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Avoid These Medicare Pitfalls

Contributor Mark Miller points out the pain points when signing up for Medicare.

Christine Benz: Hi, I'm Christine Benz for Morningstar. Signing up for Medicare seems incredibly straightforward, but there are actually pitfalls to be aware of. Joining me to cover some of them is retirement expert Mark Miller.

Mark, thank you so much for being here.

Mark Miller: Hi, Christine.

Benz: Mark, let's talk about this. First of all, what is the initial enrollment period, the general enrollment period for Medicare?

Miller: As we go through this, I think listeners will see it's not so incredibly straightforward, which is really unfortunate. It'd be great if it was simpler. The initial enrollment period for Medicare is very--actually, that is kind of straightforward. That is, you turn 65, which is the eligibility age for Medicare. The initial enrollment period is, if you are ready to enroll at 65, you can do this as much as three months before your 65th birthday and as late as three months after. That's the initial enrollment. And then your coverage will start a month later than your enrollment date. So, that's worth thinking about if you're transitioning from workplace insurance, you want to avoid gaps, make sure you do it early enough that with that one-month lag you get covered.

Benz: There's also what's called a special enrollment period. Let's talk about that and who that affects.

Miller: Also, fairly straightforward. This is, let's say, you continue to work past 65; you're 66 or 67, now you retire. And so, you want to sign up for Medicare. There is a special enrollment period that lets you do this, assuming that that's your situation, and the rules are pretty similar. You sign up whenever that point is of retirement, and your coverage starts a month later.

Benz: Let's discuss some of the situations that would prompt someone to delay filing for Medicare, not filing right at around age 65.

Miller: A lot of it stems from sort of the way that Social Security and Medicare interact, used to interact, now interact. If you have already filed for Social Security before age 65, your Medicare card comes automatically when you turn 65. So, all of this that we're discussing becomes kind of not important to you. Your card will arrive. You go ahead and make your elections on things like your Part B coverage, whether you want traditional Medicare or Medicare Advantage, all those choices. But you're enrolled automatically at 65.

But with increasing numbers of people working longer, not filing for Social Security, trying to delay their claim for Social Security--usually a good thing to do--that's where you need to be proactive in making a Medicare decision to avoid problems and that's where a lot of this stems from. So, people working longer, still on employer coverage and the like.

Benz: Spousal coverage, how would that fit in there?

Miller: The thing we are saying here is that the default thought people ought to have is when you're 65, get on Medicare except if you're still working and you're covered by insurance at work or you have a spouse who is covered by your policy. In those situations, you don't have to enroll in Medicare. Again, there's an exception though. This applies to situations where your employer has 20 or more workers. If it's a small business with 20 or fewer, you should enroll in Medicare anyway, because Medicare becomes your primary coverage at that point and your employer's coverage becomes secondary.

Benz: How about if I'm covered by my spouse's healthcare plan? So, I'm Medicare eligible but I've been covered by the spouse's plan.

Miller: There you could also choose not to enroll in Medicare at that point.

Benz: Let's talk about where these complications can come into play. I want to talk about penalties and also, importantly, coverage gap. So, let's start with the penalties, how you can trigger a penalty if you goof this up.

Miller: If you are late, your penalty--we're talking primarily here about the Part B premium--you'll be charged a late surcharge for your premium equal to 10% of the Part B premium for every 12 months that you're late and that's a lifetime penalty. So, imagine that you're two years late, 20% penalty on your Part B lifetime.

Benz: That's huge.

Miller: It can really add up to significant money. And you know, where people get into trouble here is when they think they have coverage that exempts them that in fact does not. A great example would be COBRA coverage. So, we just talked about if you still have employer coverage, you can stay off Medicare …

Benz: And avoid this penalty.

Miller: … very easy to think, oh, I'm on COBRA for whatever reason; that's my employer's plan, I don't need to sign up for Medicare. Wrong. Because the rule is you have to be actively employed in order to stay off Medicare. And COBRA is not active employment coverage--it's for a former employee. This is one where people screw up quite frequently and find out that they should have done something, and they didn't.

Second is, people who are covered on the Affordable Care Act exchanges. So, let's say, you have an exchange policy and you turn 65 and you think, oh, I have insurance, I don't have to shift to Medicare. Again, wrong. At 65, you need to move. Sometimes people think, oh, I have this retiree coverage from my employer, that exempts me from Medicare. Also, not correct. Medicare is always primary. So, this is why I say, lean towards being on Medicare unless you are super sure you have a rock-solid exemption to stay off of it, which is just the active employment exemption.

Benz: Let's talk about how the coverage gaps can come into play, because this seems super important. Once you are at age 65, people do start incurring more healthcare claims. What are the coverage gaps here?

Miller: Well, the coverage gap, this comes up if you're late. Let's say you are 66 or 67, and you realize you should have been on Medicare and you are now starting to the process of getting moved over. In addition to those penalties we just discussed, to do this, you have to wait for what's called the general enrollment period. This is a form of special enrollment period that only runs from Jan. 1 to the end of March every year. That's when you have to enroll, in that window. So, let's say, you realized, I don't know, March of a given year I need to be on Medicare. You can't sign up until the following January and then your coverage won't start till July. So, you've got this potentially year-plus period where you have no insurance. You've probably been kicked off of your other insurance because that insurer says, wait a minute, you are supposed to be on Medicare. And so, this is a big--I think in some respects it's even a bigger risk than the late penalty. Let's say, a serious health issue comes up during that gap period, you are going to bear it in terms of your insurance coverage. So, this is as important as the late penalties I would say.

Benz: Absolutely. Let's talk about HSA contributions, how they come into play here, too, as if this weren't complicated enough!

Miller: I know, this is another great one. So, increasing popularity of high-deductible insurance plans in the workplace, they come coupled with a health savings account. Medicare is not classified as a high-deductible insurance plan. Therefore, you cannot continue to contribute to an HSA once you go on Medicare. But in addition to that, contributions need to stop six months before you go on Medicare. And the reason for that is that when you enroll in Part A Medicare--hospitalization--that enrollment is retroactive for six months. Now, the consequences of this are some tax penalties. So, the tax advantages that you're enjoying on the HSA contributions means you are going to have some tax penalties.

Benz: Just the new contributions?

Miller: Not a disaster, but it's something to look out for and try to coordinate.

Benz: Mark, really helpful information. You have done--you've got a blog, and you also have an in-depth booklet where you look at this specific issue how to avoid some of these penalties on your website.

Miller: Because of the complexity of this, I've started developing a series of these short kind of retirement guides on specific topics, and it's tied to the newsletter I do at RetirementRevised.com. So, you're able to download a short PDF to read about this, and then it's always tied with a podcast interview with an expert. So, it's like, listen to the podcast, read the guide, you should be good to go.

Benz: Fantastic. Mark, thank you so much for being here.

Miller: Thanks, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.