Navigating the Transition between Employer Insurance and Medicare
More and more people are working beyond the traditional retirement age of 65. And age 65 is when we decide on the form our Medicare coverage will take. This raises three questions:
If your employer covers you, how do you decide whether to keep that coverage or move to Medicare?
What do you need to do to avoid penalties as you navigate the two systems?
How do you transition safely to Medicare once you leave your employer-sponsored coverage?
How do you decide between employer-sponsored healthcare and Medicare?
If you have employer-based health insurance through your (or your spouse’s) current job, you may not have to sign up for Medicare at age 65 as long as you are working. However, you do need to check that the group health plan qualifies as “creditable” coverage by government standards. Your benefits administrator can tell you if it does.
Your coverage will vary with the number of employees in your company: “up to 20” or “more than 20” employees. If it has 20 or fewer employees, Medicare pays for services first, and your company insurance pays second. With over 20 employees, your company insurance pays first, and Medicare pays second. Your benefits administrator can help make the most of your employer plan and avoid paying penalties related to Medicare Part A (hospital insurance), Part B (medical insurance) and/or Part D (prescription drug insurance).
Some companies also offer retiree coverage once you are no longer active in the company. If that is a consideration, ask the benefits administrator how that insurance interacts with Medicare.
Takeaway action step: Work closely with your company’s benefits administrator in the period leading up to your 65th birthday and until you have transitioned away from company coverage to Medicare. It’s not a simple process!
What Medicare elements could cause penalties?
You could face penalties related to Medicare Part A, Part B and Part D. But you need to be concerned about the entire Medicare package and the timing of all other Medicare-related options.
Part A (hospital insurance): Part A is premium-free to most people since you earn access to it by working. If it’s free, you should enroll in Part A anytime within the 7-month window around your 65th birthday, even if you have employer insurance. The one exception is if you participate in a company HSA plan, as you cannot participate in both (see explanation below).
If your Part A is not premium-free, you don’t have creditable employer coverage, and you don’t sign up for Part A when required, your premium could go up by 10% for twice as long as you went without Part A after you should have been enrolled.
When you (or your spouse) lose access to creditable employer coverage, you have eight months to enroll in Part A without incurring penalties.
Part B (medical insurance): Everyone has to pay a monthly premium for Part B, which in 2022 starts at $170.10 and increases significantly as your income rises. You will want to monitor your Part B sign-up carefully.
If you have creditable coverage elsewhere, there is no need to enroll when you turn 65. However, when you (or your spouse) lose access to health coverage, you have eight months to enroll in Part B without penalties, even if you have opted for COBRA or other non-Medicare coverage.
Penalties go up the longer you go without enrolling, and you will pay them as long as you have Part B (which for most people is for life). Those penalties will be added to your monthly Part B premium and equal 10% for every 12 months you didn’t sign up.
If you want Medicare to cover you as soon as your job-based insurance ends, you must sign up for Part B the month before your other coverage ends.
Part D (prescription drug coverage): Part D is Medicare-approved drug coverage provided by private companies that charge a monthly premium.
You can wait to get Part D coverage if you have creditable drug coverage through your employer plan. However, the coverage must provide the same value as Medicare Part D, as confirmed each year in the insurer’s Annual Notice of Creditable Coverage disclosure.
If your plan loses its creditable status or you lose your coverage, you have two months to enroll in a Part D plan. On the other hand, you can also join a Part D plan (or get a Medicare Advantage plan that includes the drug coverage) while you have employer coverage.
Once you are required to enroll in Part D and don’t, a penalty of 1% of the average Part D premium will be added permanently to your monthly premium for each month you go without coverage. To avoid a Part D late-enrollment penalty, do not go more than 63 days without creditable drug coverage.
Part C (Medicare Advantage): You have two months after your employer coverage ends to join a Medicare Advantage plan. Medicare Advantage is private insurance that replaces Original Medicare’s Part A and Part B – and possibly Part D. To have continuous coverage, sign up and join a plan before your employer coverage ends.
Medicare Supplement (Medigap): Medigap is private coverage that works with your Original Medicare Part A and Part B to help cover the 20% of Medicare-approved expenses left uncovered. During the six months following your 65th birthday and once you first have Part A and Part B, you can choose from every available Medigap plan regardless of any pre-existing health conditions. After that, insurers can decline your application or increase your premiums.
When you lose your health coverage – such as when you transition off your employer plan – you are granted “guaranteed issue rights,” which give you the six months of protection you had around your 65th birthday.
How do you transition safely to Medicare following employer-sponsored coverage?
When it’s time to transition to Medicare, start thinking about your sign-up strategy a few months before. You will need your employer to fill out HHS Form 0938-0787 and other forms to qualify for the Special Enrollment Period triggered by your insurance status change. (This allows you to enroll outside your initial or general Medicare enrollment periods.)
As you select among the elements described above, leave enough time to avoid a coverage gap. Your coverage will start the month after Social Security receives all your completed forms.
One detail: If you have been contributing to a Health Savings Account with your employer, be sure to stop contributing six months before retiring to avoid a tax penalty. (Your Medicare Part A coverage reaches back and starts six months before the date you sign up for Medicare, which triggers a conflict.)
Takeaway action step: Your company cannot be held responsible if you fail to take the actions needed to transfer smoothly from company insurance to Medicare, as long as they provide the necessary documentation. That makes it essential for you to start early, plan carefully and execute as required.