Paying for health care in retirement can be a challenge, so most people over the age of 65 rely on Medicare. Like most federal programs, Medicare is complex and navigating its arcane rules can be daunting. Mistakes can be costly, so learning how Medicare works is critical.
Most people become eligible for Medicare when they turn 65. The initial enrollment period lasts seven months starting three months before the month you turn 65. If you fail to sign up during your initial enrollment period, you may have to wait until Medicare’s general enrollment period, which runs from January 1 to March 31 of each year. You may also be required to pay penalties for late registration. Here’s how the penalties work.
Medicare coverage comes in two flavors: original Medicare and Medicare Advantage. Original Medicare has two main parts: Part A and Part B. In addition, other options have been created to help Medicare meet the needs of the typical consumer. These include Medicare Part D, and Medigap insurance. These additional options are provided by private companies under contract with Medicare.
Medicare Part A covers inpatient hospital care, skilled nursing care (when medically necessary), hospice and home health care. If you or your spouse have worked for at least 10 years, Part A will be provided to you without cost. However, if you don’t have enough work history, you will pay a monthly premium in 2023 of $278 if you have worked between 30 and 39 quarters or $506, if you have worked less. If you do not enroll in Part A during your initial enrollment period, you will pay a penalty equal to 10 percent of your monthly premium. You will have to pay the penalty for twice the number of years you did not sign up. For example, if you were eligible for Part A 2 years ago, but didn’t sign up, you will be required to pay the 10 percent surcharge on your monthly premium for 4 years.
Late penalties on Part B are even tougher. Medicare Part B covers doctor visits and outpatient care and other medically necessary services like ambulance services, clinical research and durable medical equipment. Monthly premiums in 2023 will start at $164.90. If your income is above $97,000 for single tax-payers and $194,000 for married-filing-jointly taxpayers, you become subject to what is called the income-related monthly adjustment amount, or IRMAA, which will significantly increase your cost of coverage.
If you fail to sign up for Part B during your initial enrollment period, your monthly premium will increase by 10 percent for every year you are late in enrolling. For example, if you were eligible two years ago and failed to sign up, your premiums will increase by 20 percent. The late penalty for Part B stays with you for as long as you have Medicare coverage.
Medicare Part D plans are issued by insurance companies that contract with Medicare to provide prescription drug coverage. Monthly premiums for plans available in Monterey County range from as low as $4.50 to as much as $130, depending on the benefits provided. If you don’t join a drug plan when you first enroll in Medicare, but decide to join later, you will be charged a 1 percent penalty for each month you went without drug coverage. For example, if you go a whole year without coverage, your penalty will be 12 percent. Since Part D plans vary so much in price, the penalty is calculated based on something called the “national base beneficiary premium.” In 2023, the national base beneficiary premium will be $32.74. The monthly penalty is permanent and will be added to your premium for as long as you have a Medicare drug coverage, even if you switch plans.
Another pitfall can occur if you are still covered by an employer’s health plan when you turn 65. Many employer-based plans provide only secondary coverage once you are eligible for Medicare. In that case, if you do not enroll in Medicare, you will effectively be without health coverage. A similar problem can arise if you lost your job and have health coverage through COBRA or if you are retired from the military with TRICARE. Therefore, it is extremely important to carefully review your health coverage well before you turn 65.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to smerrell@montereypw.com.