Medicare Checklist: Avoid Costly Enrollment Mistakes

For older people who aren't covered by a health plan at work, Medicare is nearly always the most affordable and comprehensive alternative.

But as good as Medicare is, the penalties for not signing up for it at the right time can be brutal, as a cautionary story in the Boston Globe (paywall) in 2023 revealed.

In the story, Alan Cregg signed up for Medicare Part A (which covers some but not all inpatient medical costs) when he turned 65. This was the right thing to do, since for most people, there are no monthly premiums for Part A.

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However, because he was covered by his wife's employer's health insurance plan, he didn't sign up for Medicare Part B for outpatient care or Part D prescription drug coverage.

Costly penalties for delayed Medicare enrollment

The trouble started when Cregg's wife lost her job. Because she wasn't 65 yet, she signed them both up for COBRA coverage through Cigna insurance.

Believing that being on COBRA was the same as having employer health insurance, Cregg once again didn't sign up for Medicare Part B.

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A year later, he needed knee surgery. Cigna initially said they would cover the costs. But after he had the procedure done, the insurer changed its mind, saying that he should have signed up for Medicare Part B and D instead of going on COBRA. Cregg ended up paying the entire $20,000 medical bill out of his own pocket.

Even after paying, Cregg continued to dispute Cigna's turnaround, claiming that the insurer never explicitly told him he needed to sign up for Medicare. A year later, Cigna agreed to reimburse Cregg (in part because of the bad publicity generated by the Boston Globe article).

While this may sound like a happy ending, it really isn't. Why? Because Cregg will probably still have to pay a surcharge on his Medicare premiums for the rest of his life.

The cost of delaying Medicare enrollment

When you're eligible for Medicare but are no longer "actively covered" by your company's health care plan, you have eight months to sign up for Medicare Part B from the day you lose that coverage.

Being on COBRA doesn't count as "active coverage." Neither does post-employment health care coverage you could receive through your retirement plan.

If you miss this eight-month special enrollment period, you might not be able to sign up again until the next Medicare general enrollment period, which lasts from January 1 to March 31 every year.

And if you wait a year or more before signing up, you'll have to pay a 10% late-enrollment premium penalty for each full year you don't sign up. That penalty never goes away.

You'll also get penalized if you don't sign up for Medicare Part D prescription drug coverage right away.

Once your special enrollment period begins, you have two months to sign up for Medicare Part D. If you miss this deadline, you'll pay a cumulative 1% penalty for each month you delay signing up.

For example, if you wait a full year before signing up, your penalty will be 12% more than the standard monthly Medicare Part D premium. Like the Medicare Part B penalty, this one is permanent, too.

That's why it's important to know when you should first sign up for Medicare and under which conditions you may or may not need to enroll based on your current employment situation.

Your Medicare Enrollment Checklist

1. Figure out if and when you need to sign up.

If you turn 65 and are still covered by your employer's health plan, you may not need to enroll in Medicare. Whether you do or not depends on several factors.

If your company has more than 20 employees, you may not need to enroll in Medicare when you turn 65, because your group health plan probably meets Medicare's "creditable coverage" standards. In this scenario, your employer can't force you to drop their coverage and use Medicare instead.

If your company has 20 or fewer employees, and its group health plan doesn't meet Medicare's standards of creditable coverage, you probably will need to sign up for Medicare Parts A, B and D by your special enrollment deadline to avoid paying late-enrollment penalties.

In either of the above scenarios, you'll want to speak to your employer's benefits administrator to get their advice on whether you need to sign up for Medicare (or not).

Even if you don't need to enroll, you may want to compare premiums, deductibles, copays and prescription drug costs of your current health insurance vs those for Medicare. That way, you can see if, from a cost perspective, one option makes more sense than the other.

One other factor to consider: If you currently contribute to a health savings account (HSA) at work, you can no longer contribute to it once you sign up for Medicare.

However, you can still use all remaining money in your HSA to pay for qualified out-of-pocket health care expenses.

2. Sign up for Parts B and D immediately if you're no longer covered by employer health insurance.

Don't make the mistake Alan Cregg made. If you or your spouse loses your employer group health insurance for any reason and either one of you is age 65, enroll in Medicare within eight months if:

You're unable to find a new job with a company that offers creditable group health care coverage.
You're not eligible to join your new employer's health plan (because you're a part-time or contract employee).

If you're eligible for COBRA coverage, you can still sign up for it even after you've enrolled in Medicare. In these situations, COBRA may pay only for expenses that Medicare doesn't cover.

And since COBRA premiums can be extremely expensive, it may not be worth it to double your coverage this way.

3. Don't worry if you've signed up for Medicare and then get another job where you're eligible for employer health insurance.

Once you're enrolled in Medicare, you should never drop your coverage even if your new employer offers a creditable group health plan.

Should you sign up for your company's plan, keep in mind that Medicare will always be your primary health care provider. Your company plan will generally pay only for expenses Medicare doesn't cover.

Help is available

The issues around Medicare enrollment are complex, especially if you're still working and need to figure out whether you should enroll immediately or whether you can put it off until you retire.

If your employer doesn't have the knowledge to help you figure out what to do, consider contacting a local representative of the State Health Insurance Assistance Program (SHIP). These consultants can work with you at no charge to help you understand and evaluate your available Medicare options. To find a SHIP counselor in your area, visit www.shiphelp.org.

This material has been provided for general informational purposes only. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a qualified Medicare consultant for specific Medicare-related assistance.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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David Jaeger, CFP®, is a financial adviser at Canby Financial Advisors in Framingham, MA. David enjoys learning about each client’s unique situation and specific goals so that he can work with them to provide clarity and relieve stress. He earned his BA in History from Loyola University Maryland.

Advisory services offered through Canby Financial Advisors, LLC, an Investment Adviser registered with the U.S. Securities and Exchange Commission. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or ability.