Not everyone is eligible to put off enrolling in Medicare without incurring penalties (if and when you do enroll down the road). But for those who are eligible, it’s important to follow the rules carefully.  Medicare has several parts, each with its own rules and penalties for delayed enrollment. Let's look at those rules and the consequences you’ll face if you break them. (For background, read When You Can And Can't Delay Enrolling In Medicare and Should You Delay Enrolling In Medicare?)

Initial Enrollment Period

To understand what’s considered delayed enrollment, you need to first understand what’s considered timely enrollment. Medicare has what’s called an initial enrollment period, and it begins three months before you turn 65, includes the month when you turn 65 and lasts for three more months after you turn 65, for a total of seven months.  If your birthday is April 5, for example, your initial enrollment period runs from January 1 through July 31.

A surefire way to avoid penalties is to sign up during this period. But some people don’t want to sign up as soon as they’re eligible, because they want to continue contributing to a Health Savings Account (HSA), because they can get better or cheaper health insurance through their employer (see The Employee's Guide to Medicare) or because the healthcare providers they rely on aren’t accepting new Medicare patients (see What to Do When Your Doctor Doesn't Take Medicare).

Medicare Part A

If you qualify for premium-free Part A, the component of Medicare that provides hospital benefits, you don’t have to worry about penalties for delayed enrollment. How do you know if you qualify for premium-free Part A? If you or your spouse had Medicare taxes withheld from your paychecks during your working years (most people do; it’s part of The Federal Insurance Contributions Act, which also withholds Social Security  taxes, appearing on your pay stub as FICA), then you’ll usually qualify. Specifically, you need at least 40 Social Security work credits (refresh your memory with What are Social Security credits for and how can I earn them?).    

However, if you don’t qualify for premium-free Part A (usually because you had insufficient credits and/or didn’t pay Medicare taxes for enough years) and you don’t sign up during the initial enrollment period, there’s a penalty of 10% of the monthly premium for double the number of years you were eligible for Part A but didn’t enroll.  So if you were eligible in 2014 but didn’t enroll until 2015, you’d have to pay penalties for two years to atone for your one year of non-enrollment.

The size of your premium depends on your work credits. If you have to pay the maximum premium, your penalty would have been 10% of $407 for 12 months throughout 2015 and and will be 10% of $411 for 12 months throughout 2016. To put it another way, the annual penalty works out to 1.2 times an extra month’s premium. You’d pay $488 in penalties for 2015 plus $493 in penalties for 2016, for a total of $981.

So, if you skip the initial enrollment period, is there any way to avoid the penalty when you join later? Yes, if you’re still working and covered by an employer’s health plan (or while your spouse is still working and you’re still covered by your spouse’s employer’s plan). Or if you enroll within eight months after you (or your spouse) stop working.       

If you have limited income and assets and qualify for Medicaid or a Medicare Savings Program, Part A penalties won’t apply to you.       

Medicare Part B

Part B covers doctor visits and certain medical equipment. Delaying enrollment in Part B means paying a permanent penalty: higher premiums for life. The penalty is 10% of the Part B premium for every 12-month period during which you weren’t enrolled. Part B will cost about $120 per month for new enrollees in 2016 (more for high-income earners). So if you postpone enrollment for 30 months, you could end up paying a penalty of 20% of $120 per month in 2016, which would be $24 per month or $288 for the year. You’d keep paying the 20% penalty on the new Part B premium amount in subsequent years.

How to avoid this bite? Similar to Part A, above: You must enroll in Part B while you’re still working and covered by health insurance through your company (or your spouse's company plan, if he or she is still working) or during the eight-month special enrollment period that begins one month after either of you stops working.   

Say you didn’t sign up at age 65 when you first became eligible because you were still actively employed and covered by your company's plan. Then you decided to retire in February at age 70. You could avoid the penalty by enrolling in Part B while you’re still working or before the end of October after you stop working. If you’ll get retiree health benefits from your employer, you can wait until October without worrying about any gaps in your insurance coverage, but if not, you should enroll in January so your Part B coverage will begin February 1. 

As with Part A, if you have limited income and assets and qualify for Medicaid or a Medicare Savings Program, Part B penalties don’t apply to you.

Medicare Part D

The government requires seniors to have either Medicare Part D, which covers prescription medications, or creditable prescription drug coverage from a current or former employer or a union.  A plan is considered creditable if it is as good as or better than Part D coverage; ask your insurance company if your plan qualifies. If you don’t have either of these, when you later enroll in Part D, you’ll face a permanent penalty, as with Part B. The other way to get Part D coverage is through a Medicare Advantage plan that offers drug coverage (not all do).

If you retire and lose your creditable prescription drug coverage, you can sign up for Part D during a special enrollment period and avoid penalties. If you have a COBRA plan with creditable coverage, you can keep using that until it runs out. The key is that you can’t go without either Part D or creditable coverage for more than 63 days or you’ll incur the penalty. This rule means you’ll probably need to enroll in Part D well before those 63 days are up since your Part D coverage won’t begin until the first of the month after you sign up. Make sure to keep proof of creditable coverage to show your new Medicare Part D plan so you won’t have to pay the penalty.

Since you can get Part D coverage from lots of different providers who offer different benefits, Part D premium costs vary.  As a result, the Part D penalty is calculated as a percentage of what Medicare calls the “national base beneficiary premium,” which is a confusing way of saying the average cost of a Part D prescription drug plan. In 2016, that premium is $34.10. The penalty is 1% of this amount times the number of months you didn’t have either creditable coverage or Part D. So if you went uncovered for 12 months, your penalty for 2016 would calculate to 12% of $34.10, or $4.09 per month. However, Medicare rounds this amount to the nearest 10 cents, making your actual penalty $4.10 per month, or $49.20 for the year. You’ll keep paying that penalty in subsequent years and it will be calculated on the new national base beneficiary premium each year.

You must have Medicare Part A or B to enroll in Part D. If you miss the initial enrollment period for Parts A and B and sign up during general enrollment, which is January 1 through March 31 each year, you can enroll in Part D during a special enrollment period from April 1 to June 30 and start getting coverage July 1. By doing so, you could face a lower Part D penalty than if you had to wait until the usual Part D open enrollment period, which runs from October 15 through December 7 each year and gives you coverage beginning January 1.   

Medicare Part C/Medicare Supplemental Insurance

These parts of Medicare, also called Medicare Advantage and Medigap, respectively, do not have penalties for not signing up at a specific time because they are optional. (Learn more in 5 Distinct Features of Medicare Advantage and When to Get a Medigap Insurance Plan.)

Medicare Advantage open enrollment runs from October 15 through December 7 and coverage goes into effect January 1.

Other Possible Penalties

You are not allowed to contribute to an Health Savings Account once you’re enrolled in Medicare. If you make contributions when you’re no longer eligible to, they’re considered excess contributions. You will have to include these contributions as taxable income when you file your annual return, and you’ll pay a 6% penalty on them. If you’ve earned any investment income from your excess contribution, you’ll also have to include that amount in your income and pay a 6% penalty on it. To avoid paying these penalties, withdraw your excess contributions before your tax return is due. (For related reading, see How To Use Your HSA For Retirement.)

Under the Affordable Care Act (ACA), colloquially known as Obamacare, just about everyone has to carry health insurance. If you not only don’t enroll in Medicare, but also don’t obtain any other health insurance that the ACA calls minimum essential coverage, you’ll have to pay a penalty.  This “fee,” called the “individual shared responsibility payment,” is the higher of 2.5% of household income or $695 per adult in 2016. Having a Health Insurance Marketplace Plan, an employer-based plan, retiree health insurance, COBRA, or Medicare Part A or C will allow you to avoid this penalty. If you’re not covered for less than three months, you can also avoid the fee, under what's called the “short gap” exemption.

If you postpone Medicare Part A enrollment and aren’t eligible for a special enrollment period, you’ll have to sign up during the general enrollment period that runs from January 1 to March 31 each year. Because coverage doesn’t begin until July when you sign up during this period, you could end up without insurance for more than three months, triggering the 2.5% Obamacare penalty.

The Bottom Line

Why does Medicare penalize people who sign up late? It has to do with the way insurance works (all types of insurance, not just Medicare): by pooling risk. Insurers need a large group of people paying premiums, many of whom will file few or no claims, so that they can afford to pay the large or frequent claims of other policyholders. Without this balance, insurance companies can’t stay in business. Pooling risk in this way also helps keep premiums down so folks can afford to have insurance. Medicare doesn’t want people to wait to enroll until they’re sick because then the system would break down. (For further reading, see What is the  main business model for insurance companies? and How Does Adverse Selection Affect Insurance Premiums?)

Medicare’s enrollment rules and penalties are complicated, and you may have to read through them several times while thinking about how they apply to your situation before they start to make sense. If you’re enrolling in Medicare during the initial enrollment period around your 65th birthday, you don’t need to worry about penalties. But if you’re strategically postponing enrollment for whatever reason – to be able to make additional HSA contributions or to stay covered under your superior company insurance plan – you should understand how and when the penalties apply to make sure you won’t incur them. Or at least, to know they’re coming so you can plan to pay for them.




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