Most people seem to be aware that there is a penalty for late-enrollment into the Medicare program. Unfortunately though, most people are unaware of how significant the penalty is. It is actually one of the steepest penalties that the federal government imposes on retirees. Perhaps second only to the 50% penalty for failing to withdraw Required Minimum Distributions.

Making matters worse, the Medicare penalty is not a one-time penalty. It is a penalty that stays with you for the rest of your life! That’s a tough pill to swallow to say the least. Ensuring that you enroll during the proper windows can be critical to your long-term financial health.

In this post, I’ll discuss what the late enrollment penalty is, a common reason retirees fail to enroll on time, the two primary enrollment periods, and what you might do if you’ve missed those windows.

How much is the Medicare penalty for late-enrollment?

It is a 10% penalty for every 12-month period that you were eligible for Medicare Part B but didn’t enroll. So, if you’re 70 and didn’t enroll in Medicare Part B, there could be a 50% (5 x 10%) penalty. For example…

The starting point for Part B premiums in 2019 is $135.50 per person. If you enroll at age 70 after missing the enrollment periods, your expected premium would be approximately $203.25 per month. This includes the penalty of about $67.75 per month. This is the monthly penalty that will last the rest of your life!

In lump sum terms based on the above example, if you live to 85 years old, you could pay over $12,000 in penalties alone. Even if you are just one year late, the penalties could amount to over $3,000.

If your spouse is the same age and also hadn’t enrolled, these penalties could be doubled. It gets worse. The penalty estimates above are not even including the Medicare premium increases that would occur along the way. Pretty steep penalty huh?

And that is just the Part B penalty. Part D also charges it’s own late enrollment penalty of 1% per month or 12% per year for every year an individual was eligible to enroll but did not. This is getting expensive.

A common culprit:

The most common cause I hear for folks paying this lifelong penalty surrounds the confusion of retiree medical coverage provided by their employer. Some companies offer their retiring employees retiree health coverage. In this case, many retirees mistakenly assume this qualifies as employer health coverage for Medicare purposes - and thereby the Special Enrollment Period at the retiree’s choosing. It does not.

There are actually two qualifying factors to be classified as creditable coverage for a future Special Enrollment Period.

• You or your spouse (if covered by your spouse’s plan) must be actively employed.
• You must be receiving health benefits through the spouse that is actively employed.

If that doesn’t fit your description, you need to enroll in Medicare.

When can you enroll? There are generally two periods to enroll in Medicare. Your Initial Enrollment Period and Special Enrollment Periods.

Enroll during your Initial Enrollment Period

If you enroll during your Initial Enrollment Period (IEP), you will avoid the penalty entirely. Your IEP is a seven-month window surrounding the month of your 65th birthday.  It includes the three months prior to your birth month, your birth month, and three months following your birth month.  For example, if you were born in July, your enrollment period would be from April to October the year you turn 65.

Enroll during a Special Enrollment Period

If you are still actively working and covered by an employer-sponsored health plan, Medicare provides an alternative to your Initial Enrollment Period called a Special Enrollment Period.  This is an eight-month period that begins with the month your group health coverage ends or the month your employment ends, whichever comes first. 

IMPORTANT EXCEPTION: This eight-month window for the Special Enrollment Period does not apply if your employment or employer-sponsored health coverage ends during your IEP. So, if your employment ends during your IEP, then you will need to enroll during your IEP.

What if you’ve already missed both of the above windows?

Option #1:

If you or your spouse is still actively employed and has the option to be covered under their health plan, re-enroll into the health plan during your open enrollment periods. Then, upon retiring, you may make yourself re-eligible for the Special Enrollment Period.

Option #2:

If option #1 doesn’t work for you, there may be an additional opportunity for recourse via employment; though it could be tough to pull off. You could go back into the workforce for a company that will offer coverage under their employer health plan - it must be a company with 20 or more employees. Upon retiring this time, you may utilize a new Special Enrollment Period to sign up for Medicare penalty-free.

However, in either scenario, please note if you went without creditable health insurance at any point between age 65 and when you eventually enroll for Medicare, you may still be subject to a delayed enrollment penalty. Still, these are two options that may help.

Option #3:

Appeal. While the U.S. government pretty strictly enforces its rules, there may be opportunities to appeal the penalty if you were given bad information or if they have incorrect data. In most cases, the letter you’ll receive from the Social Security Administration includes instructions on how to appeal Medicare’s ruling. You must have your ducks in a row when appealing the penalty though as they will not accept a plea of ignorance.

Additional Note: If you are already receiving Social Security benefits, you will automatically be enrolled for Part A and B upon reaching age 65.

Hope this helps clear the air on Medicare! And I hope you’ll consider sharing this with your friends to help ensure they aren’t penalized!

Related Reading: Medicare: Almost Everything You Need to Know

Thanks for reading!
Ashby Daniels

If you’re looking for a retirement planner to help you make a comfortable transition into retirement and want to see if we’re a good fit, reach out to me here.

Disclaimer: The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.