Where problems lurk

Not everyone who reaches age 65 must enroll in Medicare. For example, most individuals who plan to continue working can opt to retain the health coverage they receive through their employer’s plan and to delay signing up for federal insurance.

However, before delaying or opting out of coverage, its critical for those nearing age 65 to fully understand the regulations that govern the federal health program, as an enrollment error can trigger significant consequences:

1.  Financial penalties

Generally speaking, everyone must sign up for all parts of Medicare coverage (hospital, medical and drug benefit plans) when they reach age 65. (Individuals already getting Social Security benefits are automatically enrolled in Medicare Part A and Part B—they don’t need to apply.) The eligible enrollment period begins three months prior to the month in which an individual turns 65 years of age, and ends three months after that person’s birthday month. Thus, including their birthday month, this initial sign-up period is seven months long.

Those who fail to enroll in Medicare during this period can be hit with these additional charges:

• For Medicare Part B (medical) coverage, there is a 10% late enrollment penalty for every full 12-month period of eligibility that elapses without a worker having creditable coverage.
• The penalty for late enrollment in Part D, Medicare’s prescription plan, is typically 1% of the national base beneficiary premium ($36.78 in 2025) for each full month a person did not have creditable drug coverage, rounded to the nearest $0.10. 

Individuals age 65 or older who are covered by a health plan through an employer or spouse’s employer, however, can safely enroll in Medicare at a later date provided:

• Their current healthcare coverage is deemed to be creditable; i.e., that it is at least equal to Medicare coverage. However, some companies offer health plans that do not meet this standard. For example, businesses that employ 20 or fewer workers typically do not provide creditable coverage. 

When coverage is creditable, company benefit administrators are required to annually provide workers aged 65 or older with written proof of their medical and drug coverage being creditable. (Workers who have creditable employer-sponsored coverage and want to replace it with Medicare can sign up for federal health insurance during a special enrollment period.)

But keep in mind: Those who both lack creditable insurance coverage and fail to sign up for all parts of Medicare, including prescription drug coverage, when they become eligible at age 65 can be subject to financial penalties that remain in place for the remainder of their lives.

2. Tax penalties

Individuals who continue working after signing up for Medicare are not permitted to continue making contributions to a Health Savings Account (HSA) that is paired with a qualified high-deductible health plan. (This rule does not apply to other types of medical savings accounts.)

The penalties for violating this rule can be substantial: 6% of excess premiums contributed to the HSA. Further, the penalty is applied annually until the disallowed amounts, along with any related earnings, are removed from the account.

This problem most often occurs when an individual signs up for Social Security and discovers, after the fact, that they have automatically been enrolled in Medicare Parts A and B, which is how the program works.

While it is possible to disenroll from Part B, the Part A hospital coverage is mandatory—and retroactive, and begins six months before they either signed up for Social Security or reached age 65, whichever is later.

Individuals can avoid this pitfall by stopping their HSA contributions six months before signing up for Social Security.

3. Inadequate healthcare

The quality of the healthcare available through a given Medicare plan can have a profound impact on an insured individual’s finances, lifestyle and relationships.

For most Americans, selecting retirement health coverage is a binary choice between two options: Original Medicare; or Medicare Advantage (available through various private insurers). Each offers distinct advantages, and limitations.

Briefly summed up: Original Medicare offers participants a greater choice of doctors and health service providers, but comes with higher total costs. While Medigap insurance helps cover out-of-pocket costs, purchasing this supplemental coverage means total premiums are higher than for Medicare Advantage plans. Furthermore, additional expenses can be incurred for vision, dental and hearing services as well as for prescription drugs.

Conversely, those enrolled in Medicare Advantage can expect to pay a lower single premium for hospital care, outpatient services and prescription drugs. However, enrollees are typically confined to using the services of a local network of providers. But overall costs tend to be significantly lower than for Original Medicare. Note: Medicare Advantage beneficiaries should be prepared for variable out-of-pocket expenses since these costs may be relatively high for enrollees with poor health.

Also be aware:

• Only those enrolled in Original Medicare are allowed to purchase Medigap insurance, which covers the cost of copays and deductibles for Medicare Parts A and B. 
• Individuals who fail to sign up for a Medigap plan within six months of initially enrolling in Original Medicare may find they’re either unable to procure this supplemental coverage (due to restrictions imposed by insurance carriers) or they may be penalized with higher premiums and waiting periods to cover pre-existing conditions. In most states, these rules similarly apply to individuals previously covered by a Medicare Advantage plan and switching over to Original Medicare during the annual enrollment period. Local chapters of the State Health Insurance Assistance Program (SHIP) can provide state-specific details. 
• Medicare coverage of long-term care expenses is very limited—underscoring the importance of having a well-thought-out long-term care plan. 
• There are many additional considerations to weigh before making a final selection. For example, individuals who live in another part of the country for part of the year might find it’s especially challenging to have their healthcare coverage limited to a local Medicare Advantage network. 

As the chart below illustrates: Both options require signing up for Parts A (hospital insurance) and B (coverage for doctors, medical tests and outpatient procedures). Beneficiaries would be wise to revisit their choice of Part D plan or Medicare Advantage provider each year.

Careful research and planning can help those about to turn age 65 avoid the pitfalls inherent in Medicare sign-ups. Financial services professionals and employers are both well-positioned to provide guidance on how clients/employees/retirees can safely navigate the transition from company-provided health coverage to Medicare.

For more information, please refer to slides on Medicare in our Guide to Retirement.

Regarding tax penalties: Please note this information is not offered as personal tax advice. Individuals should make benefit decisions in consultation with a qualified tax professional.

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