When it comes to retirement planning, almost everyone knows that turning 65 is an important milestone. At 50, you are awarded the opportunity to join AARP and for the next decade, various senior discounts kick in. But for many, the milestone with the greatest financial impact comes at 65, when you are eligible for Medicare. For those without retiree or employee health insurance, this is a huge benefit. But along with this eligibility comes strict deadlines, harsh penalties and complex decisions. I hope this memo can help clear up some confusion surrounding Medicare enrollment and what your options are for adding additional coverage.
Individuals turning 65 who don’t have existing insurance coverage must enroll in Medicare. They have a 7-month window to enroll that begins 3 months before the month of their 65th birthday and ends 3 months after. This is particularly important for Parts B and D because there are monthly costs associated with these. For those unfamiliar with the different parts of Medicare, here’s a quick overview:
Part A: Inpatient hospital coverage
Part B: Outpatient medical services (doctor visits, lab testing, diagnostic imaging, etc.)
Part C: Medicare Advantage plans – private Medicare insurance you choose instead of regular Medicare
Part D: Prescription drugs
*Other letters such as F & G represent Medigap plans which are optional supplemental coverage you can buy to fill in the gaps in Medicare*
Part B is medical coverage for perhaps the most common form of health service, doctor visits. If individuals without creditable coverage miss the age 65 deadline, they are subject to a 10% penalty of their Part B premium for every 12 months missed, and this surcharge continues for life. Part D (prescription drug coverage) also has a late enrollment penalty if no other creditable drug coverage is in place when you are first eligible. Also in jeopardy if you miss this deadline is Medigap’s guaranteed issue right that requires insurance companies to offer certain policies even if you have a preexisting condition.
Let’s talk about who needs to enroll. Since Part A is free, there really is no reason to not go ahead and enroll in this part at 65, even if you are covered by an employer plan. It doesn’t cost anything, so it makes sense to go ahead and sign up. The only reason not to would be if you want to contribute to an employer HSA account. Enrolling in Part A would make you ineligible to participate in an HSA due to the high deductible plan requirement.
Since Part B comes with a monthly premium, you should delay if you don’t need it. If you are already receiving Social Security benefits when you turn 65, you will automatically be enrolled in Parts A and B. If you are still covered under an eligible group plan, you’ll want to opt-out for Part B.
Upon losing employer coverage, there is an 8-month special enrollment period allowing enrollment in Part B with no penalty. Your company plan must meet the IRS definition of group coverage in order to delay without penalty. Group coverage criteria is met if the employer has more than 20 employees. Marketplace plans, COBRA and TRICARE (unless still active duty) do not qualify as group coverage for this purpose.
Many of you are aware that people who earn over a certain threshold are subject to an Income Related Monthly Adjustment Amount (IRMAA), a monthly surcharge to the standard $135.50 Part B premium. The surcharge starts at $54.10 per month for married couples earning over $170k and can be as high as $325.00 for those earning $750k per year. The IRMAA may also apply to Part D premiums. You may not be aware that this IRMAA is based on your modified adjusted gross income on your IRS tax return from 2 years prior. Since this time frame often captures pre-retirement income, it’s possible that someone may find themselves subject to the surcharge, only to have their income drastically reduced in retirement. If this happens, the good news is you can request a reconsideration of the initial determination from the Social Security Administration. One of the qualified life changing events for reconsideration is work stoppage.
When you are ready to enroll, you may do so online at SocialSecurity.gov or in person at your local Social security office if you haven’t delayed coverage. Those who delay past 65 have to mail an application or apply at a Social Security office. If you sign up before the month you turn 65, coverage will begin on the first day of your birth month. If you sign up the month you turn 65, coverage takes effect the first day of the next month. After your birth month, there will be a 2 or 3 month wait. During the 8-month special enrollment period, coverage kicks in the first day of the month following enrollment.
Now that we’ve discussed enrolling in Medicare, let’s talk about choices that need to be made. We are currently in the middle of the annual Medicare open enrollment period which runs from October 15th through December 7th. I briefly touched on the 4 parts of Medicare (A,B,C and D). Parts A, B, and D provide basic coverage, so let’s focus now on what these parts don’t cover such as deductibles, co-pays and other medical expenses that could be exhaust your savings in the event of a serious illness. This is where Medicare Advantage (Part C) and additional supplemental plans known as Medigap plans come into play.
Let’s first talk about Medicare Advantage plans. It’s important to note that Advantage plans are a replacement for Medicare and are sold by private companies. These plans are required to provide the same benefits as Medicare A & B, but not drug coverage (Part D). If you want drug coverage, you need to shop for a Medicare Advantage plan that includes that, not all do. Using Medicare Advantage instead of traditional Medicare, you agree to use the plan’s network of providers except in emergencies. This limited network of providers is the biggest downside with Medicare Advantage plans. It’s important to thoroughly research plans and make sure any doctors you want to use are in network. For people who maintain second homes in another area, this is probably not the best option due to limited regional coverage. Generally speaking, Medicare Advantage is a good option for healthy individuals, but can get expensive for someone with significant health problems and frequent doctor visits. With Medicare Advantage plans, you still pay your calculated Part B monthly premium amount and there may be an additional charge for more comprehensive plans. During the first 3 months of the calendar year, Medicare Advantage enrollees can switch to a different Advantage plan or choose traditional Medicare. Returning to traditional Medicare could be problematic if enrollees want to add a Medigap policy to their coverage.
Medigap plans are also sold by private insurance companies and function as supplemental coverage to Medicare. They provide help in paying for some of the out of pocket expenses associated with Medicare such as deductibles, copays and coinsurance. Prescription drug coverage is not included in any Medigap plan. Patients are able to choose any doctor who accepts Medicare and there is no need for a referral to see a specialist. There are 20 standardized plan types in 47 states (MA, MN and WI have their own plans). While benefits are standardized, costs are not and fluctuate based on insurance company and location. Medicare plus Medigap premiums are typically more expensive than the Medicare Advantage alternative, but you may reduce your out of pocket costs. You are eligible to add Medigap during a 6-month period after turning 65. During this period, you can’t be turned down or charged more based on health conditions. If you apply later on, you may be subject to medical underwriting and your acceptance isn’t guaranteed.
By now your head is probably spinning. With so many options, choosing the right plan may seem overwhelming. If you are currently researching Medicare options for yourself, I’ll leave you with a few resources to help make your decision. Feel free to contact me with any questions you may have and I’ll do my best to help you navigate the Medicare maze.