Transitioning to—and from—Medicare

This article is from savvymedicare.net and written by Elaine Floyd, CFP®

There are two key times when a client may make the transition from existing health insurance to Medicare. The first is when the client turns 65. If the client is already retired and existing insurance is a retiree plan or COBRA or an individual health plan purchased through the exchange (Obamacare), Medicare will now be the new primary payer. If the client is receiving Social Security when he turns 65, he will automatically be enrolled in Parts A and B. If he has a retiree plan, he may be able to keep it for supplemental insurance; he’ll need to check with the insurer to find out how the plan will be integrated with Medicare. If he has individual insurance, he will be dropping that plan as of the first day of the month he turns 65 and will need to find supplemental insurance to go with the Medicare. If he is not receiving Social Security when he turns 65, he will need to proactively enroll in Medicare Parts A and B and arrange to have supplemental insurance, including drug coverage, lined up and ready to start at the same time Medicare starts.

The other time the transition to Medicare may happen is when a client retires. If he is still working when he turns 65, he may stay on the employer plan and defer Medicare. But at some point, he’ll be leaving the job for good. At that point he will enroll in Medicare Parts A and B and find supplemental insurance and drug coverage, coordinating everything so the new plan starts when the old one stops.

Now, as the Coronavirus rips through the country causing layoffs and business shutdowns, there is a third time the transition to Medicare may happen: when a client gets laid off or otherwise terminates employment unexpectedly. If the client had been deferring Medicare in favor of employer insurance, the loss of such insurance will likely drive the client onto Medicare (unless the client chooses to go on a spouse’s plan). What’s different about a layoff compared to retirement is that the client may eventually go back to work.

So the key question on the client’s mind is this: If I enroll in Medicare during this period of unemployment and later go back to work, can I later disenroll from Medicare and go onto the new employer plan? The answer is yes, with some caveats.

Transitioning to Medicare

First, let’s cover the transition TO Medicare. A client age 65+ who is still working or newly terminated is still in his special enrollment period, which allows him to enroll in Medicare at any time (up to eight months after the employer insurance terminates). To avoid a late-enrollment penalty due to enrollment after age 65, he would simply have the employer complete Form L564 attesting that he has been continuously covered by employer insurance.

Enrollment is done through the Social Security Administration, and is quick and easy. The harder part is choosing supplemental insurance. I recommend Original Medicare with a Medigap policy (plan G) and a prescription drug plan (as opposed to a Medicare Advantage plan, which may involve higher out-of-pocket costs in the face of illness). Clients who get a Medigap policy at the same time they enroll in Part B will not be subjected to underwriting and will be able to get a policy no matter how sick they are. Use Medicare’s plan finder to search for Medigap policies and drug plans, or refer your clients to a licensed agent. Make sure to coordinate everything so the new Medicare plan starts when the old plan stops.

Clients earning more than $87,000 (single) or $174,000 (joint) may be charged the IRMAA. SSA will look at their 2018 tax returns to determine 2020 premiums. If income going forward will be lower due to a job loss or reduction of hours, they can appeal the IRMAA by filing Form SSA-44 within 60 days of receiving their premium notice.

Unlike employer plans, which are primarily designed for younger, healthier people for whom illness is rare, Medicare was designed for older people who tend to encounter more health problems as they age. When paired with supplemental insurance (Medigap) and a prescription drug plan, Medicare offers very comprehensive coverage. The biggest expense is the monthly premiums. Premiums for Part B, Medigap, and a drug plan should run around $300 to $400 a month (more if the client is subject to the IRMAA). Once premiums are paid, there should be little or no out-of-pocket expenses except for things Medicare doesn’t cover, such as dental, vision, and hearing.

Going back to work

Clients who enrolled in Medicare during a period of unemployment may go back to work and once again have access to employer health insurance. Should they take it? Or should they stick with their Medicare plan?

To answer this, start with an analysis of the two plans, comparing benefits and out-of-pocket costs, including premiums, deductibles, and copayments, just as you would do for any 65-year-old who is still working and deciding between Medicare and the employer plan. Employers cannot force employees to take the employer insurance (although the insurance reps selling the plan may give that impression). Employees over 65 have every right to opt-out of the employer plan in favor of Medicare.

Still, there are two reasons why a client going back to work may want to disenroll from Medicare and go onto the employer plan: 1) Now that the client is working, Medicare would cost significantly more due to the IRMAA; or 2) the plan is an HSA funded by employer contributions and the client does not expect to need those contributions to meet the deductible (i.e., he doesn’t plan to get sick and would use the HSA as a tax-favored savings plan).

While it is possible to disenroll from Medicare in order to go onto an employer plan, there are two caveats.

A client who re-enrolls in Medicare upon retirement would not get another Medigap guaranteed-issue period. If he drops his Medigap policy to go onto the employer insurance, he may not get it back again because the original Medigap guaranteed-issue period would have ended six months after he enrolled in Part B. If he later applies for a Medigap policy he may not qualify depending on health status and state of residence (New York, Connecticut, Maine, and Massachusetts require Medigap insurers to take everyone; the rest do not).
In order to make HSA contributions, he would have to disenroll from both Part A and Part B and make sure no contributions are made for any month he is enrolled in any part of Medicare. Part A enrollment is usually backdated by six months (or back to age 65), so contributions for that period would have to be backed out.

Remember that anyone receiving Social Security must enroll in Part A. Once a client starts receiving Social Security benefits, at age 70 if not before, he will be enrolled in Part A (at least) and there can be no further HSA contributions. A high-deductible plan without the employer’s HSA contributions would be far inferior to Medicare. The client may ask the employer for a different, non-HSA type of plan. Then you’ll need to compare that plan to Medicare to see which plan offers the most benefits at the lowest cost.

Incidentally, suspending the Social Security benefits will not allow him to get out of Part A. The only way he can disenroll from Part A, once he has filed for Social Security, is to withdraw his application and repay the Social Security benefits, as well as any Part A benefits taken during that period. This must be done within the first 12 months of application. Once 12 months have passed, it is no longer possible to disenroll from Part A, even if the Social Security benefits are suspended.

Medicare can truly be a lifesaver during periods of unemployment, especially during a pandemic. Make sure your age 65+ clients understand the benefits of Medicare and help them make the most of their options.

References and further reading