How to Avoid Medicare Penalties: A Medicare Customer Question
Clients should understand that some people with Medicare Part B and drug coverage pay more than others.
When your client is ready to apply for Medicare, proactive planning is more important than ever.
Now with more people working past the age of 65, more beneficiaries are called to actively explore their Medicare enrollment options before making a decision.
It’s a significant change from times when simply signing up for Social Security retirement included access to Medicare.
If a Medicare signup is not completed in line with the program’s rules, then beneficiaries can risk throwing their retirement savings plans off course by paying penalties that could last for many years.
This is because Part B and Part D Medicare penalties are not incurred as a one-time payment — they last for life.
So, it is important for beneficiaries to sign up for Medicare Part B and Medicare Part D when they are first eligible, and that timing is also affected by someone’s plans around working after 65.
The Question:
What Medicare penalties should clients be aware of?
The Answer:
Medicare Part A, which covers hospital services, only incurs penalties if one has to purchase Part A.
Often this is not the case as most people have premium-free Part A through Medicare taxes.
However, Medicare Part B, which covers hospital outpatient care and physician services, and Medicare Part D, prescription drug coverage, can carry monthly penalties for life if a beneficiary misses their initial enrollment period (IEP).
The IEP gives a window of seven months for a beneficiary to choose a plan that’s right for them.
Based on the person’s birthday — it begins three months before a beneficiary turns 65 years old, their birth month, and three months after their birth month.
The Centers for Medicare and Medicaid Services (CMS) sets the base premium rates on an annual basis, and these rates are the starting point from which penalties are calculated.
(Note: The national base premiums for Part B and Part D premium are also adjusted based on income.)
For Part B coverage, the late-enrollment penalty is a percentage of the monthly premium.
The amount starts at 10% and increases 10% for every full 12 months they delay enrollment.
For example, if someone waits 24 months to enroll, they face a 20% penalty on their monthly premium.
For Part D coverage, there is a penalty of 1% for each full uncovered month that a beneficiary delays enrollment.
This could add up to 12% if someone waited a year to enroll in Part D.
Furthermore, if the CMS increases the base premium for a given year, so does the beneficiary’s late penalty.
Please refer to the complete breakdown of 2022 Medicare costs issued by CMS>
Age 65 and Still Working
Individuals who continue to work past age 65 can receive an exception from enrollment and penalties if their employer health insurance or spouse’s employer health insurance provides qualifying coverage. Increasingly, Americans are working later in life, with the 65-74 age bracket having a 31.5% labor force participation rate — a 7% jump since 2000.
As more workers are working past retirement age, they can continue to opt in to their employer-based coverage.
However, once workers decide to retire, they must sign up for Medicare within eight months of stopping work, and they have 63 days to get qualifying drug coverage before they incur a penalty.
The employer-based coverage exception does not apply if a beneficiary works for an employer with fewer than 20 employees.
In this case, the beneficiary would need to enroll in Part B during the usual IEP that begins with the beneficiary’s 65th birthday.
People participating in COBRA could also face a penalty if they delay Medicare enrollment, because COBRA is considered secondary coverage to Medicare.
Unfortunately, beneficiaries can get stuck with a Medicare late enrollment penalty, which can add up to thousands of dollars in unnecessary expenses.
This can be prevented by helping clients stay ahead of the IEP and map out their Medicare enrollment plans before they reach age 65.
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