Last week, we started our series on tax opportunities or traps in retirement with the Affordable Care Act’s Premium Tax Credit. You can catch up on that piece from our blog by clicking here.
Today, I’ll introduce you to another healthcare-related trap in retirement – Medicare's “Late Enrollment Penalty”.
Did you know that by enrolling late for Medicare, monthly premiums can cost an additional 10% or more depending on how late you file? Over a 25-year retirement, this penalty can be a significant cost increase.
What Is the Late Enrollment Penalty?
To start, I think a brief primer on the types of Medicare would be helpful. Traditional Medicare has three main parts plus optional supplemental coverage, sometimes called Medigap, all with certain letters.
Part A is free for most and covers inpatient services.
Part B has a $170/month starting premium for outpatient services.
Part D is for pharmaceutical benefits and costs starting about $35/month.
You can also see a quick overview of what Medicare covers here.
The “Late Enrollment Penalty” usually pertains to Medicare Parts B and D if someone does not enroll on time.
For Part B, the penalty is a 10% additional premium for each year someone did not enroll, prorated monthly. So, if a qualifying person signed up for Medicare Part B two years later than they should have, they would pay an extra 20% (about $400/year) of premium, forever.
The late enrollment penalty is 1% per month for Part D, multiplied by the national base premium of about $35/month. For someone who signs up two years later, that would be 24% x $35, costing about $100/year. Like Part B, this penalty lasts as long as you have Medicare.
When Is the Deadline for Signing Up?
Initial Enrollment Period
This period usually corresponds with someone’s 65th birthday. The seven-month period includes the three months before, birthday month, and three months after the 65th birthday. As long as you sign up during this time, there is no penalty.
Special Enrollment Period
This period applies to people age 65 or older who were still working and covered by an employer’s (or spouse’s) group health insurance plan. After leaving their employer or losing coverage, participants have up to eight months to enroll in Medicare without penalty.
One common pitfall when someone age 65 or older retires is taking COBRA for the allowable 18 months. COBRA does NOT count for group coverage and can lead to someone having to pay the Medicare Late Enrollment Penalty.
The combined Medicare Part B and D penalty could be $500 per person per year (or more at higher income levels) with a two-year delay. While this penalty does seem harsh, there is very little a participant can do about it other than enrolling in Medicare within the prescribed timeframe.
For more information on the late enrollment penalty, you can check out the links below.