Financial professionals and employers can position themselves to provide some much needed guidance on how clients/employees/retirees can safely navigate the transition from company-provided health coverage to Medicare.

Sharon Carson, Retirement Strategist, pinpoints three areas where professional guidance can be especially helpful.

Where problems lurk

Not everyone chooses to enroll in Medicare when they reach age 65. For example, individuals who plan to continue working may wish to retain the health coverage they receive through their employer’s plan and to delay signing up for federal insurance.

However, running afoul of Medicare’s rules can trigger: 

1. An unexpected gap in coverage.

The initial Medicare enrollment period begins three months prior to the month in which an individual turns 65 years of age and ends four months after that person’s birthday month. Individuals can enroll at any time during this eight-month long period without fear of late sign-up charges being applied.

However: If they enroll in Medicare during their birthday month or in the four months following it, they may experience a gap in health insurance coverage as Medicare won’t start until the first of the following month. While this may not be a big time lag, it does leave that individual without coverage for the intervening period; a potentially expensive risk if they experience a major health issue.

Note: If an individual’s 65th birthday falls on the first day of a given month, the Social Security Administration will judge their birthday to have taken place in the preceding month. Therefore, their eligible enrollment period will start (and end) a month earlier.

2. Lifetime financial penalties 

Individuals who lack creditable insurance coverage and who do not sign up for Medicare when they become eligible at age 65 can be subject to penalties.  

Creditable coverage is insurance provided by an employer (or a spouse’s employer) that is at least equal to Medicare coverage. Note: Company benefit administrators are required to annually supply workers aged 65 or older with written proof if their medical and drug coverage is creditable.

Note: In 2025, employees will be less likely to have creditable drug coverage from their employer because Medicare’s prescription plan (i.e., part D) will have lower out-of-pocket costs (due to government-negotiated pricing for insulin and other drugs) than in the past. 

Employees who find themselves in this position will need to first sign up for Medicare Part A (hospital insurance, which is usually free) before they are permitted to sign up for Part D.

Alternatively, employees can choose to drop all of their employer coverage and sign up for all the parts of Medicare.

Even if employees think they don’t need creditable coverage, it’s advisable to sign up for Medicare coverage to avoid penalties down the road, which will remain in force for life:

• The penalty for late enrollment in Part D is typically 1% of the national base beneficiary premium ($34.70 in 2024) for each full month a person did not have creditable drug coverage, rounded to the nearest $0.10.
• For Medicare Part B (medical) coverage, there is a 10% late enrollment penalty for every full 12-month period of eligibility that elapsed without a worker having creditable coverage in place.

3. 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 may have been 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 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. 

This chart, excerpted from J.P. Morgan’s Guide to Retirement, outlines the decisions individuals must make: 

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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