More Americans are working past 65 and continue to have employer-sponsored health insurance. However, the intersection of Medicare and employer coverage has a number of traps for the unwary and some of these traps come with real financial consequences. This makes it more important than ever that you (and your employer) understand the complex rules for starting coverage under Medicare. This blog post will identify some of the traps in these rules.
Medicare Part A and HSAs. If you (or your spouse) has paid Medicare taxes for at least ten years, you do not pay monthly premiums for Medicare Part A (hospital) coverage. Because Part A does not require premiums, most workers start Part A at 65 even if actively employed.
- Trap 1: Once Part A starts, you are no longer eligible to contribute to a Health Savings Account (HSA). So, if that HSA deduction is important to you, then you need to make sure you do not enroll in Part A at age 65.
- Trap 2: Once you sign up to receive Social Security benefits, you are also (automatically) applying for Part A coverage. So, the only way to defer Part A coverage (and retain that HSA contribution) is to also defer commencement of your Social Security benefits.
- Trap 3: Once you do enroll in Part A and you are over age 65, your Part A enrollment is effective retroactively for 6 months. So, you should stop making HSA contributions 6 months before you start your Medicare Part A coverage.
Medicare Part B and Late Enrollment Penalties. Medicare Part B (physicians and outpatient) coverage does require a monthly premium and so, if you have other coverage, it may be tempting to defer Part B until the other coverage stops. But a warning – if you do not enroll in Part B when you first become eligible you may be subject to a significant penalty. However, there is no penalty if you defer Part B and you have certain (but not all) other health coverage.
As an FYI, the penalty is 10% of your Medicare premium for every full 12-month period when you were eligible for Part B but didn’t enroll. For example, if you waited for three years to enroll, your penalty could be 30% of the premium, so when you enroll in Part B you would pay your Part B monthly premium, plus 30%. Here is the kicker – you pay this penalty for as long as you have Part B (in other words, for the rest of your life after you retire).
Here are some of the traps:
- Trap 4: The late enrollment penalty does not apply if you have coverage from your employer (or your spouse’s employer) and that coverage is because of current employment. So, if you have COBRA coverage or retiree health coverage, you should not delay your Part B enrollment.
- Trap 5: The late enrollment penalty does not apply if you have employer coverage only if the employer has at least 20 employees. So, you should not delay Part B enrollment if your coverage is from a smaller employer. Working past 65 can have significant personal and financial rewards and retaining your employer coverage after you reach age 65 can be a real benefit. However, Medicare’s rules for coordinating Medicare eligibility and employer coverage contain a number of traps for the unwary. Avoiding these traps can help make sure you fully enjoy the benefits of working after 65.