Understanding Medicare: Key Points for Retirement Planning

Most people nearing retirement have heard of Medicare, the federal health insurance program. If you’ve worked long enough to qualify for Social Security, you’re generally eligible for Medicare starting at age 65. (Some exceptions apply, such as for certain disabled individuals and those with End-Stage Renal Disease.)

But Medicare isn’t a one-stop-shop program. It’s divided into several parts, each with its own purpose and rules. Here’s what you need to know.

Medicare Part A: Hospital Insurance

Medicare Part A, hospital insurance, is the more commonly known feature of Medicare.

What it covers:

• Inpatient care in hospitals
• Limited time in a skilled nursing facility (if specific conditions are met)
• Certain home health care services under strict criteria

What it doesn’t cover:

• Long-term care assistance, like help with daily activities (bathing, cooking, etc.)

Cost:

• Part A is premium-free if you’ve worked long enough to qualify for Social Security.
• You can enroll at 65, even if you’re not yet claiming Social Security.

Medicare Part B: Outpatient Coverage

What it covers:

• Medically necessary services (doctor visits, preventive care, screenings)
• Mental health care
• Some home health services and medical equipment

Cost:

• Part B premiums depend on your income, with higher-income households paying more. Late enrollment penalties may apply if you delay signing up.

Medicare Part D: Prescription Drug Coverage

What it covers:

• Prescription medications

Cost:

• Part D premiums are also means-tested (based on income).

When Should You Enroll in Medicare?

Initial Enrollment Period (IEP):

• Starts: 3 months before you turn 65
• Ends: 3 months after your 65th birthday month
• Special rule: If you were born on the 1st of the month, coverage can start the month before your birthday.

The graph below provides a visual representation of how it works.

Already Receiving Social Security?

• You’ll be automatically enrolled in Parts A & B when you turn 65.

Still Working at 65?

• If you’re covered by an employer plan with 20 or more employees, you may delay enrolling in Medicare Parts A & B without penalty. If you are covered by a creditable prescription drug plan through your employer you can also delay enrolling in Part D without penalty.
• If your employer plan covers fewer than 20 employees, you must enroll in Medicare when eligible, as it becomes your primary insurer.

Avoiding Late Enrollment Penalties

Part A: No penalties if you are eligible for premium-free Part A. However, if you do not qualify for premium-free Part A and need to purchase it, there is a late enrollment penalty if you don’t sign up when first eligible. The penalty is: 10% of the monthly premium for twice the number of years you delayed enrollment.

• Example: If you delayed enrolling for 2 years, you’d pay the additional 10% penalty for 4 years.

Part B: Late enrollment penalties apply (10% per year of delay) unless you qualify for a special exception, such as being covered by a large employer plan.

Part D: A penalty applies if you go without creditable prescription drug coverage for 63 days or more after your initial enrollment period. The penalty is 1% of the “national base beneficiary premium” for each month without coverage and is added to your Part D premium permanently.

Do I need to enroll in Medicare Part A, B and D if I’m still working?

If you are still working at 65 and enrolled in a group health insurance plan offered by an employer with 20 or more employees (or based on your spouse’s employer), here’s how Medicare enrollment works:

• Part A: You can delay enrolling in Part A without penalty if you have employer coverage, but many people enroll since it’s premium-free for most. Once enrolled, you are no longer eligible to make HSA contributions.
• Part B: You can also delay enrolling in Part B if your employer coverage is deemed creditable. You’ll have a Special Enrollment Period (SEP) of 8 months to sign up after you or your spouse stop working or lose group coverage.
• Part D: You can delay enrolling in Part D if your employer plan includes creditable prescription drug coverage (coverage as good as Medicare Part D). Your employer should notify you annually if the plan meets this standard.

Important Notes on Part D:

• If your employer plan is not creditable, you must enroll in Part D during your Initial Enrollment Period to avoid penalties.
• If you go 63 days or more without creditable prescription drug coverage, you’ll face a late enrollment penalty. This penalty is 1% of the national base beneficiary premium for each month without coverage, and it’s added to your Part D premium permanently.

When you or your spouse leave the employer plan, you’ll have a Special Enrollment Period (SEP) of 2 months to sign up for Part D without penalty. If you go on COBRA, and turn 65, you will need to enroll in Medicare as your COBRA coverage will become secondary.

Key Points About COBRA and Medicare at 65

1. COBRA Does Not Count as Creditable Coverage for Medicare:

COBRA is not considered creditable coverage for delaying Medicare enrollment. If you delay enrolling in Medicare Part A and/or Part B while on COBRA, you may face late enrollment penalties.

1. Medicare Becomes Primary:

Once you turn 65 and are eligible for Medicare, Medicare becomes the primary insurer, even if you’re on COBRA. COBRA then acts as secondary insurance. If you don’t enroll in Medicare when you’re first eligible, COBRA may refuse to pay for services that Medicare would have covered, leaving you responsible for the costs.

1. Initial Enrollment Period (IEP):

If you’re turning 65 and not yet enrolled in Medicare, you’ll need to sign up during your Initial Enrollment Period, which starts 3 months before your 65th birthday and ends 3 months after.

1. Special Enrollment Period (SEP):

If you’re on COBRA and previously delayed Medicare enrollment because you were covered by a large employer plan (20+ employees), you can use a Special Enrollment Period to enroll in Medicare without penalties. This SEP lasts 8 months from when your employer coverage ends (not COBRA coverage).

1. Part D Enrollment:

If COBRA includes prescription drug coverage, you must confirm if it’s creditable coverage for Medicare Part D. If it’s not creditable and you delay enrolling in Part D for more than 63 days, you’ll face a late enrollment penalty when you finally sign up.

If on COBRA, What Should You Do?

• If you turn 65 while on COBRA, it’s best to enroll in Medicare Part A and Part B during your Initial Enrollment Period to avoid penalties and gaps in coverage.
• If you don’t, COBRA may no longer pay for services that Medicare would have covered.
• Evaluate whether a Medigap policy or Medicare Advantage plan could provide better secondary coverage than COBRA.

How much does Medicare Part B cost?

Part B and Part D premiums are based on your Modified Adjusted Gross Income (MAGI) from two years prior. This premiums in excess of the base premium are called the “Income-Related Monthly Adjustment Amounts” or IRMAA. 2025 premiums are shown below.

Important: If you’ve had a significant income change (e.g., retired, sold a home), you can appeal your premium calculation. Common appeal reasons include:

• Retirement (no longer working or a reduction in work)
• Divorce or death of a spouse

How IRMAA Works: Calculating Your Medicare Premiums

Medicare premiums for Part B and Part D are determined by Income-Related Monthly Adjustment Amounts (IRMAA). The Social Security Administration calculates your premiums based on your Modified Adjusted Gross Income (MAGI) from two years prior. Here’s how it works:

• MAGI Calculation:

The IRS provides your tax filing status, adjusted gross income (AGI), and tax-exempt interest income to the Social Security Administration. These figures are combined to calculate your MAGI.

• Example for 2025 Medicare Premiums:

If 2025 is your first year on Medicare, your premiums will be based on your 2023 MAGI.

• Part D Premiums:

Part D, which covers prescription drugs, has a separate premium schedule that is also means-tested.

• Payment Process:

If you’re collecting Social Security, your premiums are automatically deducted from your benefits. If you haven’t started Social Security, you’ll receive a quarterly invoice for your premiums.

Important Considerations:

• One-Time Income Spikes:

Selling a home, receiving a large bonus, or other one-time income events may inflate your MAGI in a prior tax year, leading to higher Medicare premiums two years later.

• Strategic Income Planning:

Managing withdrawals from retirement accounts (IRAs, 401(k)s), capital gains, and investment income several years in advance can help control your Medicare costs.

Can I appeal a Part B Premium Increase?

If your income has dropped significantly since the tax year used to calculate your premiums, you can appeal your IRMAA premium. The Social Security Administration allows appeals based on specific life events.

Valid Reasons for Appeal:

1. Death of a spouse
2. Marriage, divorce, or annulment
3. Work reduction (e.g., cutting back hours)
4. Work stoppage (e.g., retirement)
5. Loss of income from income-producing property
6. Loss or reduction of certain types of pension income
7. Other qualifying life events

How to Appeal:

• The Social Security Administration sends an annual notice detailing your upcoming Medicare premiums.
• If you believe you qualify for a reduction, submit an appeal immediately using Form SSA-44 (“Medicare IRMAA Life-Changing Event”).

Common Appeals:

• Retirement (work stoppage): This is one of the most frequent reasons clients appeal.
• Reduced Income: If your income drops due to retirement or another qualifying event, this reduction can significantly lower your premiums.

By staying proactive and monitoring your income changes, you can reduce unnecessary costs and make the most of your Medicare benefits. As with health insurance, Social Security, and every other retirement planning decision, to make the most of your money, it is essential that you develop a working knowledge of the rules or find trusted advisors to guide you.

To learn more about health care costs in retirement, check out our free recorded YouTube Class How to Plan for Health Care Costs in Retirement.