Coordinating Social Security Benefits For Those Who Lived Or Retire Abroad

There are about 270 million people, equivalent to roughly 3.4% of the world’s population, who live outside of the country of their birth. In the United States, approximately 44 million people (1/7^th of the population) are foreign-born. Over 9 million Americans are estimated to currently live overseas, and several million more have spent some part of their careers working outside the US. In other words, a lot of people must deal with the complexities of a ‘cross-border’ existence.

When it comes to planning for retirement, in particular, income sources that may span the rules of more than one country, dealing with multiple currencies, and understanding how different tax laws interact, are just a few of the many challenges that financial planners and their clients face when cross-border issues are involved.

Financial planners based in the United States (or any country) typically work with clients of their home country, who have only lived and worked in that country, which means that cross-border planning may not often be top of mind. However, for advisors who practice long enough or whose practices are large enough, getting at least some clients who face cross-border issues is almost inevitable, especially given both the wealth of expatriate clients (often with high-level jobs in corporate environments) and the rise of living abroad in retirement. Yet unfortunately, employee benefits, particularly Federal programs like Social Security and how they are taxed, often complicate retirement planning when individuals have paid into and may participate in more than one social security system.

US Social Security Benefits For Those Who Work Abroad (Outside The US)

The most common way to qualify for US Social Security benefits is by accruing 40 Social Security credits (also known as quarters of coverage) for paid employment in a job that itself pays into the Social Security system. US Social Security also covers US Citizens and Green Card holders who are self-employed outside of the United States and who are required to pay both the employee and employer component of Social Security taxes.

Social Security credits are generally accrued over 10 years or more of work and when reaching the age of 62. The Social Security Administration will then take the individual’s 35 highest inflation-adjusted years of contributions into consideration when calculating the benefit amount to be received at full retirement age.

Various adjustments will be made to achieve the final benefit number, including when the individual starts claiming Social Security, whether other family members are receiving benefits (due to the family maximum benefit limitations), and if the individual is receiving any pensions through employment that is uncovered by US Social Security, such as US government or foreign jobs (the so-called “Windfall Elimination Provision” and “Government Pension Offset” rules).

For individuals who have spent some of their careers working outside the United States – and thus not simply participating in and paying into US Social Security under the ‘normal’ rules – a common question is how the time spent working in a foreign country will impact their Social Security benefits. Working overseas can generally impact workers in two main ways: 1) The number of years they pay into US Social Security (which they can continue to do while on an overseas assignment) and how this affects their qualification for US benefits (given their non-US work), and 2) the right to receive a foreign social security pension (by being a worker that pays into and participates in the foreign country’s own retirement system), which may lead to a reduction in their US benefits.

Working overseas may have no impact at all on an individual’s US Social Security benefits; everyone’s facts and circumstances are different. For example, if an individual works overseas on a temporary assignment and continues to pay into US Social Security for the duration of their overseas assignment, the overseas assignment should have no impact on the worker’s Social Security benefits. Alternatively, if an individual has 35 years of relatively high earnings in the US while paying into US Social Security, along with additional years living and working overseas and accumulating foreign social security benefits, their AIME (Average Indexed Monthly Earnings), which is used to calculate their PIA (Primary Insurance Amount) for Social Security benefits, may not be impacted at all.

We will explore in more detail how overseas work can impact Social Security benefits.

Totalization Agreements – Social Security Bilateral Agreements

To gain a better understanding of the potential impact on US Social Security benefits for work outside the US, it is important to first understand if the overseas work was in a country that has established a Social Security Totalization Agreement with the United States and to understand how Totalization Agreements actually affect an individual’s Social Security benefit.

Since the late 1970s, the US has established 30 bilateral Social Security agreements (commonly known as Totalization Agreements) with other countries. Most of these agreements started in countries that were the largest trading partners of the US and where US multi-national corporations were most likely to have an overseas presence. The most recent 4 agreements, with Brazil, Uruguay, Slovenia, and Iceland, were finalized in the last 2 years, and more agreements are expected in the future. Though with approximately 195 countries in the world, many people who currently or have previously worked outside of the US may not have their work covered by a Totalization Agreement.

Totalization Agreements have two primary objectives: The first goal is to eliminate double taxation (paid by employers and employees) of the same income being taxed for social security programs by more than one country. The second goal is to coordinate and protect workers’ benefits when their careers have taken place in more than one country, especially given that many countries (including the US) pay benefits on a sliding scale with higher replacement rates for lower-income individuals and lower replacement rates for higher-income individuals, which makes it important that a cross-border citizen doesn’t get unduly high benefits for what appear to be two ‘low-income’ careers that were really one high-income career spanning two countries.

Notably, each country’s rules on who is required to pay Social Security and other taxes are different. In some circumstances in cross-border work, an individual’s income, without an income tax or social security treaty benefit, may require that both the employer and employee fully pay income and social security taxes in more than one jurisdiction.  The elimination or reduction of this full taxation by multiple jurisdictions is one primary goal of these bilateral treaties; without them, it could make many cross-border or international work assignments impractical. Tax rates could easily approach 100% or more, providing a big disincentive for such employment.

How Social Security Totalization Agreements Avoid Double Taxation of Benefits

Dual Social Security tax liability for employers and employees can increase the cost of employment by up to 70% of an individual’s base salary and generally impacts both US taxpayers employed outside the US and Non-Americans working in the US. Furthermore, dual tax payments often result in no additional benefits to the employees (e.g., for those who have already earned the maximum benefits in one or both countries) and an extra tax on both employees and employers. Totalization Agreements were therefore developed to avoid this double taxation burden and to make benefit coordination more efficient for both employers and employees with respect to cross-border employment.

The United States tax code generally requires self-employed individuals, regardless of where they live in the world, to pay both the employer and employee components of US Social Security. Many countries where an individual works and lives also require self-employed individuals to pay local social security taxes in exchange for coverage. Most US Totalization Agreements eliminate both the dual coverage and dual taxation of social security in this situation and, if not directly addressed, the agreements provide flexibility for the governments to be able to make exceptions on a bilateral basis when an individual's circumstances don’t fit neatly into the way the rules are designed.

When a worker is not required to pay US or foreign Social Security taxes because of a Totalization Agreement, they generally must document their exemption by obtaining a certificate of coverage from the government whose Social Security program remains in force. It is important to review in detail the specific Totalization Agreement of the country in question. Like all tax treaties, the devil is in the details; making generalizations on whom is exempt from which system may lead to an incorrect assumption. US citizens who are self-employed overseas are required to include their foreign social security certificate of coverage with their annual tax return filed with the IRS.

Notably, Totalization Agreements (with the exception of one between the US and Italy) include what is known as a “detached worker rule”, allowing an employee posted overseas to be exempt from local social security taxes for up to 5 years. The employee would maintain benefit coverage and continue to make payments into their own national social security program for up to 5 years, after which point they would be required to localize and would have to be treated as a local employee for the purposes of social security rules. For example, it would be possible for an American citizen to work overseas for up to five years and never break from their US Social Security contribution record (i.e., they would continue to pay into US Social Security). They would not be required to make any contributions to the foreign social security system during those five years.

How Social Security Totalization Agreements Harmonize Dual Coverage Of Benefits

In addition to dealing with Social Security double taxation, Totalization Agreements also aim to harmonize benefits. Work in multiple countries can often be used to help meet the minimum working time requirements in order to be eligible for benefits from certain social security systems. With the caveat that it can also distort benefits if total years of service and coverage aren’t coordinated properly.

For example, if an individual has accumulated at least 6 credits in the US Social Security system, their work in countries that have a Totalization Agreement with the US can be counted towards the 40-credit minimum requirement for US Social Security benefit eligibility. Thus, an individual’s working years are “totalized”, where a partial benefit will still be paid out of the US Social Security system despite having paid into US Social Security for less than the 40 credits. Without a Totalization Agreement, the US worker that moved around frequently across foreign countries might never accumulate enough Social Security credits to get their US – or even any other foreign country’s – Social Security benefit at all.

Example: Bill was born in the United States in 1960. Between full-time work and summer jobs, Bill had accumulated 20 credits in the US Social Security system by the age of 25.

In 1985 when Bill turned 25, he decided to take a job in London. Once there, his personal and professional lives merged, and he decided to stay living and working in the UK until retirement. After relocating to the UK, Bill never contributed to US Social Security again.

An individual with only 20 credits under the US Social Security system wouldn’t normally be entitled to any US Social Security benefits under most Totalization Agreements the US has with other countries. However, because of the particular terms of the Totalization Agreement between the UK and the US, Bill will be entitled to US Social Security (based on only 20 credits) for the time he worked and contributed in the US. The Agreement between the US and the UK counts the years worked in the UK to gross-up Bill’s working record as though he met the 40-credit US Social Security requirement.

Bill’s monthly US Social Security benefit will likely only be around $400 a month, due to 30 of his 35 years of contributions for the AIME calculation having a value of zero, but at least he will get credit and some money back in retirement for the years he did contribute.

It is important to recognize that the Totalization Agreement does not increase the number of credits for the calculation of the monetary payout; it only helps to meet the minimum time requirement of working, so the worker gets a return on the money they paid into the system. The receipt of non-US social security benefits may also cause US Social Security benefits to decrease by way of the Windfall Elimination Provision (WEP).

Windfall Elimination Provision (WEP)

The primary function of the Windfall Elimination Provision (WEP) is to prevent workers who receive benefits from a non-covered plan from receiving higher Social Security benefits as though they were long-time lower-wage earners. While many people impacted by the WEP receive pensions from a state or US government job that is exempt from Social Security taxation, the WEP also applies to foreign government pensions.

The WEP formula reduces the Social Security replacement rate up to the first Social Security “Bend Point” (or $960/month in 2020) from a 90% replacement rate down to 40%, effectively reducing up to 50% x $960/month = $480 in Social Security benefits.

Totalization Agreements can help an individual to receive benefits from countries like the US, where they would not otherwise meet the minimum time of contribution requirements to receive any benefits. Thus, for individuals who worked in the US for less than 10 years but met the 40-credit requirement to receive US Social Security due to a totalization calculation from work in a foreign country, their US Social Security Benefits would not be impacted by the WEP. Alternatively, if an individual has contributed to US Social Security for more than 30 years, and they also receive benefits from non-covered employment, the Windfall Elimination Provision will not apply simply by virtue of the WEP rules themselves (which eliminate the reduction after 30 years of paying into Social Security).

Taxation Of Other Countries’ Social Security Benefits By The United States

One of the immediate concerns for retirement planning (and often a major expense!) is the taxation of retirement income, which includes the taxation of US and foreign Social Security benefits. Many Americans and their financial advisors who deal with cross-border issues for the first time are surprised to learn that the US taxes its citizens and Green Card holders on worldwide income, regardless of where they live.

So, if a US Citizen or Green Card holder lives outside of the US and earns most or all of their income outside the US, all of that income, including both US and foreign Social Security benefits, will generally be subject to the taxation rules of the US… and if the income is in a foreign country, may also be taxed in the foreign country of residency. Though, as discussed further below, exceptions may apply.

Which Country Gets ‘First Bite’ At The Income Tax Apple For Cross-Border Workers?

The country of primary physical residency typically has the ‘first bite at the apple’ when it comes to taxing the income of an individual, as most countries with an income tax will levy income taxes on worldwide income.  The US Tax Code considers all American citizens and Green Card holders to be residents of the US for tax purposes, even though they may actually reside in another country.

That means that if an individual resides in the United States and receives both US and foreign Social Security benefits, the US Federal and state governments will consider foreign social security as US taxable income first.

By the same measure, if an individual resides outside the US while receiving social security benefits from multiple countries, the country where they live will generally tax their worldwide income. If that person living outside the US is a US taxpayer, the US Federal Government, which taxes worldwide income, will also require the US citizen to include their foreign benefits as taxable income on a US tax return. Similarly, when the US pays Social Security benefits to non-American taxpayers overseas, there is often a US tax withholding on that income.

Notably, the order of taxation is important not just to the taxpayer but also to the government entities collecting the taxes, as many aspects of taxation are affected, including how foreign tax credits are applied, withholding taxes, making estimated tax payments, and the application of treaty rules. The order of how taxation by each government entity is carried out can also potentially impact how the individual is taxed at the local, state, and Federal levels.

The obvious complication of these scenarios is the risk that retirement benefits (or other income) will be double-taxed and whether there is a way to reduce the taxation of benefits from one country when it is also being taxed by another.

Bilateral Tax Treaties Clarify How Cross-Border Income Will Be Taxed

When cross-border conditions are involved, it is often not obvious which government(s) have the right to tax social security (or other) income for a given individual. For US taxpayers, in almost all circumstances, regardless of where they live in the universe, the US government retains the right to tax them on their worldwide income.

There are a few minor exceptions and, in order to discover these, one must go deep into the world of bilateral tax treaties. Even if you are a native English speaker with a degree in tax law, treaty interpretation is one of the more challenging aspects of cross-border tax planning. It is not uncommon for even an experienced professional to make errors in treaty interpretation, though for many client situations, an understanding of a tax treaty can lead to some rather interesting results. Before getting a bit deeper into treaties, let’s cover a few of the more common issues.

Many countries have bilateral tax treaties with their most common trading partners. The US, for example, has 58 income tax treaties with other countries, and there are over 2,500 bilateral tax treaties in force around the world. Double tax treaties are normally a legal agreement between two countries that govern which country has the right to tax different types of income and often at what tax rate. Treaty provisions apply to both corporate and individual income, and updates happen very infrequently.

Treaty language is often clear in some situations and very opaque in others, and each treaty is different. Thus, one should be very hesitant to generalize on the application of a treaty to a specific client situation.  For the financial planning professional who is curious about the application of tax treaties, here are a few key things you may find in tax treaties between the US and other countries:

1. Income tax treaties generally cover the following types of income: business income, income from real property, dividends, interest, retirement, royalties, capital gains, employment (including employment with government agencies), social security, alimony, and child support.
2. Savings Clauses in almost all treaties make it such that benefits that appear to be available to an individual are often, but not always, null and void for US taxpayers.
3. Limitations on Benefits Clauses often exist as an effort to prevent abuse of the law.
4. Treaties often allow for the exchange of information between countries.
5. Non-US taxpayers (generally US citizens and Green Card Holders) will often be allowed to lower US tax rates on certain types of US-source income.
6. When interpreting and applying treaty positions to a client's situation, a team approach, which includes a lawyer, CPA, or other tax professional experienced in international tax planning, is often advised, especially for large value and complex situations.

Reading and understanding a bilateral income tax treaty and applying its results to a client's situation can be one of the most difficult yet rewarding components of specializing in cross-border planning. You may find that taxes or tax withholding on certain income from the US or another country can be reduced or eliminated (though you may have trouble convincing a bank, broker-dealer, tax authority, or other financial intermediary that you are correct).

You may also read a certain clause in a treaty that leads you to believe that only a certain state (country) has the right to tax certain income, leading you to conclude that certain income is not taxable in the United States. You would often be wrong in the conclusion with respect to your US taxpayer client due to the “savings clause” found in many treaties that, despite other provisions, allows the US to impose taxation on its citizens’ worldwide income. While there are many general rules, the devil is always in the details.

To find a list of all of the countries that have an income tax treaty, a simple visit to the IRS website income tax treaty page will give you a list of all of the current and past treaties as well as technical explanations. The tax treaties will all have a section that discusses the taxation of Social Security income. When you have a client who is either a resident of another country or who will receive social security benefits from another country, you can look to determine whether a tax treaty might apply to their situation and then research the relevant provisions.

One of my favorite tax treaty stories on Social Security arose from a blog post by Phil Hodgen, one of the best authors on the tax and legal complexities for cross-border situations involving the US. Phil wrote about the US-Italy income tax treaty with respect to Social Security and, in his typical style, made the complex area of international tax law understandable…after several twists and turns where it seemed unclear whether the US could tax US Social Security for an American living in Italy, the conclusion was that, in fact, this was taxable income in the United States.

In response to the blog post, another cross-border tax professional, Marina Hernandez CFP, EA, responded that in the technical description of the tax treaty, further language indicated that, in fact, if the US citizen residing in Italy happened to also be an Italian citizen, then only Italy would be able to tax the US Social Security income.

Tax treaties are complicated, and a team approach to getting the correct answer, even for something that seems as simple as social security taxation, can be extremely useful.

Reducing Foreign Income Tax – The Foreign Tax Credit And Foreign Earned Income Exclusion (FEIE)

For the US Citizen who lives in or outside the US and is taxed by a government outside the US on their retirement income, they can generally claim a foreign tax credit on their US tax return. The Foreign Tax Credit is the most common way a US taxpayer can avoid being double-taxed on foreign income.

In order for a foreign tax to qualify for the US Foreign Tax Credit, it must pass 4 tests:

1. The tax must be imposed (i.e., a credit can be claimed only for a tax that has been imposed by a foreign country or US possession);
2. The tax must have been paid or accrued (i.e., it can’t simply be a potential or future tax due; it won’t be eligible for the Foreign Tax Credit until it actually is paid or accrued at that future date);
3. The tax must be a legal and actual tax liability (note that this may not be the total withholding amount, as any tax refunds would reduce the amount of tax that would qualify for the credit); and
4. The tax must be on income (i.e., foreign wages, dividends, interest, and royalties will generally qualify) or payment made in lieu of income (e.g., a foreign levy that is not in payment for a specific economic benefit and that is imposed in place of – not in addition to – an income tax).

There is no limitation on the amount of the Foreign Tax Credit other than the maximum US tax owed on foreign earned income (the credit is non-refundable; additionally, it can be carried back for 1 year and carried forward 10 years). When used properly, it is a straightforward and easy way to avoid double taxation by reducing US Federal taxes, one for one, against foreign taxes paid. Note, however, that the Foreign Tax Credit is a Federal reduction and, generally, foreign income will be fully taxed by those US states that impose a state income tax (without necessarily receiving a foreign tax credit adjustment for state taxes paid on the same income).

For many US taxpayers contemplating moving overseas, they have often come across the Foreign Earned Income Exclusion (FEIE). For the 2020 tax year, if a US taxpayer meets the bona fide residence test or the physical presence test, they can exclude up to $107,600 (indexed for inflation) in foreign-earned income from Federal taxation in the US.

However, the FEIE is often misunderstood in retirement planning. Individuals often think that by moving overseas and taking withdrawals from their US retirement accounts, as well as Social Security income, that they can use the FEIE to avoid US taxes. The problem here is about the definition of income. The US tax laws do not consider withdrawals from US retirement accounts (401ks, 403bs, IRA accounts, etc.) or Social Security income to be earned income (i.e., the “EI” in the Foreign Earned Income Exclusion). Thus, the FEIE does not exempt this retirement income from US taxation, even if an individual meets the other conditions for the FEIE to apply. The FEIE is not a retirement planning tool to lower US taxes on retirement income; instead, it functions to reduce taxes on any earned income received overseas.

Another method used to reduce double taxation in retirement, which has been touted by certain advisors who live outside the US, is the renunciation of US Citizenship. This is an extreme planning measure that is generally not worthwhile when all factors are considered but has increased in popularity over the past decade as a direct result of the Dodd-Frank Act. It should be noted that renunciation of US citizenship does not lead to the cancelation of Social Security benefits, though it does impact an individual’s rights to claim income tax treaty benefits.

Foreign tax credits and the application of some treaty positions will often lower or eliminate double taxation of benefits. Having a detailed understanding of your clients’ situation and access to professional resources when needed are critical in being able to help your clients plan accurately for their retirement income and to ensure that they are tax compliant while not paying more taxes to which they are legally obligated.

Cross-Border Planning Considerations For Clients With Respect To Social Security

The most important cross-border planning considerations for clients who work in more than one country tend to involve the number of years they contribute to a particular system and how future benefits will be impacted. For example, establishing clarity about an individual’s eligibility for benefits and whether US Social Security will be decreased by the WEP will largely depend on how long they contributed to each respective country’s Social Security system.

The important milestones in the US Social Security system and cross-border work history are the following:

• To receive any Social Security benefits from the US, a minimum of 6 credits must be accumulated, and this can generally be accomplished by working in two different calendar years.
• In order to receive full benefits from US Social Security and not have them reduced by the WEP, it would be necessary to accumulate 40 credits in the United States in combination with one or several of the countries with whom the US has a Totalization Agreement.
• If an individual will be receiving benefits from a foreign social security system, having more than 30 years of substantial earnings in the US will ensure that there is no reduction in Social Security benefits due to the WEP.

Cross-Border Planning – Special Situations Regarding Social Security

Spousal benefits are one area where the US Social Security system can provide interesting benefits in cross-border situations. Generally, individuals who are 62 or older, with spouses who have applied for Social Security benefits, will be entitled to the higher of their own benefit or 50% of the claiming spouse’s benefit.

Many Americans in the US or overseas are married to someone who may or may not have worked in, lived in, or even visited the US. In order to qualify for spousal benefits, it is not necessarily a requirement to have worked in, lived in, or even visited the US. However, the rules pertaining to spousal Social Security benefits should be verified as they are different depending on the country in which the foreign spouse is a resident or citizen. These situations, involving mixed couples consisting of US and non-US citizens, can create interesting planning opportunities and challenges. If the US citizen spouse is eligible for Social Security, then their non-US citizen spouse is often eligible for spousal benefits from Social Security, even if they have never lived in the US. Medicare benefits may also be possible, but these generally require the non-citizen spouse to have 5 years of legal residency in the US.

The US Social Security Administration often stops paying benefits to any non-US citizen 6 months after leaving the United States. There are major exceptions to this rule, though, generally for citizens and residents of countries that have a Totalization Agreement with the United States. If you have a non-US-citizen client who is looking to move overseas, you will want to see if they will be entitled to receive Social Security benefits at all if they leave the US. This will depend on a number of factors, including when they were eligible for benefits, if the benefit in question is based on another worker’s earning history, and their country of citizenship or residency.

Limitations On Paying US Social Security Benefits To Foreign Bank Accounts

There are approximately 700,000 beneficiaries receiving Social Security benefits outside the US, and the SSA produces a list that breaks out these payments by country and type of payment (check, international payments, and payments through a US bank).

For US Citizens who live overseas, they can generally receive their US Social Security payments in either a US or non-US financial institution. However, the Social Security Administration (SSA) does have some restrictions. For US citizens who move to Cuba, North Korea, or other restricted countries, the SSA will suspend payments but will reimburse them retroactively if the citizen moves to an eligible nation-state. Furthermore, if a US citizen moves to Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, or Uzbekistan, there are special procedures that must be followed to regularly receive benefits.

Social Security Planning Issues For Self-Employed Business Owners With Cross-Border Income

Self-employed individuals and small business owners who are US taxpayers either living outside the US or with overseas income face several complexities as well as opportunities with respect to retirement income planning. It is well beyond the scope of this article to get into all of these important details, though a few highlights are worth mentioning.

If the self-employed individual lives in a country without a US Totalization Agreement, but with Social Security taxes of its own, the formation of a corporation, whether US or foreign, will likely be a good idea to optimize Social Security taxes. However, forming a foreign corporation is riddled with complexity for US taxpayers, and a qualified tax advisor and/or attorney should be consulted before the entity is formed in order to understand the critical choices that need to be made to avoid punitive filing requirements and taxation of the overseas entity in the US.

Given the complexities of the situations faced in these situations, a US tax advisor and/or lawyer skilled in working with small business owners on cross-border issues can be critical to both staying tax compliant as well as optimizing income and Social Security taxes.

Cross-Border Discovery Questions Regarding Social Security

In order to better understand the impact of working outside the US on an individual’s Social Security benefits, knowing the right questions to ask is critical during the data-gathering phase.

Below is a starter list that should be helpful for advisors to collect information about your client’s overseas employment and social security situation.

QUESTIONS TO ASK THE CLIENT:

• In which country(ies) has the client worked, and for how many years in each country?
• Was the client on an expat package when overseas, and did they and their employer continue to pay into US Social Security and/or into another country’s social security system?
• Was the client self-employed?
• What nationalities does the client hold?
• In what country does the client plan to retire?
• What are the expected benefits of all social security systems? (For clients who aren’t sure what their social security benefits are, they can be directed to their social security office to request an explanation of benefits, often years in advance of their benefits getting paid out.)

QUESTIONS FOR THE ADVISOR TO RESEARCH:

• Was the work outside the US in a country that has a Totalization Agreement with the United States?
• Was the work outside the US in a country that has an income tax treaty with the United States?
• Were the client’s US tax returns filed properly with respect to all matters related to foreign employment?
• How will the country of residence, the country paying benefits, and the United States (if the individual is retiring outside the US), tax retirement benefits?

Most retirement planning software programs are not designed with the cross-border client in mind. You may have to make certain assumptions on taxation, exchange rates, benefits, etc., and then augment your planning results with the impacts you discover by diving deeper into the implications of foreign taxation and treaties.

Cross-Border Medicare Considerations

Medicare often comes up in the discussion of Federal benefits and cross-border retirement planning. Medicare benefits are, in general, not available outside of the United States, and Medicare is not part of the Social Security Totalization Agreements (limited exceptions are made for emergency services). In addition, working outside of the United States, even in countries with Totalization Agreements, will not allow an individual to be totalized to meet the 10-year minimum requirement for contributions to Medicare in order to be able to claim Medicare benefits. Which makes it especially important for the US expatriate to have at least enough (i.e., 10 years of) US work to ensure they will qualify for US Medicare benefits (at least/especially if they plan to retire in the US and rely on the US Medicare system for healthcare in retirement).

On the other hand, Medicare does cover individuals who live in Puerto Rico, Guam, the US Virgin Islands, and a few other territories of the United States. Some overseas benefits are available from Medicare Advantage Plans, though you will have to review the plan’s coverage to be certain. For members of the military who receive Benefits under the Tricare program, Tricare coverage is available outside of the United States.

An important planning consideration related to Medicare is for individuals who turn age 65 while living overseas and who may return to the US. For every year that an individual is eligible for Medicare, and they choose not to enroll, their future premiums will increase by 10% per year missed. Exceptions are granted when an individual is covered by an employer-sponsored health plan. Documentation of coverage should be obtained from the employer and insurance company confirming employer-sponsored coverage over the age of 65 before applying for Medicare benefits.

---

Cross-border planning is an exciting subset of comprehensive financial planning and impacts millions of people living in the US and overseas. Social Security is just one area where individuals with overseas work experience can benefit from working with a planner who has a comprehensive understanding of the impact of their international experience.

Each client’s situation is unique, and the challenges often require a combination of financial, tax, and legal expertise. Cross-border situations don’t discriminate based on wealth and income, and clients who are clearly in the middle class face the same complexities as clients who are in the 1%.

As a financial advisor whose goal is to act in the best interest of clients, it becomes critical that they understand where their expertise approaches its limits and where they (or the client) may need to involve other professionals in order to ensure the advice being given is accurate.