What Do I Need to Know About Medicare If I Have Employer-Provided Health Insurance After Age 65?
Presented By Tom Kennedy, CFP®:
As you approach your initial enrollment period, which begins three months before your 65th birthday, you may have several questions about Medicare enrollment planning if you or your spouse continue to work and have employer-provided coverage. Your specific circumstances, Medicare’s payer rules, and the IRS’s tax rules will determine the answers.
Can you have Medicare and employer insurance at the same time?
Am I required to enroll in Medicare when I’m first eligible at age 65?
The answer depends on whether you or your spouse are or can be covered by employer-provided health insurance from an employer with 20 or more employees.
- At least 20 employees. You can remain on an employer’s health insurance plan if it has 20 or more employees. Your employer must continue to offer you the same health insurance that is available to employees who are younger than 65. You can also remain on your spouse’s health insurance after your 65th birthday if the employer’s plan covers spouses.
- Fewer than 20 employees. If your or your spouse’s employer has fewer than 20 employees and is not part of a multiple employer group health plan, you must enroll in Medicare. Signing up during your initial enrollment period will help you avoid the potential for incurring Part B and Part D late enrollment premium penalties.
What are the Part B and Part D late enrollment premium penalties?
Failure to complete timely enrollment in Part B can cause a 10 percent penalty to be added to your Part B premium. You will incur the 10 percent penalty if one year lapses after you should have enrolled during an initial or special enrollment period. The 10 percent penalty is permanent. It will not be reduced or eliminated based on subsequent events or changes in income.
Part D assesses a 1 percent penalty for each month you fail to enroll and are not covered by a creditable prescription drug plan. In the context of Part D, creditable coverage is a prescription drug plan that pays as much as a standard Part D plan. The 1 percent penalty is calculated from the national Part D base premium. Like the Part B penalty, it is also permanent.
Since I don’t have to pay a premium for Part A, will I effectively receive additional hospital insurance if I only enroll in Part A?
Part A is premium free if you or your spouse worked and paid FICA tax for at least 10 years. Employer-provided coverage is always the primary payer. Medicare’s coordination of coverage rules will determine whether Part A will pay for excess hospital charges. As the secondary payer, Medicare may, but is not guaranteed to, cover the portion of hospital bills that employer-provided health insurance does not cover.
Can enrolling in Part A cause problems if I have a high deductible health plan (HDHP) and a health savings account (HSA)?
Yes. Part A’s retroactive coverage period can cause problems if you contribute to an HSA after age 65 and within six months of your Medicare enrollment. Avoid difficulties by keeping the following rules in mind:
- You can contribute to an HSA if you have an HDHP. Medicare is not an HDHP, and you cannot contribute to an HSA if you are enrolled in any part of Medicare.
- Medicare Part A has a six-month retroactive coverage period. If you enroll in Medicare after age 65, your Part A coverage will cover the six-month period prior to your enrollment.
- Stop HSA contributions six months prior to Medicare enrollment to avoid an excess contribution to an HSA. You can prorate your HSA contributions based on your enrollment date. If you plan to enroll in Medicare in October, for example, you could contribute to an HSA through April. In 2021, the maximum for a family coverage HDHP/HSA is $7,200, and the age 55 catch-up contribution is $1,000. The prorated contribution is: $7,200 + $1,000 ÷ 12 months = $683.33 x 4 months = $2,733.33. Other factors to consider include the following:
- If your spouse is not yet eligible for Medicare and has an HDHP, they can continue to contribute to an individual HSA.
- You can use an HSA to pay for Medicare Part B, C, or D premiums; however, you cannot use an HSA to pay the premium for a Medigap or Medicare Supplement policy.
- You have until April 15 (i.e., the tax filing deadline) to withdraw excess contributions to an HSA without incurring a penalty.
When should I enroll in Medicare after retiring if I stay on my employer-provided health insurance through COBRA?
COBRA is the acronym for the Consolidated Omnibus Budget Reconciliation Act, a federal law that allows you to stay on an employer’s health plan for a limited time after you retire. If you elect COBRA, you will pay up to 102 percent of the insurance premium. You must understand the rules below to coordinate COBRA with Medicare enrollment.
- You can maintain employer-provided health insurance coverage through COBRA for 18 months after retiring. A spouse who is ineligible for Medicare, as well as dependent children, can stay on COBRA for up to 36 months.
- Medicare has an eight-month special enrollment period (SEP) that starts when employer-provided coverage ends. Although COBRA allows you to maintain the health insurance you had through an employer, that continuation through COBRA is not employer-provided coverage.
- The 8-month SEP does not start after the 18-month COBRA eligibility period ends. The SEP’s 8 months run concurrently with COBRA’s 18-month eligibility period. You can use COBRA in the months after you stop working, but you should enroll in Medicare within 8 months of your retirement.
- You will avoid Part B and Part D premium penalties if you complete your Medicare enrollment during the eight-month SEP.
- Your employer will need to complete Form CMS-L564E to certify that you had creditable coverage prior to your Medicare enrollment. During the pandemic, the Social Security Administration is allowing individuals to complete Form CMS-L564E if they cannot obtain certification from their former employer. If you complete Form CMS-L564E, you will need to provide additional verification, such as a pay statement, insurance card, or explanation-of-benefits letter.
How will my annual income before Medicare enrollment affect my Part B and Part D premiums?
The answer depends on whether your preretirement modified adjusted gross income (MAGI) is above the thresholds for the income-related monthly adjustment amount (IRMAA). IRMAA is a surcharge assessed on the Part B and Part D premiums of Medicare beneficiaries who have MAGI above certain thresholds. Once you retire, your MAGI may decrease below the MAGI reported on your most recently filed income tax return. Other important IRMAA details are below:
- The Social Security Administration will use the most recently filed income tax return to determine whether you are subject to the IRMAA surcharge. There is usually a two-year gap between the income tax year for the most recently filed return and the year that the IRMAA surcharge will be added to the Medicare premiums. For example, the 2021 IRMAA assessments are based on 2019 income tax returns.
- You can file Form SSA-44 to report a change in your post-retirement income and request the removal of the IRMAA surcharge.
- The IRMAA surcharge will be removed if you experience one of the following life-changing events: marriage, divorce/annulment, death of a spouse, work stoppage, work reduction, loss of income-producing property, loss of pension income, or employer settlement payment.
- In 2021, the IRMAA assessment begins for single-income tax filers with MAGI above $88,000 and married joint filers with MAGI above $176,000. MAGI, for purposes of the IRMAA assessment, is the sum of your adjusted gross income plus tax-exempt interest income.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Tom Kennedy is a financial advisor located at Global Wealth Advisors 520 Post Oak., Suite 450, Houston, TX 77027. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial network®, Member FINRA / SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (832) 649-8111 or at firstname.lastname@example.org.
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