pay the 1.45 percent Medicare withholding tax  into a separate retirement account that is not part of the Social Security Act. Generally, federal employees that were employed before 1983 automatically qualify for Medicare Part A Premium-free.

Some public employees pay only the Medicare portion of the FICA tax. In other words, these public employees do not pay into the Social Security System. For them, Medicare covered employment only involves the 1.45 percent Medicare tax.

However, when it comes to private sector employees, like election workers for example, things work a little differently. The federal government took its workers off of the Social Security System in 1986. With that, the government established the FERS (Federal Employee Retirement system).

The FERS system provided federal retirees defined benefit plans for retirement annuities, disability benefits, and survivor annuities. In addition, it outlined a tax-deferred savings plan that uses wage contributions, partially matched by the government, to secure the incomes of federal retirees.

Federal employees can also get Medicare with covered employment, as well as access to the Federal Employees Health Benefits (FEHB) program. The FEHB program offers health plans that coordinate benefits and out-of-pocket costs with Medicare coverage. State and local government also pay a role in available health insurance benefits as well.

Federal employees pay the 1.45 percent Medicare withholding tax. They pay into a separate retirement security account separate from Social Security. Federal employees employed before 1983 automatically qualify for Medicare Part A Premium-free.

The employee beneficiaries can combine Medicare with other parts of the Federal Employee Health Benefits to create a secure health insurance situation.

Medicare Covered Employment

What is Medicare covered employment?

The taxes withheld by Medicare are the keys to getting Medicare benefits on the best possible terms. A person’s working years set the stage for health benefits at lowest possible costs.

Even after earning 40 Medicare-covered quarters of employment to get premium-free Part A, this still leaves premiums for Part B. As well as providing comprehensive healthcare, having both Parts A and B allows for further options to potentially enhance coverage through a Medicare health plan.

With Medicare health plans, many of the choices boil down to out-of-pocket costs for services covered under Parts A and B. For many, making a decision also includes seeking benefits not normally covered by Medicare like dental, vision, and hearing.

Using a private Medicare health plan as your Medicare coverage can potentially mean lower out-of-pocket costs as well as these additional benefits.

Use our helpful comparison tool when considering the private plans offered through MedigapPart D: Prescription Drugs, and Part C: Medicare Advantage.


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