A Medicare Primer

What you need to know about Medicare before you hit your 65th birthday.

EDITOR'S NOTE: This article was originally published in the March 2007 issue of Kiplinger's Retirement Report. To subscribe, click here.

If you're celebrating your 65th birthday within the next year or so, get ready for a big gift from the government: Medicare coverage. But this present comes with strings attached in the form of complex enrollment rules that could cost you money if you're not careful.

Among other things, you'll have to figure out how Medicare dovetails with your workplace or retiree coverage and understand its coverage gaps. You must also choose between managed-care benefits or fee-for-service coverage. "It was a hugely intensive effort," says Judy Kerstein, a department store marketing director in New York City, who turned 65 last January.

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When You Should Sign Up

To reduce the chance of foul-ups, contact the Social Security Administration (www.ssa.gov; 800-772-1213) three months before your 65th birthday. Medicare's initial enrollment period runs for seven months, starting three months before the month you turn 65 and running three months after your birth month.

Everyone is eligible for Medicare at age 65, even when an individual's normal retirement age for Social Security benefits is later. If you were born in 1942, for example, your full retirement age is 65 and ten months. A senior who waited until then to sign up for Medicare would've missed the initial enrollment period for Part B coverage, which covers outpatient care. That senior would have had to wait until the general enrollment period, which runs from January 1 to March 31 for benefits starting July 1.

But you will incur a 10% premium penalty for each year you wait beyond your initial enrollment period. You'll pay that surcharge as long as you have Part B. You can sign up for premium-free Part A, which covers hospital services, at any time with no penalty.

For the Part D drug plan, you must apply during the initial enrollment period to avoid a penalty, which accrues monthly. If you miss the initial period, you can sign up during the last six weeks of the year for coverage that begins January 1. You can avoid the Part D late fee if you can prove that you had drug coverage elsewhere that is at least as good as the Medicare benefit.

If you opt for fee-for-service care, make sure you sign up for a Part D plan as well as private supplemental coverage to fill Medicare's coverage gaps, called Medigap. An alternative is a Medicare Advantage managed-care plan, which includes gap and drug benefits. This option will likely be cheaper than traditional Medicare, but you may lose the provider choice of fee-for-service care.

If You Have Workplace Benefits

Individuals who still work can qualify for a special enrollment period (SEP) that exempts you from penalties, says Howard Houghton, coordinator of the Virginia Insurance and Counseling Assistance Program for Fairfax County. To qualify, you must enroll in Part B while you're covered by a group plan offered by your employer or your spouse's employer -- or during the eight months following the month that the group health plan coverage ends or the employment ends, whichever is first.

Deane Beebe of the Medicare Rights Center says the advocacy group last year heard from a retiree who was assessed a 230% Part B penalty when she signed up 20 years after her special enrollment period ended. The retiree, who worked and had group coverage into her late sixties, falsely assumed her two decades of retiree health benefits played the same role as active worker coverage when it came to late-fee waivers.

Newly eligible beneficiaries who are still covered by workplace insurance can choose the parts of Medicare they want. You can sign up for Part A or Part B, or both, but you can't get drug coverage unless you enroll in one of these parts. But if your spouse needs your workplace coverage, there's a chance you could lose those benefits if you join a Medicare Advantage or Part D plan, so check first. For questions, call Medicare at 800-633-4227 or visit www.medicare.gov.

Contributing Editor, Kiplinger's Retirement Report