The hand-off from employer health insurance to Medicare can be one of the trickiest challenges you will face in managing your retirement.
The rules are full of pitfalls that can cost you thousands of dollars in unnecessary premiums or lead to a risky gap in coverage.
Here are the six most frequent questions I get about the work-to-Medicare transition:
1. Is the Medicare enrollment process automatic?
A: Only if you have already claimed Social Security benefits by the time you turn 65, which is the Medicare eligibility age.
If not, Medicare requires you to sign up in a seven-month window before and after your 65th birthday, unless you have employer coverage or through your spouse.
Failing to sign up when required is costly. Monthly Part B premiums, which cover doctor visits and medical supplies, jump 10 percent – lifetime – for each full 12-month period that you should have been enrolled. Penalties also are applied for late enrollment in Part D (prescription drugs).
If you retire after 65, you can take advantage of an eight-month special enrollment period that begins the month after employment ends.
2. Should I enroll in Medicare even if I am offered COBRA health insurance when I leave my job?
A: Yes. Although you might need COBRA to cover a spouse or dependent child, Medicare must be your primary insurance coverage once you are over age 65.
“People often miss that memo and find out about the consequences in a nasty way,” says Katy Votava, president of Goodcare.com, which advises consumers on health plan selection.
Besides leading to penalties, missing the special enrollment window could mean going with nothing but COBRA, which provides limited coverage to retirees, until the next enrollment period, which could be a year away.
3. What if I am still working when I turn 65?
A: If your employer has fewer than 20 insurance-eligible workers, Medicare will be your primary coverage, so go ahead and enroll.
You can stick with your employer’s coverage and forestall Medicare enrollment if your employer has 20 or more insurance-eligible workers. The insurance must be similar to Medicare benefits as measured by a set of standards set by the program.
You also could enroll in Medicare, which would provide secondary coverage to fill gaps in your employer’s plan.
One caveat: Do not enroll if you contribute to a Health Savings Account linked to a high-deductible employer plan. You are prohibited from making further contributions to the HSA once enrolled in Medicare.
4. What if I want to execute a file-and-suspend strategy for Social Security? Could I contribute to an HSA in that situation?
A: No. Claiming Social Security benefits automatically triggers enrollment in Medicare Part A, which covers hospital and nursing home stays. That would still be true if you file and suspend your benefits while still working and participating in a high-deductible employer health insurance plan.
5. Do I sign up for Medicare when I retire if my former employer provides a retiree health benefit?
A: Even if your former employer offers a retiree health benefit, it is important to sign up for Medicare at age 65 to avoid penalties and coverage gaps. Employer-provided benefits usually provide a secondary layer of coverage – often covering co-pays or providing a drug benefit.
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The key to coordinating the two insurance plans: “Understand who pays first,” says Votava.
But Votava says retirees should compare the cost of retiree coverage with what is available on the open Medicare market. “I often see people holding on to retiree coverage when it’s not the best value for them.”
This is especially true for with supplemental plans that cap out-of-pocket costs, either Medigap or Medicare Advantage. “I’ve had clients find much less expensive Medigap or Medicare Advantage policies with equal or better coverage,” Votava says.
6. What if I retire, enroll in Medicare and then go back into a full-time job?
A: If your new employer provides health insurance, you can drop Medicare and re-enroll when you finally retire without paying late enrollment penalties.
Call the Social Security Administration (1-800-772-1213), which will send a form to sign that creates a record of what you are doing. The paper trail is important because it helps you avoid late enrollment penalties when you return to Medicare.