Here’s why dropping Medicare for employer coverage may come with snags

Personal Finance

For retirees on Medicare who head back to work, the move could provide the option of employer-based health insurance.

And given the various costs associated with Medicare, the employer’s plan might be cheaper. Yet before you drop parts of Medicare with the idea of picking them up down the road, be aware that there could be snags.

“The process is straightforward, but there are a few consequences people should be aware of,” said Medicare expert Patricia Barry, author of “Medicare for Dummies.”

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While the current number of retirees who re-enter the workforce is hard to come by, the share of people age 65 or older still working has been steadily rising for years.

For people age 65 to 74, it’s projected to reach 30.2% in 2026, up from 26.8% in 2016 and 17.5% in 1996, according to the Bureau of Labor Statistics. Among those age 75 and older, the share projected to be working in 2026 is 10.8%, up from 8.4% in 2016 and 4.6% in 1996.

Most retirees pay no premiums for Medicare Part A, which provides hospital coverage. Part B, which covers outpatient care, comes with a standard monthly premium of $144.60 for 2020 (although higher earners pay more). Part D, which provides prescription drug coverage, has a 2020 base premium of $32.74. Higher earners pay more for that coverage as well.

Some people choose to go with an Advantage Plan and receive their Medicare Parts A, B and D benefits (and often extras like dental and vision) through that option. Those plans also often come with a premium.

Assuming you are receiving Part A for free, there are two things to be aware of that could put a snag in your plan to drop Medicare Part B and switch to a qualifying employer option. (Be aware, too, that the rules are different for employers with fewer than 20 workers.)

For starters, if a health savings account, or HSA, comes with the employer’s group coverage — in other words, it’s a “high-deductible” health plan — you cannot make contributions to an HSA while on Medicare, even if only Part A.

For 2020, a high-deductible health plan is one with a deductible of at least $1,400 for an individual and $2,800 for a family, with maximum annual out-of-pocket costs (not counting premiums) of no more than $6,900 and $13,800, respectively. That excludes out-of-network costs.

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HSAs come with a triple tax benefit, however: Contributions are tax-deductible, earnings are tax-free and withdrawals also are untaxed as long as they are used to cover qualified medical expenses. For 2020, contributions are limited to $3,550 for individual coverage and $7,100 for family coverage. People age 55 or older can put an extra $1,000 in per year.

If you think that dropping Part A so you could contribute to an HSA might be an option, be aware that going that route would mean having to repay the government for any medical services you received under Medicare, Barry said. And if you were getting Social Security benefits, you’d need to give back that money, as well.

Additionally, if you use a supplemental policy — also called Medigap — alongside Parts A and B, you’d have to drop that coverage. That’s even if you just opt out of Part B.

And, Barry said, it might be difficult to get another policy down the road.

When you first sign up for Medicare, you get six months to buy a Medigap policy without the insurer charging you more or denying coverage due to your health status or pre-existing conditions. So if you drop it and re-apply later, the insurer can consider your health when deciding whether to cover you or charge you more (unless you live in a state with different rules).

Separately, people who must pay premiums for Part A cannot voluntarily disenroll from Part B without also disenrolling from Part A, Barry said.

Meanwhile, if you were to switch to your employer’s coverage, be aware that there are rules for re-enrolling in Medicare at some point.

The process is straightforward, but there are a few consequences people should be aware of.

Patricia Barry

Author of “Medicare for Dummies”

As long as your employer-sponsored health care is considered qualifying coverage by the government, you get an eight-month window to re-enroll in Part B when you stop work or lose the group coverage.

“If you miss that eight months, you have to wait for general enrollment, which is January through March, and then the coverage isn’t effective until July,” said Elizabeth Gavino, founder of Lewin & Gavino in New York and an independent broker and general agent for Medicare plans.

You could face a late-enrollment penalty if you miss your eight-month window or go too long without acceptable coverage. For each full year that you should have been enrolled but were not, you’ll pay 10% of the monthly Part B base premium.

Meanwhile, you also could enroll in an Advantage Plan during your eight-month special enrollment period.

If you were to stick with basic Medicare (Parts A and B), you’d get two months to get a standalone Part D prescription drug plan once workplace coverage ends. If you miss that window, you could face a late-enrollment penalty. That amount is 1% of the national base premium for each full month that you could have had coverage but didn’t.

Additionally, the Social Security Administration will want to talk to you before you make the decision to drop Medicare. While you can download the necessary form for voluntary disenrollment from Part B, the agency requires either an in-person or on-phone consultation with one of its officials while you fill out the form.

“They want to make sure the person understands the consequences for dropping coverage,” Gavino said.

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