Tony Farrell turned 65 four years ago — the age when most people shift their health coverage to Medicare. But he was still employed and covered by his company’s group insurance.
“I asked the company if I needed to move to Medicare when I turned 65, and was told that I could stick with their plan, so that’s what I did,” said Mr. Farrell, a marketing and merchandising executive for specialty retailers. At the time, he was working for a company that makes infomercials in San Francisco.
Four months later, Mr. Farrell was laid off, but he kept the company’s health insurance for himself and his family under the Consolidated Omnibus Budget Reconciliation Act (Cobra), the federal law that allows employees to pay for coverage as long as 36 months after a worker leaves a job.
“I just thought, this is great — the coverage won’t change,” he recalled. “I was just relying on my own logic and experience, and felt that if I didn’t need a government service, I wouldn’t sign up for it.”
But Mr. Farrell unknowingly ran afoul of one of the complex rules that govern the transition to Medicare — and now he is paying the price.
Medicare requires enrollees to sign up during a limited window before and after their 65th birthday. Failing to do so leads to stiff late-enrollment penalties that continue for life, and potentially expensive, long waits for coverage to begin. There is one major exception: People who are still employed when they turn 65 can stay with employer-provided group coverage.
What Mr. Farrell missed is that Cobra coverage does not qualify. He didn’t realize his error for more than a year, when the end of his Cobra coverage approached and he began looking into Medicare. The mistake means that he will pay a late-enrollment penalty equal to 20 percent of the Part B base premium for the rest of his life. This year, the penalty increases his standard premium of $135.50 to $162.60.
The transition to Medicare from other types of insurance is plagued by problems like Mr. Farrell’s — and, so far, there isn’t much of an early warning system to alert people close to retirement age of the pitfalls. These complex rules also affect people moving from Affordable Care Act exchange plans and retiree health coverage. And workers who use Health Savings Accounts in conjunction with high-deductible employer insurance need to watch out for tax issues related to timing.
The basics on signing up
Medicare enrollment in Part A (hospitalization) and Part B (outpatient services) is automatic if you have claimed Social Security benefits before your 65th birthday — your Medicare card will arrive in the mail and coverage begins the first day of the month in which you turn 65. There is no premium charged for Part A in most cases, and you may be able to turn down Part B at that point without incurring late-enrollment penalties if you are still working and receive your primary insurance through work.
If you have not yet applied for Social Security, signing up for Medicare requires proactive steps to avoid problems.
Medicare offers an Initial Enrollment Period around your 65th birthday. If you miss that window, you will be subject to a late enrollment surcharge equal to 10 percent of the standard Part B premium for each 12 months of delay — a penalty that continues forever. That can really add up. In 2017, 1.3 percent of Part B enrollees paid penalties (about 701,000 beneficiaries), according to the Congressional Research Service. On average, their total premiums were 31 percent higher than what they would have been.
Medicare’s prescription drug program (Part D) comes with a much less onerous late enrollment penalty, equal to 1 percent of the national base beneficiary premium for each month of delay. In 2019, the base monthly premium is $33.19, so a seven-month delay would tack $2.32 onto your plan’s premium.
Late enrollment also exposes you to significant gaps while waiting for Medicare coverage.
Medicare has three enrollment periods. The Initial Enrollment Period includes the three months before you turn 65, the month of your 65th birthday and the three months after you turn 65. Coverage begins one to three months later, depending on when you enroll. For people transitioning from employer coverage at other ages, a Special Enrollment Period is available for eight months after other insurance ends, and coverage begins the first month after you enroll.
But late enrollees must wait for a General Enrollment Period that runs from Jan. 1 to March 31 each year — and Medicare coverage does not begin until July 1.
“The penalties are bad enough, but the real risk is waiting for coverage to begin,” said Joe Baker, president of the Medicare Rights Center, a consumer advocacy and policy group. “You face the risk of large out-of-pocket expenses, medical bills or debt, or inability to access care. It increases the reliance on emergency room care and creates needless health risks.”
Mr. Farrell, for example, applied for Medicare one day after general enrollment ended, in April 2016. “I didn’t realize until too late that I had missed the deadline,” he said. As a result, his Part B coverage did not begin until July 2017 — he was fortunate to find a commercial insurance policy to plug that gap while he waited.
Here are the most common situations that lead to costly errors.
IF YOU’RE STILL EMPLOYED AT 65 People who are actively employed at age 65, and their spouses, may delay enrollment in Medicare. The key word here is “active,” as Mr. Farrell discovered. “Cobra does not count as active employer group coverage,” said Philip Moeller, author of Get What’s Yours for Medicare: Maximize Your Coverage, Minimize Your Costs. “If you lost your employer coverage, you still need to sign up for Medicare when you turn 65.”
There is one other exception to the active employment rule: If you work for a company with 20 or fewer employees, Medicare becomes the primary payer, so sign up when you turn 65.
“Insurers and employers audit this regularly, and if you become seriously ill, the insurer will realize you should have been on Medicare,” Mr. Baker said. “They will refund your premiums but they also can claw back any payments they may have made that should have been covered by Medicare.”
IF YOU HAVE A HEALTH SAVINGS ACCOUNT More employers are offering high-deductible health insurance plans, and that is creating an additional complication for some workers when they retire and enroll in Medicare. These plans often are paired with tax-preferred Health Savings Accounts (H.S.A.s), which accept contributions from employers and workers to offset out-of-pocket expenses.
H.S.A.s can accept contributions only from people enrolled in high-deductible plans — and Medicare does not meet that definition. Contributions must stop when you enroll in Medicare, although withdrawals can continue, and you’ll owe taxes on any disallowed pretax contribution that you may have made. And the timing can be complicated, because Medicare Part A coverage is retroactive for six months for enrollees who qualify during those months. For those enrollees, H.S.A. contributions must stop six months before their Medicare effective date in order to avoid tax penalties.
IF YOU ARE INSURED UNDER THE AFFORDABLE CARE ACT Another common error is sticking past age 65 with a commercial policy obtained through the Affordable Care Act marketplace exchanges.
Federal law requires that you switch to Medicare at age 65. Like Cobra, marketplace coverage is secondary to Medicare; switching to Medicare later must be done during the General Enrollment Period, leaving you exposed to possible long coverage delays like the one experienced by Mr. Farrell — plus penalties.
Initially, people who made this mistake were required to repay any subsidies received for their policies, and they were subject to the standard late-enrollment penalties.
Widespread confusion about the problem led the Centers for Medicare & Medicaid Services to allow people to apply for relief from the late enrollment penalties. The relief allows some people to end their exchange coverage and enroll in Part B without penalties or gaps in coverage, and in other cases to have their penalties reduced. The relief is available through September of this year.
Details are available on this Medicare fact sheet.
IF YOU ARE ON RETIREE COVERAGE Some retirees receive coverage from former employers that supplement Medicare — typically help with meeting cost-sharing requirements or prescription drug coverage. Retiree benefits always are secondary payers to Medicare. A common error is turning down Part B coverage in the belief that this supplemental coverage is primary — and ending up with no primary coverage.
In this situation, late Medicare sign-up must be done during the General Enrollment Period, and exposes you to late enrollment penalties.
There’s a push for change
If the rules governing the transition to Medicare sound complicated, rest assured that experts agree. “Moving into Medicare from other kinds of health insurance can be so complicated that it should be a required chapter in Retirement 101,” Mr. Moeller said.
The only government warning about the risks associated with late enrollment comes in the form of a very brief notice near the end of the annual Social Security Administration statement of benefits.
The Medicare Rights Center and other advocacy groups have proposed legislation that would require the federal government to notify people approaching eligibility about enrollment rules, and how Medicare works with other types of insurance. The legislation — the Beneficiary Enrollment Notification and Eligibility Simplification Act, also would eliminate coverage gaps now experienced by enrollees during the Initial Enrollment Period and General Enrollment Period. The legislation was introduced in Congress last year, and will be reintroduced this year.
In the meantime, Mr. Baker proposes a simple rule of thumb to help people approaching Medicare eligibility to avoid costly errors.
“If you are eligible for Medicare, you should really consider it to be your default, primary coverage. If you are going to decline Medicare, think very carefully and take the time to really understand all the rules.”