What You Need to Know About Enrolling in Medicare

If you are about to turn 65, get up to speed quickly on the rules. Missing an enrollment deadline can be costly.

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A Medicare card is one of the best birthday gifts a 65-year-old could wish for. But for a growing number of baby boomers, signing up for this most prized of gift cards can be a bewildering and frustrating exercise -- and too often a costly one.

The enrollment rules and timelines are so confusing that many seniors who work past 65 accidently miss sign-up deadlines. So do retirees who remain on company health plans, as well as the self-employed or early retirees who buy individual coverage on the new health care exchanges. The possible consequences could be months without health care coverage and premium penalties for life.

Joe Baker, president of the Medicare Rights Center, says his nonprofit group fields 15,000 calls a year on its helpline. "We see the problem growing," he says. "People's life situations are more complex." For example, he says, more people are working longer, and many mistakenly think they don't need to enroll in Medicare at age 65 if they have workplace coverage.

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Recognizing that a rising number of baby boomers are falling through the enrollment cracks, the Obama Administration recently announced it would improve the information it provides to people who are newly eligible for Medicare. In the meantime, an excellent resource is the Medicare Rights Center's online Medicare Interactive service (www.medicareinteractive.org), which answers dozens of enrollment questions. Or you can call your State Health Insurance Assistance Program (find your state SHIP at www.shiptacenter.org).

To help you navigate the complex Medicare enrollment maze, we outline here many of the rules and timelines. Begin with a review of the fundamentals.

You are eligible for premium-free Part A, which pays for hospital services, if either you or your spouse paid Medicare payroll taxes for at least 10 years. Otherwise, you can each buy into Part A for premiums that range as high as $407 a month. A divorced spouse who is single and did not accumulate enough working credits on his or her own can get Medicare benefits on an ex-spouse's record if they were married for at least ten years.

If you are getting Social Security benefits when you turn 65, you are automatically enrolled in Part A and Part B, which covers outpatient services. You will get your Medicare card in the mail three months before your 65th birthday. You pay a monthly premium for Part B. In 2015, the standard premium for most beneficiaries is $104.90 a month, although higher-income beneficiaries pay more. The premium is deducted from your Social Security payment. You can turn down Part B -- an ill-advised move unless you have coverage from your or your spouse's current job.

You need to sign up for Parts A and B if you're not claiming Social Security benefits. "The folks who get into trouble are those who are not taking Social Security at 65, and many more people are delaying," says Kathryn Votava, president of Goodcare.com, a Rochester, N.Y., firm that advises individuals and small firms on health coverage. "If you're not taking benefits, you don't get automatically enrolled in Medicare. You don't even get a notice." As Congress has shifted the full retirement age for Social Security benefits from 65 to 66 (and 67 in the future), 65 has remained the eligibility age for Medicare.

That means it's up to you to watch the calendar. You can enroll in Parts A and B during a seven-month "initial enrollment period," which begins three months before the month you turn 65 and ends three months after your birthday month. To avoid a coverage gap, it's best to enroll during the first three months. "If you want to have Medicare in place the first day you're eligible, enroll well in advance of your 65th birthday," says Maura Carley, president of Health Care Navigation, in Darien, Conn., and author of Health Insurance: Navigating Traps & Gaps (Ampersand, $20).

Miss your initial enrollment period and you could be stuck without Part B coverage for many months. Unlike Part A, which you can enroll in at any time after the initial enrollment period, you must wait to sign up for Part B until the next "general enrollment period," which runs from January 1 to March 31, and Part B coverage won't begin until July 1. If you do not have qualifying employer coverage, you will pay a 10% penalty for life for each 12-month period you delay signing up for Part B.

The initial enrollment period is the same for a private Medicare Advantage plan. An Advantage plan, which provides coverage through private insurers rather than the government, generally provides Part A and Part B benefits, includes drug coverage, and covers many co-payments and deductibles.

With the basics out of the way, it's time to tackle the tougher questions: Do you need to enroll in Medicare if you're still working at 65? What if your employer offers you retiree health benefits? How do plans that cover drug costs and other out-of-pocket expenses fit into the puzzle?

If you're on the job at 65. Don't rely on your employer for Medicare guidance. "We find that employers frequently provide wrong or confusing advice about when employees should enroll in Medicare," says Baker, whose group is helping the federal government create information for employers.

If you work for a company with fewer than 20 employees, be sure to enroll in Part B during your initial enrollment period. Medicare automatically becomes your primary payer, and your employer's plan is unlikely to pay for any expenses that could be covered by Medicare -- even if you neglect to enroll in the government program.

An employee may discover this after filing claims with the employer plan. Typically, the insurer will notify the worker that it will not pay a claim because it should have been submitted to Medicare, Carley says. At times, an insurer processes several claims until it realizes the employee was eligible for Medicare -- and then seeks repayment from the employee. As long as you're still employed, you can enroll in Part B without penalty -- and you should do so immediately.

Your spouse can continue on your employer plan until age 65 as long as you keep the plan for yourself as secondary coverage. But Votava says it could be cheaper for your spouse to buy individual coverage from an insurance company.

If you're not covering your spouse on your employer plan, it's rarely worth the cost of keeping the plan just for expenses not covered by Medicare -- especially if your employer's insurance limits the choice of providers or won't pay for out-of-network care. Your best bet: Buy a Part D prescription-drug plan and a Medigap supplemental insurance policy (more on those later).

A self-employed person or an early retiree who has an individual insurance policy should enroll in Medicare during the initial enrollment period, says Casey Schwarz, policy and client services counsel with the Medicare Rights Center. Otherwise, depending on the state, Schwarz says, a policy "can coordinate with phantom Part B," meaning that it will pay secondary to Medicare, even if you haven't enrolled.

The same advice applies to someone who bought a policy on a federal or state exchange and is getting a federal tax credit to offset premium costs under the Affordable Care Act. Under IRS rules, the subsidy will stop by the end of your initial enrollment period, Schwarz says.

The rules are different if your employer has 20 or more employees. You do not have to enroll in Part B while you're still working. You should enroll in Part A because it's free, and Part A will be secondary to your employer plan. A spouse who is 65 or older can stay on your company plan and delay Part B until you leave.

It could make sense to drop your employer coverage if your benefits are inadequate and your premiums, deductibles and other out-of-pocket costs are high. You should compare the benefits and costs of your employer plan with the costs of Medicare, plus Part D and a Medigap policy.

Once you leave your job, you can enroll in Part B without penalty during an eight-month "special enrollment period," which begins the month after you stop working. To avoid a gap in coverage, be sure to enroll in Medicare a month or two before you leave your job. If you miss this enrollment period, you will need to wait until the next general enrollment period.

Older workers may run into a bit of a roadblock if they have a tax-free health savings account tied to their employer's high-deductible health plan. A worker who is getting Social Security benefits is automatically enrolled in Part A at age 65. And once you're on any part of Medicare, you can no longer make contributions to the HSA.

Enrolling in a drug plan. Medicare Part D plans, sold by insurance companies, cover outpatient prescription drugs. You're eligible for Part D if you have either Part A or Part B. If you enroll in an Advantage plan, be sure it includes drug benefits.

You can enroll in Part D during the same seven-month initial enrollment period as Part B. Miss your initial enrollment period, and, Carley says, "you'll be paying for drugs out of pocket until the next enrollment period," which, for Part D, runs from October 15 to December 7.

If you missed your initial enrollment period, you could be eligible for a two-month special enrollment period. To qualify, you must have lost "creditable" drug coverage -- perhaps you are older than 65 and kept your employer drug coverage until you retired, or maybe you were covered by a COBRA plan with drug coverage. (Caution: The Part B and Part D special enrollment periods differ.)

To be creditable, your drug coverage must have been at least as good as Part D. You could be liable for lifetime penalties if you go for more than 63 days without creditable coverage before applying for Part D.

For every month you delay, the penalty is 1% of the "national base premium," which is $33.13 a month in 2015. If you delay for nine months, for example, your penalty will be $2.98, which will be added to your monthly Part D premium for the rest of your life.

Your employer is supposed to issue an annual notice to employees whether its drug coverage is creditable. "I caution people that they need to get that statement each year," Votava says.

Erroneously assuming an employer's plan is creditable can be costly. Say you retire at age 70 and enroll in Part D within the two-month special enrollment period, but Medicare determines that your employer drug benefit was too skimpy during one year to be considered creditable. You'll be socked with 48 months' worth of lifetime penalties because you went without creditable coverage for more than 63 days.

Filling in the gaps. Traditional Medicare does not cover all of your medical expenses. You'll be liable for deductibles, co-payments and other costs. It pays to buy a private Medigap policy to fill in the gaps. You must have Parts A and B to buy a Medigap plan.

The best time to enroll is during the six months that begin in the month you turn 65 and apply for Part B. If you delay Part B because you have coverage from your or your spouse's current employer, you should enroll in a Medigap plan when you enroll in Part B.

A Medigap policy can set you back as much as $200 a month. But if you're enrolled in Part B, don't delay enrolling in Medigap until your out-of-pocket medical costs balloon, says Aaron Tidball, manager of Medicare operations for Allsup, which advises individuals on health plans. Only during certain enrollment windows do you have a right to a policy at the best available rate regardless of your health. If you apply outside these time windows, Tidball says, a Medigap plan could refuse to take an applicant. And if it does accept you, he says, "the underwriting can be so significant that the cost makes it impossible" to afford. A handful of states allow people to buy policies without medical underwriting outside the enrollment periods.

Hazards of post-retirement benefits. Many well-meaning corporate benefits managers tell departing employees that they do not need to enroll in Medicare until their COBRA or retiree health benefits expire. These employers do not understand that the clock for your special enrollment period starts ticking when your employment ends, not when your employer-based benefits end, Baker says. The enrollment period is tied to "whether you are actively at work, not the kind of coverage you have," he says.

Here's a common scenario: You retire six months shy of your 65th birthday and go on COBRA. Under federal law, you can buy into your employer's health plan for 18 months at 102% of the cost. You like the plan so you don't bother to enroll in Part B during your initial enrollment period. At some point, "the plan discovers its error and will switch to secondary, paying a small portion or none of the bills," Tidball says.

That means you could be stuck without Part B coverage until the July after the next general enrollment period. The lesson: If you're on COBRA when you turn 65, enroll in Medicare during your initial enrollment period. You should drop COBRA, unless you have a spouse who is younger than 65 and covered by the plan. A spouse can continue on COBRA for up to 36 months or until he or she is eligible for Medicare.

As for retiree health benefits, they're always secondary. Say you retire at 67 with three years of fully paid retiree health benefits. Having been offered such a great deal, you decide to wait until age 70 to apply for Medicare. Because it may take some time for your insurance company to recognize the conflict -- and start rejecting your claims -- you may miss the eight-month special enrollment period.

Susan B. Garland
Contributing Editor, Kiplinger's Retirement Report
Susan Garland is the former editor of Kiplinger's Retirement Report, a personal finance publication whose subscribers are retirees and those approaching retirement. Before joining Kiplinger in 2006, Garland was a freelance writer whose work appeared in the New York Times, the Washington Post, BusinessWeek, Modern Maturity (now AARP The Magazine), Fortune Small Business and other publications. For 12 years, Garland was a Washington-based correspondent for BusinessWeek, covering the White House, national politics, social policy and legal affairs. Garland is a graduate of Colgate University.