updated on January 15, 2019
A s more Baby Boomers approach age 65, they are confronting the complexities of making first-time Medicare enrollment decisions.
“At many companies, retiring used to mean transitioning from your employer’s health plan to a retiree health plan,” said Paula Muschler, manager of the
Only 25 percent of U.S. employers reported offering retiree health benefits in 2012, according to a recent Kaiser Family Foundation survey of employers with more than 200 employees. This represents a 7 percent drop from 2007. By contrast, in 1988, nearly two-thirds of employers (66 percent) offered retiree group health coverage, according to Kaiser data.
The Big Transition
Muschler encourages employers to discuss Medicare plan selection with their employees as they approach their 65th birthday. Employers can help employees navigate the following situations in the Medicare maze.
Employees turning 65 who plan to keep working.
Those turning 65 may make their Medicare plan selections without penalities if they do so three months before their birthday, the month of their birthday, or three months after it; this timeframe is known as the individual's "initial enrollment period.”
Traditional Medicare has two main parts: Part A is hospital coverage, and Part B is medical services. Part D, which became effective in 2006, is a federal program to subsidize the cost of private prescription drug plans.
Generally, all employees will benefit from enrolling in Part A when they become eligible because it is free. Employees have the option of enrolling in and paying monthly premiums for Part B and Part D coverage. Those who don’t enroll in Medicare Part B would need to receive a deferral from Medicare to avoid being subject to penalties when they enroll in the future.
To Delay or Not
According to the nonprofit California Health Advocates website:
If you delay enrolling in Part B when you are first eligible because you are covered by an employer health plan, you have 8 months to apply for Part B from the date you, your spouse or family member stops working, or the date the Group Health Plan (GHP) or Large Group Health Plan (LGHP) coverage ends — whichever is earlier. This 8-month period is called a Special Enrollment Period (SEP). If you enroll in Medicare Part B during this SEP, you will be required to pay a late enrollment penalty.
If you do not enroll during this SEP, you won't be able to sign up for Part B until the next General Enrollment Period (GEP), which is from January 1 to March 31 each year. If you wait to sign up during the GEP, your Medicare benefits will not begin until July 1 of that year, and you may be required to pay a late enrollment penalty that will be added to your monthly Part B premium for as long as you are covered.
Regarding Medicare Part D drug benefits, the California Helath Advocates site further advises:
If you don't enroll in a Part D (prescription drug) plan when you are first eligible because your coverage through an employer GHP or LGHP is creditable, you will only have 63 days to enroll in such a plan after your group benefits end. If you enroll in Medicare Part D within this 63-day period, you will not be required to pay a penalty.
As for coordinating coverage under the group plan with Medicare, employer size is a factor. If an organization has more than 20 employees, in most instances the group health plan is the primary payer and Medicare acts as the secondary payer. According to the Corporation for National and Community Service's Senior Corp. website:
If the husband or wife is still working and has health coverage via their employer or union, Part A may still help pay some medical expenses not covered by any group plan. But that working spouse may choose to delay signing up for Medicare Part B until a later date. … Just remember you will have to pay a higher Medicare Part B premium simply because when you had the chance you didn’t take it.
If an employer has fewer than 20 employees, Medicare is the primary payer and the employer’s plan is the secondary payer. In this instance, it’s generally considered essential that employees turning 65 enroll in Medicare Parts A and B. If they don’t enroll, they will have to pay out of pocket anything that Medicare would have covered.
Employees who are turning 65 and preparing to retire or who have already retired.
For many retirees, employers provide no postemployment health coverage. And for some early retirees, reaching 65 could be the trigger to losing retiree coverage. “Since fewer employers offer retiree coverage, it’s important that people begin to study their options early enough to make good choices based on their needs,” Muschler said.
A key element for seniors in this situation is age; those older than 65 should have enrolled in Medicare when they reached their initial enrollment period. “Retiree coverage is secondary to Medicare, so they already would have Medicare Parts A and B,” Muschler noted. "But losing their group health coverage triggers their option to buy 'Medigap' coverage.” Private Medigap plans pay for services that Medicare doesn't cover.
“We cannot stress enough that turning 65 is a critical time period for Medicare beneficiaries to consider what they need and how they will afford it,” Muschler said. “This is their opportunity to make first-time Medicare decisions that ensure they have the proper coverage and avoid penalties later on.”
HSAs and Medicare
Under current law, individuals enrolled in any part of Medicare may not contribute to a health savings account (HSA), although HSA funds contributed earlier may be used to pay for qualified medical expenses on a tax-free basis.
As the nonprofit Medicare Rights Center explains, if individuals age 65 or older are employed and covered by an employer-sponsored high-deductible health plan (HDHP), whether they can continue contributing to their HSA depends on these circumstances:
- If they work for an employer with fewer than 20 employees, they may need Medicare in order to have primary insurance, even though they will lose the ability to contribute to their HSA. This is because health care coverage from employers with fewer than 20 employees pays secondary to Medicare.
- If they work for an employer with 20 or more employees, then their employer-sponsored health care coverage pays primary to Medicare, so they may choose to delay Medicare enrollment and continue contributing funds to their HSA.
Employees should keep in mind that Medicare Part A, which covers hospitalization, typically doesn't carry a premium and wraps around employer plans—at organizations with 20 or more employees—providing secondary coverage of hospital expenses not covered by the employer's plan. Employees should weigh the tradeoff of potentially higher pre-retirement hospital costs against their ability to increase the size of their HSAs before retiring.
Those who delayed enrolling in Medicare should stop contributing to their HSA at least six months before they plan to enroll in Medicare, the Medicare Rights Center advises. This is because those newly enrolled in Medicare Part A receive up to six months of retroactive coverage, so those who don't stop making HSA contributions at least six months before Medicare enrollment may incur a tax penalty.
Employees older than age 65 who deferred Medicare enrollment typically receive an eight-month special enrollment period to sign up, starting the month after employment ends or their group health insurance ends, whichever happens first. Employees should beware that if they elect to use COBRA for their insurance for 18 months on retirement, the special enrollment period begins when they retired, not at the end of the COBRA period. The penalties for missing the special enrollment period and enrolling late are significant and, in the form of higher premiums, continuous.
Too often, employers don't caution older workers about Medicare-plus-HSA pitfalls. "Employers have an obligation to inform their employees how to handle Medicare," but it may be rare that they do, Lawrence Kotlikoff, a Boston University economist, told the Los Angeles Times.
Stephen Miller, CEBS, is an online editor/manager for SHRM.