Medicare imposes premium penalties on people who don’t follow the program’s health insurance coverage rules. You can avoid Part D penalties by signing up when you first become eligible. But not everyone needs Medicare at age 65. The most common reason? You still have coverage through work.

If you have the privilege of postponing your Part D enrollment because you have a better prescription coverage option, you’ll need to pay special attention to how to avoid penalties later. If you make a mistake and go too long without signing up, you’ll have to pay premium penalties every month for as long as you stay on Medicare—which could easily be 20 years or longer. 

Key Takeaways

  • For every month you don’t have Part D or creditable coverage, you’re assessed a penalty of 1% of the national base beneficiary premium.
  • Once you enroll in Part D, you’ll pay this penalty indefinitely.
  • You can avoid the penalty by signing up for Part D during your initial enrollment period.
  • If you’re not ready to get Medicare yet, make sure you never go more than 63 days without Part D or creditable prescription drug coverage after your initial enrollment period is up.

What Is the Medicare Part D Premium Penalty?

The first thing you need to know about avoiding Medicare premium penalties is when your initial enrollment period is. Your initial enrollment period for Medicare starts three months before you turn 65 and ends three months after you turn 65. That means you have seven months, including your birthday month, to enroll penalty free. If your birthday is in April, for example, your initial enrollment period runs from January 1 through July 31.

From that point on, you can’t go without prescription drug coverage for more than 63 days or you’ll owe a penalty. The penalty is a lifetime surcharge on your Part D premiums once you enroll.

How the penalty is calculated

Here’s how the surcharge is calculated. Every month you don’t have coverage, you’re assessed a penalty of 1% of the national base beneficiary premium, which will be about $33 in 2021. The dollar amount of your penalty will change each year when the base premium changes.

To see how much the penalty could cost you, let’s suppose you weren’t covered for all of 2020, but you’re going to enroll and you’ll have Part D starting January 1, 2021. Your penalty for 2021 would be 33 cents x 12 (for the 12 months of 2020 you weren’t covered), or $3.96. Medicare rounds this amount up to the nearest $0.10, then adds it to your monthly Part D premium. You’ll pay an extra $4.00 a month for Medicare Part D throughout 2021. For 2022, your penalty will be recalculated on the new national base beneficiary premium.

What your premium + penalty will cost

This doesn’t mean your premium will be $37 a month in 2021. It will be the cost of whatever plan you choose plus $4. The national base beneficiary premium is just an average plan price. Each state has 25 to 35 Part D plans, and their premiums and benefits vary.

The penalty is not necessarily a big deal, especially if you only go without coverage for a few months. But it’s an enduring penalty. No insurance plan can afford to let people go without coverage until they need it. Insurers can’t stay solvent by only covering people who are filing claims. 

Initial enrollment is not necessarily your only opportunity to enroll without paying premium penalties. Here are some scenarios where you might be able to postpone enrollment without foregoing coverage.

Do You Have Creditable Prescription Drug Coverage?

A creditable prescription drug plan is one that provides coverage that's at least as good as Medicare Part D.

You may have creditable coverage through a current or former employer or trade union. These entities also offer creditable coverage:

  • Federal Employee Health Benefits (FEHB) Program
  • Veterans' Benefits
  • TRICARE (military health benefits)
  • Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA)
  • Indian Health Services

You also might have creditable coverage if you get health insurance coverage through your spouse's employer or if you’re on a COBRA plan.

Make sure you get proof of your creditable coverage in writing. Hang onto it in case you need to prove you don’t owe penalties later.

What Happens If You Lose Your Creditable Prescription Drug Coverage?

If you retire or are laid off, or your spousal coverage ends, your days of having creditable prescription drug coverage are numbered. However, you’ll have access to a special enrollment period to sign up for Medicare, including Part D, without penalty. This period lasts for two full months from the time your coverage ends.

This special enrollment period will also apply when COBRA runs out if you enroll in COBRA and retain your former employer’s creditable coverage.

If your employer’s coverage changes and is no longer creditable, you’ll also have a two-month special enrollment period to sign up for Part D without penalty.

Requirements to Enroll in Medicare Part D 

Medicare Part D is not a standalone policy; you can only sign up if you have Part A and/or Part B. So how do you get those?

One option is to sign up during your initial enrollment period. You can also sign up during Medicare’s general enrollment period, which runs from January 1 through March 31 and gives you coverage starting July 1. If you sign up for medical coverage during general enrollment, you’ll be able to enroll in Part D from April 1 through June 30 and your prescription coverage will start July 1.

If you miss that window, the next one is during the Medicare open enrollment period, which runs from October 15 through December 7 and gives you prescription coverage starting January 1.

The Bottom Line

Part D premium penalties are easy to avoid if you sign up for Medicare during your initial enrollment period and you never go off Medicare. Everyone else needs to be aware of the creditable coverage rules and special enrollment periods that apply to their circumstances. The Medicare website describes many common scenarios. If it doesn’t describe yours, a benefits counselor may be able to help.