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Mark Miller: Remaking Retirement

The Transition to Medicare: How to Get It Right

Contributor Mark Miller discusses the pitfalls to avoid.

When I talk with people close to retirement these days--and they find out that I write about retirement--the conversation often shifts to questions about the transition to Medicare.

For many people, moving to Medicare from other types of health insurance will be one of the most important retirement transitions. It is fraught with pitfalls that can be costly, and decisions that can be made that lead to a good--or bad--fit for your needs.

The key mistake to avoid is failing to sign up for Medicare at the right time. This can lead to costly late-enrollment penalties on the premiums you pay, and risky--and potentially large--gaps in your insurance coverage.

Medicare Enrollment Rules
Medicare requires enrollees to sign up during a seven-month Initial Enrollment Period that includes the three months before, the month of, and the three months following your 65th birthday. Missing that window triggers late-enrollment penalties that continue for life, as well as possibly expensive, long waits for coverage to start. (People who are still employed when they turn 65 can stay with employer-provided group coverage--more on that below.)

The most expensive late-enrollment penalty is for Medicare Part B (outpatient services); it is equal to 10% of the standard Part B premium for each 12 months of delay--and this is a lifetime penalty.

How much can this cost?

Using the most-recent Medicare trustee projections for the standard Part B premium in the years ahead (see Table V E2), someone who signed up at the beginning of this year and was 12 months late would pay $1,820 in penalties between now and 2027. If that same person was 24 months late, the penalties would total $3,646. And if the signup was three years late, the penalties would total a whopping $5,470 in 2027.

(The Part D prescription drug program has a much less onerous late-enrollment penalty, equal to 1% of the national base beneficiary premium for each month of delay.)

There's one other very important risk created by late enrollment: significant gaps in health insurance coverage while waiting for Medicare to kick in.

Medicare has three enrollment periods. If you enroll during the IEP, coverage starts one to three months later, depending on the enrollment timing. For people transitioning from employer coverage at other ages, a Special Enrollment Period is available for eight months after other insurance ends, and coverage begins the first month after you enroll.

But late enrollees must wait for a General Enrollment Period that runs from Jan. 1 to March 31 each year--and then Medicare coverage does not begin until July 1.

Let's say you learn at age 67 that you should have been enrolled in Medicare. You discover this in April of the year that you turn 67.

You must now wait until January through March of the following year to enroll. And at that point, coverage will not begin until July 1. That means you'll go for more than a year without Medicare coverage and probably will not be able to obtain other insurance in the meantime.

Why Problems Occur
Late enrollment has become a more significant risk as more people delay retirement, staying on employer insurance past age 65. Another complicating factor is that enrollment in Social Security and Medicare has become less synchronized over the years. For people already signed up for Social Security at age 65, enrollment in Medicare Part A (hospitalization) and Part B (outpatient services) is automatic.

But for people who have not yet applied for Social Security, signing up for Medicare requires proactive steps to avoid problems. The government does not send out an advance warning; there is some information about the enrollment rules in the annual statement of Social Security benefits, but most Americans don't receive that by mail any more because of budget cuts. Legislation has been proposed that would require Medicare to step up its efforts to inform people about the rules.

The problems are not limited to the transition from employer insurance, so let's consider the key issues to look out for.

Still Employed
The major exception to the mandatory signup at age 65 is for people who are still actively employed at that age and their spouses. They can delay enrollment in Medicare--as long as they are actively employed. The key word here is "actively." A problem that often crops up involves people who have been laid off from work and are using COBRA coverage. They sometimes assume that COBRA coverage qualifies them to decline Medicare at age 65--and that is not correct.

There is one other exception to the active employment exemption: people who work for organizations with 20 or fewer employers. In those cases, Medicare becomes primary regardless of whether the employer offers health insurance to its employees.

The growing popularity of health savings accounts has created one other twist on the coordination of employer insurance and Medicare. HSAs can accept contributions only from people enrolled in high-deductible insurance plans--and Medicare does not meet that definition. Contributions to HSA accounts must stop six months prior to your Medicare effective date in order to avoid tax penalties. (This is because Medicare Part A coverage is retroactive for six months for enrollees who qualify during those months.)

Affordable Care Act
Transitioning from coverage through the Affordable Care Act Marketplace exchanges also is a common trip-up point. Federal law requires switching to Medicare at age 65. (Confusion on this point prompted Medicare to allow people to apply for relief from the late-enrollment penalties. Information on this relief is available in this Medicare fact sheet.)

Finally, health insurance that some retirees receive can create confusion. This type of insurance usually provides supplemental help meeting cost-sharing requirements or prescription drug coverage; It's important to remember that retiree benefits always are secondary payers to Medicare--some retirees make the error of turning down Part B coverage in the belief that this supplemental coverage is primary and then end up with no primary coverage.

Helpful Resources
The Medicare Rights Center maintains a free telephone hotline (1-800-333-4114) that provides consumer help. The Center also publishes an excellent online guide that can answer many Medicare questions.

Federally funded State Health Insurance Assistance Programs also provide free help with Medicare. Find your local SHIP here.

If you're willing to pay to get advice and help with paperwork, hire an independent, fee-based counseling service such asAllsup Medicare Advisor orGOODCARE.com.

Medicare can provide enrollment help direct over the phone at 1-800-MEDICARE. Each year, Medicare publishes "Medicare and You," a useful, comprehensive handbook on the program. Download the guide free here.

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to WealthManagement.com and the AARP magazine. He publishes a weekly newsletter on news and trends in the field at Retirement Revised. The views expressed in this column do not necessarily reflect the views of Morningstar.com.