Miss your seven-month initial enrollment period, and you may face lifelong enrollment penalties and delayed coverage.

Why is Medicare so darn confusing? That’s the complaint I often hear from financial advisors, their clients, and most recently, one of my colleagues here at InvestmentNews who’s approaching her 65th birthday. She is understandably confused about what she should do about Medicare.

Let’s start with the basic rules. You become eligible for Medicare, the federal government’s health insurance programs for seniors, when you turn 65. Medicare includes Part A, which is premium-free and pays for most hospital costs, and Part B, which has a monthly premium and pays for most doctors’ fees and outpatient services.

But original Medicare doesn’t pay for everything, so most beneficiaries select additional coverage to fill gaps like deductibles and co-pays. About half of retirees supplement original Medicare, which is accepted anywhere in the country, with a private Medigap policy, and in some cases, a Part D prescription drug plan. Others choose to bundle their Medicare services into a comprehensive Medicare Advantage plan, which may offer additional coverage, such as vision and dental care, in exchange for using a network of health care providers.

SIGNING UP

For some people, enrolling in Medicare can mean a welcome reduction in health insurance costs compared to employer-provided group health insurance, extended group health insurance through COBRA, or buying individual insurance in the private marketplace. In other instances, it can be more costly, particularly for people whose household incomes exceeds certain thresholds, as Medicare premium surcharges are based on income.

Most people must sign up for Medicare during their initial enrollment period, which begins three months before their 65th birthday, includes their birthday month and extends for an additional three months. Miss your seven-month initial enrollment period and you may face lifelong enrollment penalties and delayed coverage. You could be subject to delayed enrollment penalties of 10% per year for every year you were eligible for Medicare but failed to enroll.

Let’s say you delayed signing up for Medicare until you were 67, two years after you became eligible. That means you’d pay a delayed enrollment penalty equal to 20% of the standard Medicare Part B premium every month for the rest of your life. In 2023, the standard Part B premium is $164.90 per month.

But there is an important exception: You don’t need to sign up for Medicare if you continue to be covered through group health insurance (that covers 20 or more people) through a current employer or through your spouse’s current employer.

In my colleague’s case, she can skip enrolling in Medicare because she has group health insurance at work. She doesn’t need to do anything now. Once she resigns or retires, she has up to eight months after that group insurance ends to enroll in Medicare penalty-free. She’ll receive a document from her employer showing that she had “creditable” insurance coverage since becoming eligible for Medicare. She can sign up for coverage during her special enrollment period.

But not all types of health insurance qualify as “creditable” coverage when it comes to Medicare. People who are self-employed or who work for a company with 20 or few employees, those who are covered under COBRA after leaving a job, or those receiving retiree health benefits must enroll in Medicare during their initial enrollment period to avoid delayed enrollment penalties. They can use their retiree health benefits to supplement Medicare instead of buying a Medigap plan.

‘ARBITRARY AND CAPRICIOUS’

One financial professional emailed me recently regarding a client who went to work for a supermarket when she turned 65. She didn’t enroll in Medicare because she had health care coverage as part of her retiree benefits through her union. Now that she’s retired from the grocery chain, she has signed up for Medicare and was told she has to pay a 20% penalty for the rest of her life.

“I’m not sure why Kaiser Permanente under a union plan is any different from Kaiser Permanente under a corporate plan,” the advisor, who is also an attorney, wrote in the email. “I thought the goal was to make sure folks received health care. It seems arbitrary and capricious to me.”

Well said, but those are the rules. That is why it is so important for advisors to help clients with crucial health care decisions as they approach retirement. If advisors can’t help, they should partner with experts who can. A good start is the Medicare Interactive Pro educational training for advisors available through the nonprofit Medicare Rights Center.

LAST CHANCE

If you don’t sign up for Medicare Part B during your initial enrollment period and you don’t qualify for a special enrollment period, you’ll have another chance to sign up for Medicare during the annual general enrollment period that runs from Jan. 1 through March 31 each year. Starting in 2023, your coverage will start the first day of the month after you signed up. Previously, people who enrolled in Medicare during the general enrollment period would have to wait until the following July 1 for their coverage to begin.

(Questions about new Social Security rules? Find the answers in Mary Beth Franklin’s 2023 ebook at MaximizingSocialSecurityBenefits.com.)