Avoid These 4 Costly Mistakes

If you fail to fully grasp certain Medicare rules, you could end up paying unnecessarily high premiums for the rest of your life. That may be true if you have not enrolled in Medicare yet or even if you already have enrolled. And in some cases, you could even face a gap in coverage and have to pay big medical bills out of pocket.

Four common and costly Medicare misconceptions and mistakes—and how to protect yourself whether you are a current or future enrollee…

• Thinking that your Social Security retirement age is the same as your Medicare-enrollment age. Over the years, the age at which people become eligible for “full” retirement benefits has increased. If you were born between 1943 and 1954, for example, your full retirement age is 66, not 65. Trouble is, many people think this full retirement age also applies to Medicare.

Not only is the Medicare-eligibility age still 65 for everyone who qualifies to receive benefits, but failure to sign up during your initial eligibility period can lead to higher Medicare premiums for the rest of your life. (Your initial eligibility to enroll lasts for seven months—the month of your 65th birthday plus the three months immediately before and after.)

How much could a sign-up delay cost you? With Medicare Part B (that’s medical insurance), for each full 12-month period that you are late in signing up, a 10% penalty is tacked on to your premiums (basic premiums are $104.90 per month in 2015) for as long as you keep getting Part B. With Part D drug coverage, the penalty is 1% of the “national base beneficiary premium” ($33.15 per month in 2015) multiplied by the number of full uncovered months you were eligible but failed to sign up. The penalty applies if you are not enrolled for 63 days or more in a row when you don’t have creditable prescription drug coverage. (Creditable coverage means that your plan’s coverage is comparable to Part D plans.)

All of that could add up to perhaps $3,000 to $5,000 in penalties over the course of your retirement if you are one year late signing up…or climb to more than $10,000 if you are several years late.

Exception: If you are covered by a group plan offered by your employer or your spouse’s employer when you reach age 65, you might be able to delay signing up for Medicare without incurring penalties (see page six).

• Thinking that it doesn’t matter which option you choose to pay for Part B. Medicare enrollees can have their Part B premiums automatically deducted from their Social Security benefits or they can pay for them separately. What most people don’t realize is that paying with Social Security deductions could save money.

By law, if you have your Part B premiums deducted from your Social Security benefits, any future increase in those premiums cannot result in a “net reduction” in Social Security benefits. In other words, if the government increases the price of Part B, your premiums cannot increase by more than the amount that Social Security’s cost-of-living ­adjustments increase your benefits. If you pay for Part B separately (not from Social Security), you have no such protection against premium increases.

Exception: If you sign up for Medicare before you begin claiming Social Security benefits, you will have to pay separately for Medicare at that time. Switch to paying via Social Security deductions as soon as you start your Social Security benefits.

• Thinking that you don’t need to sign up for Medicare as long as you’re covered by an employer. People who are covered by group health insurance plans when they turn 65—either through their employers or their spouse’s employers—often assume that they do not yet need to sign up for Medicare. But this is correct only if the employer has 20 or more employees. If your health coverage is provided by a small employer—one with fewer than 20 employees—this coverage automatically becomes “secondary” to Medicare when you turn 65. That means it will cover only the portion of your medical bills that would not be covered by Medicare if you had signed up for Medicare. If you haven’t signed up for Medicare, you will have to pay most of your medical bills out of pocket.

If you are not 100% certain whether your employer has 20 or more employees, ask the employer’s benefits department and its health insurance provider for clarification. Asking both of them decreases the odds that you will receive inaccurate information. If you receive conflicting responses and your initial Medicare-enrollment period is nearing its end, sign up for Part B and the cheapest Part D plan available to you until you can clarify the situation.

Warning: Do not just do a head count to determine whether your employer has 20 or more employees—some people who seem like employees might actually be independent contractors. Sign up for Medicare Part B and Part D immediately if you are 65 or older and the employer providing your group coverage shrinks in size from 20 or more employees to fewer than 20 employees.

Several vital related points…

Sign up for Medicare Part A (hospital coverage) during your initial enrollment period even if you are covered by a large group health plan. There is no downside to signing up—Part A typically does not charge any premiums.

If you are covered by an employer’s group plan when you first become eligible for Medicare and remain covered with no coverage gaps longer than eight months, you should qualify for an eight-month “special enrollment period.” This may be useful if your circumstances change. During this period, you will be able to sign up for Medicare without penalties even if your initial enrollment period has long since passed. Go to Medicare.gov for more information.

Cobra and retiree health plans do not protect you from Medicare late-­enrollment penalties because they are based on former employment, not current employment. (With Cobra coverage, a person pays to remain on a former employer’s health plans, generally for up to 18 months.) If you are obtaining health coverage through a retiree plan or Cobra, sign up for Medicare during your initial enrollment period (within eight months after leaving your employer) to avoid future penalties and coverage gaps.

If you are covered by a large group health plan at or after age 65, confirm with both this employer’s benefits department and the insurer providing its health plan that the drug coverage component of the group plan qualifies as “creditable coverage” under Medicare rules. If not, sign up for a Part D drug-coverage plan during your initial enrollment period to avoid future penalties. High-deductible health plans are particularly likely to have drug coverage that does not qualify as creditable.

• Not realizing that a high income you had a few years ago could unnecessarily increase your Medicare premiums this year. The Medicare system imposes higher Part B and Part D premiums on people who have modified adjusted gross incomes above $85,000 ($170,000 for married couples filing jointly). But the income figure used in this calculation actually is your income from two years earlier—your 2013 income affects your 2015 Medicare premiums, for example. If this two-year look-back takes you to a time when you and/or your spouse still were working, you could easily be charged higher Medicare premiums even though your retirement income is below the threshold.

If this happens to you, carefully read the paperwork that comes with your Medicare premium notice. It will explain how to file an appeal of your rates based on the change in your financial circumstances.