The interaction between Medicare, the federal health insurance program, and a Group Health Plan (GHP) provided by an employer requires navigating specific regulations. Individuals working past age 65 must determine the correct enrollment timing to avoid coverage gaps or lifelong penalties. This decision hinges on which insurance plan pays for medical services first, a concept known as coordination of benefits. Understanding these rules is essential for managing healthcare costs and ensuring continuous coverage when transitioning to a full Medicare beneficiary.
Understanding Primary and Secondary Payer Rules
The Medicare Secondary Payer (MSP) rules govern which insurer pays a claim first, relying on the size of the employer providing the GHP. This designation determines whether an individual should enroll in Medicare Part B immediately upon turning 65 or delay it without penalty. The employer size threshold for this determination is 20 employees.
For individuals working for a large employer (20 or more employees), the employer’s GHP is the primary payer, paying for covered services first. Medicare acts as the secondary payer, covering costs the GHP does not, such as deductibles or copayments. In this situation, most people delay enrolling in premium-based Medicare Part B, avoiding the monthly premium since the GHP provides adequate primary coverage.
If the employer has fewer than 20 employees, Medicare becomes the primary payer. The small employer’s GHP is secondary and only pays for costs not covered by Medicare. Employees in this situation must enroll in Medicare Part A and Part B upon turning 65, as failing to do so could result in little to no coverage since the GHP is designed to pay second.
Enrollment Decisions While Still Working
Medicare eligibility begins with a seven-month Initial Enrollment Period (IEP), which includes the three months before, the month of, and the three months after the 65th birthday. Failure to enroll in Part B during this window, unless covered by a GHP, results in a lifelong late enrollment penalty (LEP) and delayed coverage.
If an individual is covered by a GHP through their own or a spouse’s active employment, they can delay Part B enrollment indefinitely without penalty. When that active employment or GHP coverage ends, they qualify for a Special Enrollment Period (SEP). The SEP provides an eight-month window to sign up for Part A and/or Part B, starting the month after the coverage ends.
Certain types of coverage do not qualify an individual for an SEP, requiring enrollment during the IEP to avoid the LEP. Coverage through COBRA, retiree health plans, or Veterans Affairs (VA) benefits does not count as active employment coverage. Relying on these non-qualifying plans after age 65 and missing the IEP may result in the LEP for Part B.
How Medicare Parts A, B, and D Interact with Employer Coverage
Medicare Part A, which covers hospital insurance, is premium-free for most people, making enrollment often recommended even if the GHP is primary. Part A acts as secondary coverage, helping to pay hospital costs. However, enrolling in Part A makes an individual ineligible to contribute to a Health Savings Account (HSA), which is a consideration for those who wish to continue tax-advantaged savings.
If an individual is still working and wishes to continue contributing to an HSA, they must delay enrollment in Part A, Part B, and Social Security benefits. This is because Medicare Part A coverage is automatically backdated up to six months upon enrollment, which can create a tax penalty for any HSA contributions made during that retroactive period. Therefore, those with an HSA must stop contributions at least six months before applying for Medicare Part A.
For prescription drug coverage, Medicare Part D enrollment can be delayed if the GHP’s drug coverage is deemed “creditable coverage.” Creditable coverage means the plan’s actuarial value is at least equal to the standard Part D coverage. Employers are required to notify Medicare-eligible employees annually about whether their drug coverage is creditable, which allows the employee to delay Part D enrollment without facing a late enrollment penalty.
Managing the Transition to Full Medicare Coverage
When active employment-based GHP coverage ends, individuals must transition to full Medicare coverage using their Special Enrollment Period (SEP). The eight-month SEP is the mechanism to sign up for Part B without incurring a penalty. It is advisable to enroll in Part B before the GHP ends to prevent any gap in medical coverage.
If the eight-month SEP is missed, the individual must wait for the General Enrollment Period (January 1 to March 31), with coverage starting July 1. This delay leads to a coverage gap and results in the Part B late enrollment penalty (LEP). The LEP increases the monthly premium by 10% for every 12-month period the individual was eligible but not enrolled.
Upon full transition, individuals select a plan to supplement Original Medicare (Parts A and B). Options include a Medicare Advantage Plan (Part C), which bundles hospital, medical, and often drug coverage, or a combination of a Medigap policy and a separate Part D plan.