Most people become eligible for Medicare when they turn 65. However, many may not know it is crucial that you enroll when you are first eligible to avoid Late Enrollment Penalties. Penalties exist for Medicare Part A (Hospital Insurance), Part B (Medical Insurance) and Part D (Prescription Drug Coverage).
As the federal government is tasked with managing the funding of Medicare health insurance, Late Enrollment Penalties exist to ensure that eligible Medicare beneficiaries do not delay enrollment. The reason for this is to make certain that there is not a ‘free-rider’ problem where eligible Medicare beneficiaries only sign up for Medicare when they are sick or require Medicare-covered services to skip paying any premiums while they were healthy.
If a significant number of beneficiaries signed up only when they were sick, any premiums paid by healthier beneficiaries who started paying when they were first eligible would not be sufficient to help cover the costs of the less healthy beneficiaries.
Do I need to enroll when first eligible?
If you are turning 65, it is recommended that you enroll into both Medicare Part A and B during your Initial Enrollment Period to avoid any penalties if any of these situations apply to you:
- You get health insurance from your or your spouse’s employer and that employer has fewer than 20 employees
- You are currently using COBRA or retiree insurance from a previous job
- You are enrolled in individual health insurance plan such as an ACA plan
- You rely on short-term insurance or have no insurance at all
- You have VA health coverage
- You have TRICARE coverage and are retired
For Part D, the threshold for whether you need to sign up when first eligible is if you are receiving ‘creditable drug coverage’ from your (or your spouse’s) employer. ‘Creditable drug coverage’ means prescription drug coverage that is expected to pay, on average, as much as Medicare’s standard prescription drug coverage. The employer should provide you notice of whether your coverage is creditable in September of each year.
When can I delay enrollment in Medicare?
The most common situation where you can defer enrollment is if you are still working and your employer provides your health insurance. However, the employer must have more than 20 employees. If you are receiving health insurance coverage from a spouse you may also be eligible to defer.
For more information on how Medicare works when you are still working, read our article on Medicare When Working Past 65.
When is the Initial Enrollment Period?
Your Initial Enrollment Period is the 7-month period that:
- Begins 3 months before the month you turn 65
- Includes the month you turn 65; and
- Ends 3 months after the month you turn 65.
What are the Late Enrollment Penalties?
Part A Late Enrollment Penalty
Most people are eligible for premium-free Part A if they have paid Medicare taxes for more than 10 years (40 quarters). There is no penalty for enrolling in Part A late if you are eligible for premium-free Part A.
However, if you are not eligible for premium-free Part A, and you don’t enroll when your first eligible for Medicare, your monthly premium will go up by 10%. You’ll have to pay the higher premium for twice the number of years you didn’t sign up.
For example, if you were eligible for Part A for 2 years but didn’t sign up, you’ll have to pay the higher premium for 4 years.
Part B Late Enrollment Penalty
If you don’t get Part B when you are first eligible, your monthly premium may go up 10% for each 12-month period you could’ve had Part B, but didn’t sign up. In most cases, you’ll have to pay this penalty for as long as you have Part B. The penalty increases the longer you go without Part B coverage.
For example, if your Initial Enrollment Period ended December 2018 and you did not get Medicare coverage until July 1, 2020. Your Part B premium penalty is 20% (2 x 10%) of the standard premium, and you’ll have to pay this penalty for as long as you have Part B. (Even though you weren’t covered a total of 27 months, this period included 2 full 12-month periods so the penalty is 20%).
Part D Late Enrollment Penalty
If at any time after your Initial Enrollment Period is over, there’s a period of 63 or more consecutive days when you don’t have Medicare drug coverage or other creditable prescription drug coverage. You’ll generally have to pay the penalty for as long as you have Part D drug coverage. Medicare calculates the penalty by multiplying 1% of the monthly “national base beneficiary premium” ($32.74 in 2020, $33.06 in 2021) times the number of full, uncovered months you didn’t have Part D or creditable drug coverage.
When do I need to enroll if I delay Medicare?
If you are eligible to defer Part A, Part B or Part D of Medicare. You must enroll during your ‘Special Enrollment Period’ to avoid penalties:
- For Part A and B, your Special Enrollment Period is the 8-month period that begins after you lose your (or your spouse’s) employer coverage
- For Part D, your Special Enrollment Period is the 63-day period after you lose ‘creditable drug coverage’
Make sure you understand your options when turning 65. It’s important to enroll in Medicare in a timely manner so you are not stuck with hefty lifelong penalties. If you are thinking of delaying enrollment because you have employer coverage, always make sure to check with your (or your spouse’s) employer before deciding to defer Medicare enrollment to make sure you are in fact eligible to defer.