If you’re nearing 65 and not ready to retire, you’re in good company. Currently, more than 10 million American workers are 65 or older. For individuals covered by health insurance at work or through a spouse’s plan, approaching 65 means making sure you understand Medicare requirements, including risks of Medicare penalty.
Delaying your enrollment in Medicare Part B would allow you to save some money on monthly premiums until the job-based insurance ends. However, failing to enroll for Part B coverage within a specific window can result in a Medicare penalty that raises your premium for the rest of your life, giving you less money to put into creating a satisfying retirement. And the financial fallout could be catastrophic if you have a serious health event while you’re not covered by either job-based insurance or Medicare. Careful Medicare planning is essential for protecting the retirement strategies you and your financial planners have crafted.
The Initial Enrollment Period (IEP) for you to sign up for Medicare is a seven-month period that starts three months before you turn 65 and ends three months after the month of your birthday. (Your IEP starts a little earlier if you were born on the 1st of the month.) You don’t want to miss this window unless you know that you qualify for a Special Enrollment Period (SEP)—in other words, an opportunity to enroll later on with no penalty. Being covered by insurance at work may or may not qualify you for a SEP. Make a plan for Medicare enrollment before you turn 65 to avoid penalties and gaps in coverage.
For most people, it makes sense to apply for Medicare Part A as soon as they turn 65, assuming they worked long enough to pay at least ten years of Medicare taxes. If that’s you, you’re probably eligible for Part A with no premium, so there’s no downside to applying at 65.
Individuals who didn’t pay enough Medicare taxes do have to pay a premium for Part A and should apply within three months of turning 65 to avoid penalties. The late enrollment Medicare penalty for Part A is temporary. It’s applied to the premium for twice the number of years that enrollment was delayed. (So someone who owes a Part A premium and signs up two years late would be penalized for four years.)
All this being said, if you are covered by a high deductible employer plan and are contributing to an HSA, there are some additional considerations before you enroll in Medicare Part A. If you wish to continue to contribute to your employer HSA, you should delay enrolling in Medicare. Once you enroll you can no longer make contributions. Enrolling after your 65th birthday is possible, but you can only be covered for six months retroactively. You are always able to spend HSA funds that you have accumulated.
Medicare Part B enrollment issues can be complicated, especially for individuals who have complex insurance arrangements, so it’s always best to speak with your advisors about any specific enrollment questions to ensure you avoid a Medicare penalty. With that said, here’s an overview of three common scenarios for people working past 65.
You could also elect to sign up for Medicare Part B while still covered by your employer health plan. Because your health insurance is sponsored by a large employer, the Medicare Secondary Payer (MSP) rules apply. Your job-based insurance is primary and pays your covered medical expenses. Medicare only pays for costs that the primary payer didn’t cover (and even then may not cover everything).
Small employers want eligible employees to sign up for Part B because the Medicare Secondary Payer rules generally work in their favor. When an individual is covered by both Part B and job-based insurance through a small employer, Medicare is the primary payer and the employer’s insurance pays second.
These scenarios can be complicated because different group health plans/small employers say different things about Medicare for workers over 65. Work with whoever’s in charge of health plans at your company and your insurance advisors to make sure you’re clear on what your future coverage is going to look like.
Starting with the end of your Part B enrollment period, you’ll pay a 10% penalty for every year that you wait to sign up. Say you turn 65 this year, don’t qualify for a Special Enrollment Period and wait three years to enroll in Part B. You’ll have a 30% penalty added to your premium for the rest of your life.
You don’t need to sign up for Medicare Part D as long as you have credible drug coverage through job-based insurance. But if you don’t have adequate drug coverage or don’t qualify for a SEP, you must enroll during your IEP at age 65. If you go more than 63 days without credible drug coverage, your Part D premium will be increased by a 1% penalty for every month you go without coverage.
If you start taking Social Security benefits before turning 65 but don’t want to enroll in Medicare Part B at 65, you’ll need to take action. The SSA will automatically enroll anyone taking Social Security benefits in Medicare Part A and Part B the month they turn 65. You can refuse Part B enrollment, but you’ll need to contact the SSA before coverage starts. You should receive a card in the mail giving you instructions for refusing enrollment.
Sachetta’s advisors are here to help you navigate complicated Medicare penalty and enrollment questions. Every person’s situation is unique. Speak to your financial and insurance advisors to ensure you don’t make any missteps that leave you without health insurance or raise your Medicare premiums. Let’s make a plan now so you know you’ll be covered without expensive penalties, no matter when you decide to retire. Contact us today.
Joseph Sachetta, CFP®, CPA/PFS, MBA, MST, For over 40 years, Joe has worked in finance and accounting. He is a Certified Financial Planner, and a Certified Public Accountant. Joe’s passion lies with helping his clients strike a balance between living for today and saving for tomorrow.