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I’M JUST A FEW YEARS from age 65—and being eligible for Medicare. One of my concerns: making a mistake that could trigger penalties.
If you file for Social Security before age 65, you’ll be automatically enrolled in Medicare Part A and B. What if you’re still working at 65? Ask your human resources department for advice. Your coverage at work will dictate whether you should file for Medicare.
If you aren’t covered by an employer’s health insurance plan and you aren’t yet collecting Social Security benefits, the best time to file for Medicare is three months before you turn age 65. That’ll allow time for the paperwork to be processed—and coverage should begin on the first day of the month you celebrate your 65th birthday. If you wait until age 65 to file, you might not have coverage for another month or so.
What if you wait too long? There’s a penalty period that begins three months after you reach age 65. If it’s been more than three months since the month you turned 65 and you haven’t signed up for Medicare Part B, your monthly Part B premium will increase 10% for each full 12-month period that you could have been enrolled in Medicare Part B, but weren’t. You’ll pay this penalty for the rest of your life.
There’s a similar penalty for Medicare’s Part D prescription drug coverage, but that penalty is calculated at 1% per month. It’s also permanent. These penalties are an inducement not to wait until you’re sick to get coverage and start paying Medicare premiums.
The other penalty is potentially triggered if you’re stashing money in a health savings account (HSA) before you’re on Medicare Part A. HSAs, which offer unsurpassed tax advantages, are often funded by those with high-deductible health plans. But you aren’t allowed to fund an HSA if you’re covered by Part A.
For those who begin Medicare at age 65, you can only fund the HSA up until your birthday month. What does that mean in dollar terms? If you’re over age 55 in 2019, you can put $4,500 in an HSA, consisting of the $3,500 regular annual contribution, plus $1,000 because you’re 55 or older. To figure out how much you can contribute in the year you enroll in Medicare, you take that $4,500 and divide it by 12, which comes to $375. You then multiply that $375 by the number of months in the year before you turn age 65. If you contribute more than the maximum allowed, it’s included in your taxable income and a 6% excise tax may apply.
For those who continue to work past age 65 and delay filing for Medicare because they’re covered by an employer’s health plan, there’s another potential HSA surprise. When you enroll in Medicare Part A, you receive up to six months of retroactive coverage, but only going as far back as age 65. If you are over age 65½ and don’t stop HSA contributions at least six months before Medicare enrollment, you may incur a tax penalty. Don’t assume your employer’s benefits administrator will shut off your contributions automatically to prevent this mistake.
My plan: In the year I turn 65, I intend to file for Medicare three months before my birthday—and, because my birthday is in June, I’m only going to fund my HSA for the first five months of that year.
James McGlynn CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. His previous articles include Where to Begin, As the Years Go By and Package Deals.
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James, Thanks for a clear explanation of some important, complex topics.
I’m older than my wife, and covered by her employer insurance as a dependent. Any ideas as to how that affects my requirement to apply for Medicare? And she contributes the family maximum to her HSA – will that still be allowed?
Good advice. I would like to add my understanding of what I think are a couple of points of clarification (I’m sure James and Robert Quinn will correct me if I am wrong).
1) Regardless of employment status, everyone needs to file for Medicare A when they turn 65. Medicare A’s main benefit is hospital care and it is free. If you are still employed, it supplements your employer’s insurance.
2) You don’t have to file for Medicare B and/or D as long as you are working and have health insurance through your employer that is comparable or superior. You do need to file in a timely manner when you retire.
3) If you file within the three month period after you are eligible for benefits, SS will probably make your coverage retroactive to the date you became eligible.
We opted for a Medigap policy and found very cheap Part D coverage separately from EnvisionRX ($16 a month) which covers common generics with no co-pay.
One thing about enrollment periods for Medicare B. If you wait more than 3 months after 65th birthday, the next available enrollment period will be January-March of the next year (general enrollment period), and Medicare B won’t start until July. The 10% penalty is for each year you were eligible but not enrolled. Say you reach age 65 in April, don’t enroll, then decide in August you want Medicare B. You can’t enroll until January, and Medicare B won’t start until July, so you have a 10% penalty for late enrollment.
I think many people underestimate or simply pay no attention to Medicare premiums. In many cases they will pay far more than their employer plan premiums, especially considering income related premiums so it pays to stay on employer coverage. The typical retired couple will pay $800 or so per month for Part B, D and Medigap coverage.
James, Great information. A couple of comments. My wife was medicare eligible for a number of years, but we kept her on my insurance at my work. Due to costs we switched her to medicare last year. Almost like a qualifying event with company insurance, when we switched her from my insurance to medicare (or if you retire and loose your insurance benefit and change to medicare) you qualify for a special enrollment period. This means that you can enroll immediately and not have to wait to the next general enrollment. Since she was covered by my insurance there was not any penalty for delaying medicare B or D.
Medicare A (hospital) is free and she had signed up for it at 65. However, if you are covered by an employer’s insurance plan and want to contribute to the HSA, I don’t believe you have to sign up for medicare A either until you want to switch completely. Obviously since its free it makes sense to sign up sooner than later unless you do contribute to an HSA.