By Jeff Derdiger, Advisor, Private Client Services
Whether or not you’re considering retirement or if you’re in your early 60s, you need to be prepared for the move to Medicare. Coverage generally kicks in when you reach the age of 65; however, the government has set firm guidelines on the timing for Medicare enrollment. If you miss the window of opportunity, you could end up paying a penalty on your premiums or have a gap in coverage. On the other hand, if you have a good healthcare plan through your employer, you may not want to jump over to Medicare just yet. By understanding how Medicare works, you can make an informed decision about whether and when to enroll and take full advantage of all the benefits it has to offer.
The Medicare Alphabet
Original Medicare consists of two primary parts: Medicare Part A provides hospital coverage, which is premium-free for most, while Medicare Part B is low-cost insurance for doctor and outpatient expenses.An alternative to Original Medicare is Medicare Part C, also known as Medicare Advantage plans.These replacement plans are offered by private companies that are approved by Medicare and provide all of the coverage of Parts A and B. Most Advantage plans also include Medicare Part D coverage for prescription drugs, and many offer additional benefits, such as dental and vision care. Although Medicare Advantage plans can be useful in some situations, they also have drawbacks. Not every doctor accepts Medicare Advantage plans, for example, and the insured generally is responsible for various co-pays on medical expenses above any plan deductible.
For this reason, many people choose a Medicare Supplement Plan, also referred to as a Medigap policy, in combination with Medicare Part A & Part B. As the name suggests, Medigap covers what Medicare doesn’t pay. You can enroll in Medicare Parts A and B, and add a Medicare Supplement plan to cover deductibles and co-pays, and enroll in a Medicare Part D plan to cover prescriptions. The design essentially looks like a zero deductible, zero co-pay health plan for hospital and medical services. The good news is that either strategy (Original Medicare or Medicare Advantage) generally costs significantly less than group coverage, while ensuring full access to quality healthcare.
The Enrollment Process
Anyone receiving social security benefits is automatically enrolled in Medicare Parts A and B the first day of the month they turn 65 (or the first day of the previous month, if their birthday happens to land on the 1st), as long as they meet the program requirements. To qualify for premium-free Part A and be eligible to enroll in Part B, the individual or their spouse has to have worked at least 40 quarters (10 years) and paid into the Medicare system.
If you are not yet receiving benefits—for example, you deferred social security to age 70—you can still start Medicare at age 65, but you won’t be enrolled automatically. To enroll, simply go online at www.SocialSecurity.gov, call the Social Security Administration at 1-800-772-1213, or visit your local Social Security office in person.
After enrolling in Medicare Part A and Part B, you also need to choose which additional coverages to add. Most people start receiving mailers from Medicare Advantage and Medicare Supplement providers six months before they turn 65; however, they cannot enroll in any part of Medicare until three months before their 65th birthday month, assuming they do not already receive Social Security benefits.It is important to discuss the different coverage options with a knowledgeable insurance broker.
Choosing to Defer Coverage
If someone is still working, or their spouse is working, and they are covered under an employer’s group health plan, they may want to defer their Medicare benefits until a later date. The premium rate for Medicare Part B is based on the individual’s income listed on their tax return from two years prior and currently starts at $134/month. In 2017, the maximum monthly premium for Part B is $428.60/month. Odds are you will save money and improve your benefits by switching from group coverage to Medicare, if eligible, but it rarely makes sense to have both plans in place. In fact, if you are enrolled in an HSA-compatible group plan, you would lose the ability to make HSA contributions if you are enrolled in any Medicare coverage, including premium-free Part A.
For companies with 20 or more employees, the group insurance is primary to any Medicare coverage. That means Medicare pays second behind the group plan, which may not be worth the expense of the Part B premiums. If you are enrolled automatically, simply send back your Medicare card deferring the Part B coverage, and you will receive a new card for Medicare Part A only. You can defer Medicare as long as you want without any penalties, as long as you’re covered by a group health plan as either an active employee or a dependent of an active employee. When you leave your job, you have eight months to add the Part B coverage without penalties, and also add a Medicare Advantage or Medigap plan at that time.
Penalties and Fees
Penalties may be assessed for people who don’t have group insurance—in other words, they are not covered under an employer plan—and they still have chosen not to sign up for Medicare. If they defer Part B when they first become eligible, their premiums will be much higher if they want to add it later on. Unless you have an eligible deferral, like coverage through an employer-sponsored healthcare plan, you pay a financial penalty of 10 percent per year for every year you go without Medicare Part B. That means, if someone waives Medicare when they turn 65 and later want to enroll at age 70, they will pay a 50 percent premium penalty in addition to the base cost—and that penalty percentage increase stays in effect for life.
In addition to the Part B penalties, penalties will also apply under Part D if you defer Medicare enrollment and you either do not have group coverage through your employer, or if the prescription drug coverage under the group plan is not “creditable coverage” with respect to Part D. Employers should provide annual notices to their employees stating whether the prescription drug coverage under the group plan is “creditable coverage” with respect to Medicare Part D.
Moreover, without a group plan in place, deferring Medicare can leave you with a gap in coverage. If you don’t enroll during the standard window when you turn 65, you can only sign up for Medicare Part B during the general enrollment period between January 1 and March 31. The coverage does not take effect until July 1 of the same year, but if you are 65 or older and eligible for Medicare, you are not eligible for individual coverage. That can leave you without any health insurance for several months.
This potential gap is especially important for people who retain their group benefits through COBRA after they retire or leave a company. Even though COBRA can last 18-36 months, it is not an eligible deferral of Medicare. That means if you leave your employer after attaining age 65 and did not have Medicare Part B at that time, you only have eight months to sign up for Part B without penalties and time restrictions. While you may elect to extend your group insurance coverage through COBRA, the eight-month clock still begins when you are no longer an active employee.Making the Right Choice