As you approach your initial Medicare enrollment period, which begins three months before your 65th birthday, you may be wondering if you need to sign up if you or your spouse continue to work and have employer-provided coverage. Your specific circumstances, Medicare’s payer rules, and the IRS’s tax rules will determine the appropriate path forward. Here are answers to six common questions.
1. Am I required to enroll in Medicare Part B at age 65 if I’m still on my employer’s health plan?
The answer depends on the size of the employer.
If your company has at least 20 employees, you can remain on their health insurance plan. You can also remain on your spouse’s health insurance after your 65th birthday if the employer’s plan covers spouses.
If you or your spouse’s employer has fewer than 20 employees and is not part of a multiple employer group health plan, you must sign up for Medicare Part B to avoid late-enrollment penalties.
If your company is too small for you to delay enrolling, you’ll have an initial enrollment period of seven months that starts three months before your 65th birthday.
If you retire from or are laid off from your company, you'll have a special enrollment period of eight months following the date of termination to sign up for Medicare Part B.
Missing these enrollment deadlines could be costly.
2. What are Medicare’s late enrollment premium penalties?
You’ll have to pay a 10% penalty on your premium for every twelve-month period that lapses after you should have enrolled in Medicare Part B but didn’t. This penalty is permanent.
Likewise, if you didn't sign up for Medicare Part D prescription drug coverage during either your initial or special enollment period, you may be assessed a 1 percent penalty for each month you failed to enroll after the deadline if you don't have a creditable prescription plan alternative. Like the Part B penalty, it is also permanent.
3. Will I receive additional hospital Insurance If I only enroll in Medicare Part A while I’m still in my employer’s health plan?
Medicare Part A is generally premium free if you or your spouse worked and paid FICA tax for at least 10 years. Employer-provided coverage is always the primary payer. Medicare’s coordination of coverage rules will determine whether Part A will pay for excess hospital charges. As the secondary payer, Medicare may, but is not guaranteed to, cover the portion of hospital bills that an employer’s health insurance does not cover.
4. If I can remain covered by my employer’s healthcare plan, are there any reasons why I shouldn't switch over to Medicare coverage?
Medicare Part B and D premiums, deductibles and co-pays may be higher than those on your employer’s health plan, making Medicare a less attractive option. Plus, you have to pay Medicare premiums out of pocket—they can’t be withdrawn from your paycheck on a pre-tax basis.
But perhaps the biggest reason not to switch is that doing so may jeopardize your right to full federal protections for Medicare enrollees who also want to sign up for Medigap or Medicare Advantage coverage offered by private insurance companies. These protections prevent private insurers from requiring you to take medical exams or disclose preexisting conditions that could cause them to charge you higher premiums or deny coverage altogether. But these protections only apply if you sign up for Medicare when you’re no longer covered by any other health plan.
5. Can I continue to contribute to a Health Savings Account if I enroll in Medicare?
Normally, employees can contribute to a Health Savings Account (HSA) if they’re covered by a High Deductible Health Plan.
But you can’t contribute to an HSA if you’re covered by any Medicare plan, including Part A. And since Part A coverage retroactively starts six months before you enroll, it’s important to stop contributing to your HSA at least six months before you plan to sign up for Part A. If you don’t, any contributions you make after that time may be classified as excess contributions and you may have to pay a 6% IRS penalty unless you remove these contributions from your account.
The good news? If you still have money left in your HSA after you sign up for Medicare you can use it to pay premiums for Medicare Parts B and D and Medicare Advantage plans (but not Medicap plans).
6. What if I’m on COBRA?
COBRA is the acronym for the Consolidated Omnibus Budget Reconciliation Act, a federal law that allows you to stay on an employer’s health plan for up to 18 months after you retire or you’re laid off. If you elect COBRA, you will pay up to 102 percent of the insurance premium.
However, maintaining health insurance through COBRA is not the same thing as being covered by your employer’s health plan when it comes to Medicare enrollment deadlines.
Your eight-month SEP starts when you’re no longer on your employer’s plan, not when COBRA coverage ends. To avoid late enrollment penalties, you should sign up for Medicare even if you still have COBRA coverage. Since you’ll be paying both Medicare and COBRA premiums, it may make more sense to drop the COBRA coverage unless the latter provides better coverage and you can afford to pay for both.
If you choose to stay on COBRA, your employer will need to complete Form CMS-L564E to certify that you had creditable coverage prior to your Medicare enrollment. During the pandemic, the Social Security Administration is allowing individuals to complete Form CMS-L564E if they cannot obtain certification from their former employer. If you complete Form CMS-L564E, you will need to provide additional verification, such as a pay statement, insurance card, or explanation-of-benefits letter.
If you're confused, help is available
Choosing Medicare coverage is confusing enough without having to figure out how your employer's health plan fits into the equation. Fortunately, help is available. Every state has a State Health Insurance Assistance Program where Medicare consultants can meet with you in person or virtually at no cost to help you make the right choices. You can find one in your state at https://www.shiptacenter.org/.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
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Joelle Spear is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or jspear@canbyfinancial.com
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