Like it or not (and most employers do not), health insurance in this country is employment related. Most employers offer health insurance as a tax-free employee benefit, and most working people get their health insurance through their work. Although plan options and pricing might vary from year to year, workers who get their health insurance through their employers can feel confident that if something goes wrong with their health, they and their family will be covered up to the limits of the plan.
Two things can happen to disrupt this comfortable, predictable arrangement. One is leaving employment. The other is turning 65.
People who leave employment, whether they are switching jobs or retiring for good, will need to line up new insurance so it is set to start when the former plan ends. The type of insurance they will line up will depend on whether they are under or over age 65 when they leave the job.
A person who is under 65 may take advantage of COBRA, which allows them to stay on the same plan for up to 18 months at their own expense. This keeps them covered while they look for a new job or qualify for Medicare at 65. Or, if they are retiring for good, they may have access to a retiree plan through their former employer. Or they may go on a spouse’s employer plan. If none of these options are available, they may buy individual health insurance through the marketplace.
If a person is over 65 when they leave employment, they will typically go onto Medicare. For anyone 65 and older who is enrolled in Medicare, Medicare pays primary. If there is other insurance, such as COBRA or a retiree plan, Medicare would pay first, and the other insurance would pay second.
If a person is still working when they turn 65, they can stay on the employer plan. But if the plan covers fewer than 20 employees, Medicare would pay primary. This means anyone over 65 who is covered by an under-20 plan must enroll in Medicare to get their medical bills paid. Medicare would pay first, and the employer plan would pay second. If the employer plan covers 20 or more employees, it’s the opposite: the plan would pay first and Medicare would pay second. If the person is not enrolled in Medicare, Medicare would not pay. Any gaps left by the employer coverage, such as deductibles or copayments, would be paid by the employee.
This review of the Medicare enrollment rules all sounds very straightforward. But because people going onto Medicare are usually coming off of other insurance—and sometimes even keeping that other insurance—it can be complicated.
So let’s break it down into three categories: when a person can, should, or must enroll in Medicare.
Who CAN enroll in Medicare
Any U.S. citizen or legal resident of the U.S. who is 65 or older CAN enroll in Medicare. Part A is free if they have paid into Medicare for at least 10 years. If not, there will be a premium for Part A. Everyone pays a premium for Part B. Anyone who has either Part A or Part B (or usually both) can enroll in Part D.
Who SHOULD enroll in Medicare
Anyone who is eligible for Medicare (65 or older) whose current insurance is not as good as Medicare SHOULD enroll in Medicare. For example, let’s say you are 65, still working and covered by a plan that covers 20 or more employees. But the plan isn’t very good. It has a high deductible and would cost a person a lot of money out-of-pocket if he were to get sick. Or maybe it’s a good plan but the employee’s share of the premiums is high. Or maybe it has a narrow network of doctors, and you aren’t able to see a particular specialist. Or maybe you have developed a medical condition and now incurring high medical bills. Employer plans—especially high deductible plans paired with an HSA—are really designed for healthy people who want to be covered in case something goes wrong. Medicare is designed for older people who tend to need more medical services. So your own worsening health condition might mean you SHOULD enroll in Medicare, even though you don’t have to because you’re covered by an over-20 employee plan.
Who MUST enroll in Medicare
Anyone age 65 or older who is not covered by an employer plan that covers 20 or more employees based on active employment MUST enroll in Medicare. That is, they must enroll in Medicare if they want to have their medical bills covered. Any plan that does not cover 20 or more, including COBRA, retiree plans, and small (under 20) group health plans pay secondary to Medicare. If a bill gets submitted to them, these plans will not pay until Medicare has paid its share. But if you are not enrolled in Medicare, Medicare won’t pay. And neither will the secondary health plan.
Some of the small group insurers have created confusion by volunteering to pay in the absence of Medicare. And some people have stayed on their small group health plan for years after turning 65, not realizing that their coverage was somewhat tenuous because it could be revoked at any time. There was one particular case where the insurer didn’t realize the person had turned 65—until a medical bill got submitted and the insurer checked the person’s age. Then, claiming that Medicare was the primary payer, the insurer refused to pay. But the person wasn’t enrolled in Medicare, so Medicare didn’t pay either. The person was left stuck with the bill, until the Medicare Rights Center stepped in and negotiated a settlement.
The other reason people MUST enroll in Medicare, in addition to getting their medical bills paid, is to avoid late-enrollment penalties. Now, this can be a source of confusion too, because Medicare says you just need to be covered by an employer group plan (of any size) to have a special enrollment period. So a person could stay on their under-20 group plan for three years after turning 65. When they go to enroll in Medicare they’ll be asked if they’ve been covered by a group plan. They’ll say yes, and there will be no penalties. So yes, it’s conceivable that a person could stay on their under-20 group plan after age 65 without enrolling in Medicare, get their bills paid (thanks to a generous insurer who paid without being required to do so), and not get charged a late-enrollment penalty because they’ve had continuous group coverage. But people who remain covered by an under-20 group plan after age 65 without enrolling in Medicare are taking a risk—a risk that the plan won’t pay and that Medicare will charge them a late-enrollment penalty. The fact that insurers and Medicare sometimes bend the rules doesn’t mean people should count on it.
What about mandatory enrollment in Part A?
The preceding discussion primarily relates to Part B. Because Part B carries a premium, and because it’s possible to delay or decline Part B, that’s where most of the confusion lies. But people do need to know that when they start Social Security, they will be automatically enrolled in Part A if they are 65 or older. Usually this is not a problem. Part A is generally free and offers good hospitalization coverage. It’s only a problem when the person’s health plan is an HSA, as there can be no further contributions to the HSA after enrolling in Medicare. A person whose employer offers a high-deductible health plan, but who can’t use the contributions designed to cover the deductible, would probably be better off leaving the health plan and going fully onto Medicare. But before they do that, make sure the spouse has coverage. If the person needs to stay on the employer plan in order for the spouse to be covered, some combination of Medicare (i.e., Part A if receiving Social Security) and the employer plan (with no HSA contributions for the person on Medicare) may be the only solution.
Original article for an adviser newsletter by Elaine Floyd, CFP®, Director, Retirement and Life Planning, Horsesmouth, LLC, within which I’ve made edits for the broader public.