Medicare and Working Past 65: How to Handle Insurance When You Are Still Employed

More Americans are working past 65 than at any point in the last 50 years. Some continue working because they enjoy their careers, others because they need the income, and many because their employer provides health insurance that they are not ready to give up. Whatever your reason for staying in the workforce past the traditional retirement age, you face a decision that can have significant financial consequences: how to coordinate Medicare with your employer provided health coverage. The rules are not intuitive, the penalties for mistakes can follow you for years, and the right strategy depends on the size of your employer and the specifics of your existing coverage. Getting this right can save you thousands of dollars; getting it wrong can cost you just as much.

The single most important factor in deciding what to do about Medicare when you are still working is how many employees your company has. If your employer has 20 or more employees, your employer coverage is primary, meaning it pays first, and Medicare is secondary. In this situation, you are generally not required to enroll in Medicare Part B when you turn 65 because your employer coverage provides creditable coverage that protects you from late enrollment penalties. You should still sign up for Part A, which is free if you or your spouse paid Medicare taxes for at least 10 years, because it provides supplemental hospital coverage at no additional cost.

If your employer has fewer than 20 employees, Medicare becomes your primary insurance the moment you are eligible, and your employer coverage becomes secondary. In this case, you must enroll in both Part A and Part B during your initial enrollment period to avoid penalties and coverage gaps. If you delay Part B enrollment while working for a small employer, your employer plan may reduce its payments because it expects Medicare to be paying first. This can leave you with large out of pocket costs for medical services that neither insurer fully covers. The distinction between large and small employers is critical, and it is the first thing you should determine when you approach your 65th birthday.

If you work for a large employer and choose to delay Part B enrollment, you have a Special Enrollment Period that begins when your employer coverage ends, either because you retire or because the employer stops offering coverage. This Special Enrollment Period lasts for 8 months starting from the month your employer coverage ends or the month your employment ends, whichever comes first. During this window, you can enroll in Part B without any late enrollment penalty, regardless of how long you delayed past age 65. This is the key protection that makes delaying Part B safe when you have large employer coverage.

Do not confuse the Special Enrollment Period with the General Enrollment Period. If you miss your Special Enrollment Period, you must wait until the General Enrollment Period, which runs from January 1 to March 31 each year, and your coverage will not start until July 1. During that gap, you could be without Part B coverage for months. On top of that, you will face a late enrollment penalty of 10 percent for each full 12 month period you were eligible for Part B but not enrolled. This penalty is permanent: it is added to your Part B premium for as long as you have Medicare. A five year delay would increase your Part B premium by 50 percent for life. Tracking your enrollment deadlines carefully and acting promptly when your employer coverage ends is essential to avoiding this trap.

Part D, which covers prescription drugs, has its own set of enrollment rules that parallel Part B but are not identical. If your employer offers prescription drug coverage that is at least as good as a standard Part D plan, which is called creditable coverage, you can delay Part D enrollment without penalty. Your employer is required to notify you each year whether their drug coverage is creditable. Keep these notices because you will need them when you eventually enroll in Part D to prove that your delay was protected by creditable coverage.

If your employer drug coverage is not creditable, meaning it provides less value than a standard Part D plan, you should enroll in Part D during your initial enrollment period to avoid a late enrollment penalty. The Part D penalty is 1 percent of the national base beneficiary premium multiplied by the number of months you went without creditable coverage. Like the Part B penalty, it is permanent. If you go 36 months without creditable drug coverage, your Part D premium increases by approximately $12 per month for as long as you have Part D coverage. Over a 20 year period, that adds up to nearly $3,000 in extra premiums that you could have avoided entirely by enrolling on time.

COBRA continuation coverage and Medicare interact in ways that catch many people off guard. If you are already enrolled in Medicare when your employment ends, COBRA coverage is secondary to Medicare. Choosing COBRA in this situation provides minimal additional coverage and costs you the full COBRA premium, which is typically 102 percent of the total plan cost. For most people enrolled in Medicare, COBRA is not a good value because Medicare covers the vast majority of healthcare expenses and a Medigap supplement fills the gaps more cost effectively than COBRA.

The more dangerous scenario is choosing COBRA instead of enrolling in Medicare. If you turn 65 while on COBRA, or if you elect COBRA at age 65 or older instead of signing up for Medicare, COBRA does not count as employer coverage for the purpose of the Special Enrollment Period. This means your 8 month window to enroll in Part B without penalty begins when your actual employment ends, not when your COBRA ends. If you ride out the full 18 months of COBRA and then try to enroll in Medicare, you may have missed your Special Enrollment Period and face both a gap in coverage and a permanent late enrollment penalty. This is one of the most common and costly Medicare mistakes people make, and it is entirely preventable by understanding that COBRA is not the same as active employer coverage.

If you have a Health Savings Account through a high deductible health plan at work, you need to know that you cannot contribute to an HSA once you are enrolled in any part of Medicare, including Part A. Since Part A enrollment can be retroactive up to six months, the IRS recommends stopping HSA contributions at least six months before you enroll in Part A to avoid tax penalties for excess contributions. You can still use the money already in your HSA tax free for qualified medical expenses, including Medicare premiums, deductibles, and copays. The funds in your HSA do not expire, so any balance you have accumulated remains available to you indefinitely.

If maximizing your HSA contributions is important to your retirement strategy, you may choose to delay Part A enrollment while you are still working and covered by your employer's high deductible plan. You can delay Part A without penalty as long as you have employer coverage, and this allows you to continue making tax deductible HSA contributions. This strategy works only if you are not yet receiving Social Security benefits, because enrolling in Social Security automatically enrolls you in Part A. If you have already started collecting Social Security, Part A enrollment is automatic and you must stop HSA contributions. The interplay between HSAs, Social Security, and Medicare enrollment is complex enough that consulting with a Medicare counselor or financial advisor before your 65th birthday can prevent expensive errors.