Some of the scariest things about enrolling in Medicare are that it’s incredibly complex, you may have only one chance to make decisions that affect the rest of your life, and it can be extremely costly if you make a mistake. It’s no surprise many retirees are left wondering when to file for Medicare and how much it will cost. To make things more complex, if you’re still working or are in an unmarried relationship, there are more special rules that may apply to you.   

When are you eligible for Medicare?

Generally, you are not eligible for Medicare until you turn 65. This can pose problems for those who retire voluntarily or involuntarily before reaching that age. If you are under 65, you must find an alternative to Medicare for your health insurance. Depending on your situation, your previous employer may allow you to stay on their health insurance until you become eligible for Medicare. If your employer had over 20 employees, they must offer you COBRA, which lets you stay on their plan for at least 18 months after you retire. Some smaller employers may also offer a version of that, especially if they are based in states that have mini-COBRA laws, like Massachusetts. If you qualify, you must pay for the full cost of insurance yourself without help from your previous employer. Lastly, you may be able to acquire insurance through a healthcare exchange or obtain private insurance. 

Of course, if you are still working, you may be allowed to stay on your current employer’s health insurance. If that is the case, you must ensure it is qualified coverage for Medicare; otherwise, you may still face a late-enrollment penalty. Your HR department should be able to provide that information to you.  

When do you enroll in Medicare?

Although you don’t become eligible for Medicare until you turn 65, the enrollment period begins before that. You have a narrow seven-month period to enroll in Medicare that begins three months before and lasts until three months after the month of your 65th birthday. If you miss your window, you may face penalties for life. If you enroll in the months before you turn 65, coverage will not start until you reach that age. To ensure that you have coverage available, we suggest enrolling in Medicare in the three-month window before you turn 65 so that your coverage can start right away. 

When you file for Social Security, if you aren‘t already enrolled in Medicare, you will be automatically enrolled.  

Which Medicare plan should you choose?

When it comes to Medicare, there are a lot of decisions you need to make about your coverage. Medicare consists of three main parts plus a combination of parts: 

• Part A – Hospital Insurance 
• Part B – Medical Insurance 
• Part C – Medicare Advantage (Parts A, B, and D combined) 
• Part D – Prescription Drugs  

Part A is considered hospital insurance primarily covering hospital stays and is free if you enrolled on time. If you enrolled late, you may owe an enrollment penalty for life.  

Part B covers doctor visits. This includes visiting your primary care physician, lab tests, preventive care, etc.  

Part D coverage is for prescription drugs. Your Part D coverage will vary depending on what medications you are taking. There will be a variety of plans that change every year, which will cover different prescriptions and have different costs. This is coverage that should be reviewed annually to make sure that your plan still covers the drugs you take or, if you’re taking new drugs, allows you to switch to a plan that covers your new prescription. Medicare has a specific site to compare the various drug plans that are currently available.  

Part C is known as Medicare Advantage. The purpose of a Part C plan is to fill some of the coverage gaps from Parts A, B, and D. The plans are provided by private insurance companies and have a separate cost, which will vary depending on the plan you choose. These plans are typically HMO plans, meaning you are only covered if you use doctors/hospitals that are in-network, and you are usually not covered if you use a medical provider that is not in your home state.   

Medicare Advantage plans are known for being very limited, and you must undergo medical underwriting to switch back to a Medicare supplement plan. (Some states do allow this, such as Massachusetts.)  

In lieu of using a Medicare Advantage plan, you can instead purchase a Medicare Supplement Insurance policy, also called a Medigap policy. These are typically PPO plans, which means that you will be afforded some coverage if you use a doctor/hospital that is out-of-network, and there is typically coverage outside your home state. Not to be confused with Medicare Part A, B, C, or D, these Medigap plans are also identified by letters (currently A-N).  

To confuse things further, some Medigap plans are no longer offered (like plan C or F), but if you were on the plan prior to its decommissioning, you can stay on the plan. (But due to dwindling subscribers, the premium is likely to rise.) The type of coverage you receive from the plan is uniform, based on the letter plan you purchase, regardless of which insurance company is providing it. Since these plans generally give you more control of the doctors and services you can receive, we usually recommend choosing a Medigap plan over a Medicare Advantage plan.  

What does Medicare cost?

Medicare Part A is free. Part B (medical insurance) and Part D (prescription drugs) have a cost that is based on your income from two years‘ prior. The higher your income, the more you may need to pay for this coverage. Your Medicare Parts B and D premiums will be withheld from your Social Security if you are collecting; otherwise, they will be billed to you. 

Most people pay the standard Medicare Part B premium rate ($174.70 per person, per month, for 2024), plus a monthly premium for a Medicare supplement plan and prescription coverage to cover the costs that Medicare does not. However, if your 2022 income was over certain limits, you will pay $69.90-$419.30 more per month, per person, for Part B Medicare coverage in 2024 plus an additional $12.90-$81 per month, per person, for Part D Medicare prescription drug coverage in 2024!  

Note that the income that determines your Medicare Part B or D premium is two years prior to the current year. For example, 2024 Medicare premiums are based on your 2022 tax return income. Now, if you had a life-changing event, such as retiring from your job, divorce, marriage, death of your spouse, and a few other events, you can file a Form SSA-44 to avoid the increased Medicare premium in that year.  

These higher Medicare premium rates can impact single individuals at much lower levels than married people. For example, if you are filing your taxes married filing jointly, your income can reach $206,000 before you must pay an additional $69.90 per month in Medicare Part B premiums (and $12.90 per month in additional Medicare Part D premiums). If you file your taxes single, that limit kicks in at $103,000! That makes doing partial Roth conversions, incurring capital gains or taking IRA or 401(k) distributions, or even collecting Social Security extra expensive if you don’t consider the impact that additional income will have on your Medicare premiums for the following year!  

It can also be an unwelcome surprise to a widow/widower to find out that because of filing single, their Medicare premiums will go up three years after the year of their spouse’s death.  

An unmarried couple with a retirement income of $200,000, all earned by one of the partners, results in a monthly Medicare Part B premium of $559 for that partner, plus an additional $74.20 per month for Part D prescription drug coverage. The lower-income partner, in this case with little income, would pay the base rate of $174.70 per month. Compare that to a married couple’s premium of $174.70 per month each for the same household income. That is an extra Medicare premium (or tax, since it’s in place for only one year) of $445.60 per month, or $5,347.20 per year! This scenario can also work in the reverse, as in when one spouse passes away. After three years, the surviving spouse will be paying the extra $5,347.20/year in health insurance costs.  

When calculating the tax cost of financial planning strategies, make sure you factor in the extra Medicare premium “tax.” 

What if I’m still working and have health insurance?

As life spans continue to improve in terms of length and quality, more people continue to work past the once-standard retirement age of 65. This allows many people to save more for retirement, have a sense of purpose, and take advantage of the corporate benefits that would elapse if they retired. One of the major benefits of working is that many employers provide health insurance. But what if you’re still working past Medicare age (65)? Do you keep your insurance through work or file for Medicare?  

Large-employer plans (>20 employees) may replace Medicare coverage, and small-employer plans may require you to enroll in Medicare at age 65. Generally, if you’re working past age 65 and aren’t contributing to a Health Savings Account (HSA), you should still enroll in Medicare Part A as you approach your 65th birthday. This is because there is no cost for you to enroll.   

However, Parts B and D do have a premium that varies based on your income. The higher your income, the higher the monthly premium you will pay (this is called IRMAA). If your employer has over 20 employees, you are not required to enroll in Medicare Part B or D when you turn 65. Depending on how much you pay for insurance and your coverage, this could save you money by delaying enrollment in Medicare.  

To avoid any late-enrollment penalty in Part D, prescription coverage, you need to have “credible coverage” based on Medicare’s coverage standards. If you work past age 65, your insurer should notify you each year whether the plan qualifies as credible coverage or not. If it does, then any late-enrollment penalty should be waived; otherwise, you should consider enrolling in Part D.  

In either case, for Part B or D, it’s best to consult your insurer to confirm whether your insurance qualifies as credible coverage for a late-enrollment exception.  

What if you’re covered by your spouse or domestic partner?

Another consideration if you’re married is whether you can be covered by your spouse’s plan. In many instances, it makes more financial sense to be covered under a family plan than for each person to get their own individual insurance. This is especially true if one spouse is working and the other is not. This is also true in domestic partnership situations, which may be more common in the LGBTQ community. Domestic partners also qualify for spousal benefits when it comes to family group insurance.  

However, it’s important to note that domestic partnerships are not recognized by Medicare for avoiding a late-enrollment penalty. So even though you may be covered by a partner’s insurance past age 65, you may still need to enroll in Medicare to avoid a penalty. This can have significant implications for those in the LGBTQ community, among others who are not married, because the late-enrollment penalty lasts for life!  

How much is the penalty?

The penalty varies by each Medicare part.  

Part A:

The Part A enrollment penalty is 10% of the monthly premium. Unlike Part B, this penalty is temporary. It lasts for twice as long as you should have been on Part A but didn’t enroll. For instance, if you did not have credible coverage and should have been on Part A for the past two years, you would pay the penalty for four years.  

Part B:

The Part B penalty is much less forgiving. First, it lasts for as long as you are enrolled in Part B, which, for most, is the rest of your life! The penalty is 10% for each 12 months you should have been enrolled but were not. Therefore, if you were late enrolling by five years, you would pay a 50% penalty for the rest of your life!   

Part D:  

Like Part B, the Part D penalty lasts for as long as you are enrolled in Part D (generally for life). The calculation of the penalty is a little more complex. The penalty is 1% of the “national base beneficiary premium” (which changes every year) for every month you were not enrolled in credible coverage. So if you were late enrolling by 10 months, the penalty would be an additional 10% of the national base beneficiary premium.   

Often it is less costly for similar coverage to go on Medicare even if your employer insurance qualifies for an exception. If you’re unmarried or in a domestic partnership and are covered by your partner’s insurance, you should almost certainly enroll in Medicare to avoid any late-enrollment penalties if you’re turning 65. It is important to note that COBRA coverage is not considered employer insurance or an exception to enrolling. Make sure you enroll in Medicare as soon as your employer coverage ends if you are over age 65. 

Can I keep my HSA after I retire?

You cannot continue to save in an HSA if you are enrolled in Medicare (starting the later of the date you turn age 65 or six months prior to being covered by Medicare). However, you can continue to use your existing HSA balance to pay for qualified medical expenses penalty- and tax-free.  

All distributions from your HSA after age 65 are penalty-free, regardless of what they are used for. To be tax-free, they must be “qualified” distributions. In addition to medical expenses, your long-term care insurance premiums and Medicare parts B, C, and D premiums are considered “qualified” distributions. In general, insurance premiums are not qualified distributions, so Medicare supplement insurance premiums (also known as “Medigap”) are not considered qualified distributions. 

Summary

There is a lot to consider when reviewing which Medicare plan may be right for you, when to apply, and how much it may cost. You don‘t have to do it alone. You can also watch a Medicare webinar we hosted. If you need assistance with your tax planning or retirement planning in general, please reach out to our team.