Working after 65? Avoid 5 Medicare pitfalls

If you're over age 65 and aren't ready to retire, you may need to make an important decision: keep your employer-sponsored health care coverage, or enroll in Medicare?

There's a lot to keep track of: enrollment deadlines, health care coverage options, and possible penalties to avoid. But with some planning and homework, you can avoid the common pitfalls if you continue to work beyond age 65.

Medicare basics that everyone should know

Because Medicare works very differently from employer health insurance, there are lots of things to learn. If you continue to work after reaching age 65, you technically become eligible for Medicare, but you may or may not need to enroll right away.

Here's the dilemma: Your employer must continue to cover all eligible workers, regardless of age, under its group health insurance—yet Medicare is telling you to sign up now.

It may not be clear that you only need to sign up for Medicare once—generally, at the point when your employer group coverage is ending¹—so here's the 2-part general rule for when to join Medicare:

1. Enroll during your Initial Enrollment Period (IEP)—generally, 3 months before to 3 months after the month you turn age 65²—but only if...
2. You also lose access to your employer group health insurance coverage.¹

If you don't enroll during your IEP because you have employer group health insurance coverage, you can enroll at any time you still have employer group coverage or within 8 months after the month your employment or group coverage ends. (This 8-month window is called a Special Enrollment Period, or SEP. Note that if your employer has fewer than 20 employees, you will not receive this SEP.) You'll need to know what your coverage options will be at age 65 and adjust your Medicare enrollment to meet your needs. Ask the employer or benefits administrator that provides your health insurance if, when you turn age 65, you need to sign up for Medicare Part A and Part B.

One other situation that can cause confusion occurs if you leave your job with a "retiree" health care plan or coverage under COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1985). Neither of these health insurance options is considered employer group health insurance coverage, because they're not based on current employment, so you would be classified as a "former worker." In this case, you would need to enroll in Medicare during your IEP, or SEP if working past age 65.

Who pays first?

As with many laws and regulations, the devil is in the details. In the case of health insurance, you need to know who the "primary payer" is—the party responsible for paying your medical bills first and covering the majority of the costs.

• If, when you turned 65, you were still working and were covered through a plan other than an employer's plan (e.g., a retiree health care plan, COBRA, etc.), then Medicare is the primary payer of your health care expenses.
• If, when you turned 65, you were still working and were covered through an employer's plan, then the employer's insurance may be the primary payer.
• If, before you turned 65, you stopped working and were covered through a retiree health care plan or COBRA, such plans are the primary payer until you turn 65.

As mentioned earlier, if you work for an employer with fewer than 20 employees, you need to enroll in Medicare at age 65, during your IEP. Medicare becomes the primary payer and your employer's insurance becomes secondary.

5 pitfalls to avoid when working past age 65

1. Not doing your homework: If you plan to work past age 65, or if your spouse or partner continues to work and covers you, you've got some research to do to make sure you know your options, the costs, and any restrictions.

• Your employer is required to offer you coverage, but is that the most suitable option, based on your situation?
• Is it more expensive to stay on your employer plan or enroll in Medicare?
• Which plan offers you the more suitable coverage for your health needs?
• Can your spouse or partner remain on your employer’s plan if you decide to leave?

Tip: Review your health benefits documents and schedule a call with your company's HR or benefits group to discuss your insurance options. Read the information on Medicare.gov about working after age 65 and the coordination of benefits.

2. Failing to notify Social Security that you want to delay Medicare: If you enrolled in Social Security before your 65th birthday, you will be enrolled automatically in Medicare Parts A and B. However, if you are still covered by an employer's health plan, you could be paying for 2 plans.

• Contact Social Security (in person, phone, or online) and explain that you do not want Part B at this time—that's because Social Security manages the administration of Medicare. 
• If you automatically receive your Medicare card, you'll need to follow the instructions that came with the card to cancel your Part B coverage. Generally, there is a short time frame of several weeks to return your Medicare card and cancel enrollment. 
• If you haven't enrolled in Social Security by age 65, there is no automatic turn-on of your Medicare benefit—you just continue as an active employee, and you can enroll in Medicare and begin receiving Social Security benefits at a later date.

Read Viewpoints on Fidelity.com: Social Security tips for working retirees.

3. Enrolling in Medicare Part A, but losing the ability to contribute to your health savings account (HSA): Many employees with access to HSAs have funded their accounts hoping that they could use their HSA dollars to pay for qualified medical expenses in their retirement.

But here's the glitch: If you enroll in any part of Medicare, you lose the ability to continue contributions to your HSA. Some people who continue to work after age 65 decide to enroll only in Medicare Part A because they think it's premium-free and that it may provide some secondary insurance coverage in the event of hospitalization; however, this move may have unintended consequences.

"If you have both employer health insurance and Medicare Part A, Medicare may become the secondary payer," explains Steven Feinschreiber, senior vice president of Fidelity's Financial Solutions Group. "Medicare coverage typically kicks in after the employer's insurance and covers unpaid expenses up to Medicare's cost limit." He continues, "In general, employer insurance pays more to health care providers and hospitals than Medicare, so you may not get any cost savings benefit by having both plans—and you've lost the ability to contribute to your HSA."

Tip: Decide which option is more important to you: the ability to continue to contribute to your HSA or enrolling in Medicare at age 65, because you cannot do both. When you enroll in Medicare after turning age 65, your actual coverage becomes effective up to 6 months earlier. Therefore, you'll want to end contributions to your HSA at least 6 months prior to leaving your job. This will help you avoid a possible tax penalty for making ineligible contributions to your HSA after your Medicare coverage has kicked in.

4. Not coordinating the timing of your Part B with losing your employer group health plan coverage: As you leave your job, your health insurance generally terminates at the end of that month. It's important to apply for Medicare a couple of months before you end employment so that your coverage will be in place on the first month of your retirement. Otherwise, you may have a gap in health insurance coverage leaving you fully responsible for paying any medical expenses you incur during this period.

For example, say you are age 68 and retire on March 15. The last day of your employer health coverage typically would be March 31. If you enrolled in Medicare in advance of your retirement, Medicare coverage would begin on April 1. If you wait until the month after you retire or later to enroll in Medicare, you will have a coverage gap. Your Medicare coverage could begin on May 1 or as late as December 1 (depending on when you enroll), and you would be responsible for paying any medical bills that you incur during those months without health care coverage.

What's more, if you miss both your Medicare Initial Enrollment Period and Special Enrollment Period, you may need to pay penalties on top of your monthly premiums for as long as you have Medicare.

Tip: Fill out the appropriate Medicare forms to enroll in Medicare Part B as your employer coverage is ending (Forms CMS-40B and CMS-L564). Do so about 3 months before your last day on the job.

5. Missing the "open enrollment period" to buy a Medicare Supplement plan (Medigap) plan after employer health insurance ends: If you plan to travel abroad during retirement or want to keep your current doctors and specialists, it may make sense for you to buy supplemental insurance such as a Medicare Supplement plan. This is different from enrolling in Medicare. If you decide to do so, you'll have 6 months to buy a Medicare Supplement plan without underwriting once you have enrolled in Medicare Part B and have been assigned your Medicare Part B number. You may be able to buy a Medicare Supplement plan after the open enrollment period, but generally, unless an exception applies, you may then become subject to medical underwriting, and the insurance company can decline to sell you a policy or can charge you more. For more on Medicare Supplement plan options, read Viewpoints on Fidelity.com: Medicare Supplement plan (Medigap) 101: What you need to know.

Learning the ins and outs of Medicare and getting the timing just right is each individual's responsibility. Do your homework, understand your options, ask for help if you need it, and make sure you receive confirmation of your enrollment.

"Talking with your benefits department is one of the most important steps you can take if you are planning to work after age 65," Feinschreiber advises. "You don't want to be in a situation where you have a gap in your primary insurance coverage. Make sure you know how your health insurance will work after age 65, and coordinate the timing between your employer plan and Medicare."