If you're like many Americans getting ready to turn 65, you still have health insurance through an employer plan. However, just because you aren't ready to retire doesn't mean you aren't eligible for Medicare. In this post, we look at Medicare and employer coverage to help you understand your options and avoid late penalties.

Please note that all of the following applies whether your current health insurance plan is through your or your spouse's employer. For convenience, we use "you" throughout, but the same advice holds true if your current coverage is courtesy of your spouse's employment.

In addition, all that follows applies to those who qualify for Medicare coverage based on their age. Meaning, you are either over age 65 or within 3 months of your 65th birthday.

How does Medicare coordinate with employer coverage?

The way Medicare coordinates with an employer insurance plan depends on the answers to two questions:

• How large is the employer?
• Are you actively employed?

Employer size is determined by the number of people who work there. And actively employed means that you are currently working for your employer and not covered under a retiree health plan. Your answers to both questions determine whether Medicare is the primary payer or secondary payer.

How Medicare works with an employer health plan

Medicare defines a large company as one that employs 20 or more people. If your group health plan is through a large employer, Medicare is your secondary payer. That means that Medicare pays after your employer plan pays its share.

However, if your company employs fewer than 20 people, Medicare is the primary payer. That means your employer plan doesn't pay a dime until Medicare pays its share. If you fail to enroll in Medicare because you think you're covered by group health insurance, this could leave you with substantial medical bills.

Enrolling in Medicare when actively employed

If you are actively employed when you turn 65, Medicare enrollment is not automatic. That means you must sign up for Medicare through Social Security.

You first become eligible for Medicare 3 months before your 65th birthday. This marks the beginning of your Initial Enrollment Period (IEP). Your IEP continues through the 3 months following your birth month, for a total of 7 months.

Signing up for Medicare at any point during your Initial Enrollment Period helps you avoid a late enrollment penalty. But first, you have several choices to make regarding healthcare coverage.

Should you enroll in Medicare Part A?

For most people, Medicare Part A (hospital insurance) is premium-free. And if you are actively employed, the chances are good that you have the 40 credits necessary to qualify for premium-free Part A.

We nearly always recommend enrolling in Part A as soon as you become eligible, even if your current coverage is through a large employer. That's because it costs you nothing out-of-pocket and could save you money in the event you have a costly hospital stay.

The one exception is if you contribute to a health savings account (HSA). If you are enrolled in any part of Medicare, you may not continue to make pre-tax contributions to a health savings account. We discuss HSAs in detail below.

People who work for a small employer should definitely sign up for Medicare to avoid late enrollment penalties.

Should you enroll in Medicare Part B?

The standard Medicare Part B premium is $164.90 in 2023. Your premium may be higher or lower based on your income. Most people who collect Social Security retirement benefits pay a lower monthly premium. If your annual income exceeds $103,000 (filing singly) or $206,000 (married filing jointly), you may pay a higher premium.

If you work for a small company, you must enroll in Part B, since Medicare is the primary payer. You also risk lifelong late penalties for failing to sign up for Part B if you do not have creditable coverage. And even the best insurance plan is not considered creditable according to Medicare if it's through a small employer.

If your group health plan is courtesy of a large employer, you may choose to delay Part B enrollment without penalty. However, you should compare the costs first. This includes all of your out-of-pocket costs, including:

• Monthly premium
• Yearly deductible
• Co-pays and co-insurance
• Prescription drug costs (Original Medicare, Parts A and B, does not include prescription drug coverage – you must buy a separate Part D plan for that)

It may be that enrolling in Part B in addition to your group health plan saves you money. Or, you may find you'd be better off with Original Medicare only, and decide to drop your employer plan entirely.

If your current plan is under your employer AND it provides coverage for your spouse, don't drop it unless you can find affordable coverage for him or her. Medicare does not allow beneficiaries to add dependents the way an employer-sponsored group plan does.

Keep your proof of creditable coverage

Having creditable coverage when you become eligible for Medicare qualifies you for a Special Enrollment Period (SEP). This means you can delay Medicare enrollment without incurring late penalties. However, you must be able to prove you had creditable coverage to qualify for the SEP.

Your insurance company should send you written notification that you have creditable coverage when you join and leave the plan. Keep this letter with your medical records. When you do finally sign up for Medicare, you'll have to provide a copy of this notification to avoid paying late penalties for Parts B and D. (You may also owe late penalties for Part A if you did not pay Medicare taxes for the required 40 quarters.)

What happens with Medicare if you go back to work after you retire?

Many Americans decide to go back to work after they retire. If this describes you, and your new job offers a group health plan, you may cancel Part B. Then, when you're ready to retire again, you'll qualify for another SEP. You'll also be able to enroll in a Medigap plan without having to undergo medical underwriting.

How Medicare works with COBRA

COBRA is a health insurance program that provides continued coverage for people who are no longer actively employed. The "actively employed" part is crucial. Remember, Medicare can only be secondary coverage if you are actively employed. If you are age 65+ and retire (or your spouse does, if your coverage was through their job), you must enroll in Medicare within 8 months. Otherwise, you face a lapse in healthcare coverage and lifelong late penalties.

This tends to cause a great deal of confusion. After all, your employer offered COBRA. And generally speaking, these plans provide excellent coverage (although usually pricey – monthly premiums average around 6 times what you pay for Medicare Part B).

Since COBRA is secondary insurance, it only pays after Medicare pays its share. And if you fail to sign up for Medicare, that may leave you on the hook for 100% of your healthcare costs.

This is also true for retiree insurance. If your employer offers retiree coverage once you leave active employment, Medicare is the primary payer. Remember, you must be actively employed for Medicare to ever be considered your secondary coverage.

Some Medicare beneficiaries choose to keep COBRA or retiree insurance as secondary coverage, particularly if it's the only medical insurance available to their spouse. Others choose to drop COBRA and add a Medicare Supplement plan (commonly known as Medigap) to their primary coverage (Original Medicare). As always, the right choice depends on your unique circumstances.

You can compare your Medigap, Medicare Advantage, and Part D options with our Find a Plan tool.

Medicare and health savings accounts

Health savings accounts allow you to contribute pre-tax dollars to help cover out-of-pocket costs under a high-deductible health plan (HDHP). These funds are also not taxed when they are withdrawn (assuming they're used to pay for qualifying healthcare costs).

The caveat with an HSA is that you must be enrolled in an HDHP to reap the tax benefits. In addition, you cannot have any other health insurance – including Medicare. If, upon turning 65, you enroll in any part of Medicare, you may no longer contribute to an HSA. You may, however, withdraw HSA funds to cover your out-of-pocket costs for qualifying medical expenses. These withdrawals will not be taxed if either of the following is true:

• You are newly eligible for Medicare, i.e. within your Initial Enrollment Period
• You ceased HSA contributions at least 6 months before signing up for Medicare (if you're age 65-1/2 or older)

Your spouse may continue his or her HSA contributions even after you join Medicare.

Finally, you cannot contribute to a health savings account and collect retirement benefits from Social Security. If you wish to continue HSA contributions, you must delay both Medicare enrollment and retirement.

Can employers help pay Medicare premiums?

Your employer may help pay your Medicare Part B premium through Section 105 of the Internal Revenue Code via a Medical Reimbursement Plan. These plans allow employers to reimburse employees' healthcare expenses, including insurance premiums.

Some employers offer this option to employees who qualify for Medicare, as it is often less expensive for both you and the company. In the same way your payroll deductions for medical insurance are pre-tax dollars, these reimbursements from your employer are tax-free.

Generally, the only way to get this same type of coverage for Medigap premiums is if the employer creates a Section 105 plan that's available to all employees.

Can you enroll in Medigap if you work for a large company?

You may be able to enroll in Medigap, but you wouldn't want to. Medigap policies only pay when Medicare is your primary insurer. If you have both a group health plan and Medicare as secondary insurance, you don't need a Medigap plan.

Can you be forced to leave your group health plan when you turn 65?

No, your employer may not force you to leave your employer-sponsored health plan when you turn 65. You may choose to make Medicare your primary insurer, but it is illegal for an employer to require you to do this.

However, your employer may limit retiree plans to former employees who are younger than age 65. And, since retiree plans are considered secondary coverage anyway, you'd still need to enroll in Medicare. Retiree coverage may also change once you turn 65. Talk to your benefits administrator for details.

What happens if you delay Medicare enrollment?

Failure to sign up for Medicare upon becoming eligible carries a variety of penalties, including:

• Your current plan may refuse to pay your claims.
• If you don’t qualify for premium-free Part A, you pay a 10% penalty for twice the number of years you delayed.
• Delayed Part B enrollment penalties are 10% for the first year you could have had Medicare and failed to enroll, 20% year two, etc. You pay this penalty for the entire time you have Medicare.
• Delayed Part D enrollment depends on the number of months you go without creditable drug coverage (1% for each month) and the national base beneficiary premium, which changes every year.
• If you want a Medigap plan, you’ll have to undergo medical underwriting, which may result in refusal of coverage or higher premiums.

The day your employment ends is the day the enrollment countdown clock starts ticking. If you miss your SEP window, you have to wait for the General Enrollment Period (GEP), which lasts from January 1 through March 31. You then must wait until July 1 for coverage to begin, so you could go months without health insurance.

How do you enroll in Medicare while still employed?

The enrollment process is the same whether you’re employed or not. Your Initial Enrollment Period (IEP) begins three months before your 65th birthday and ends three months after your birth month. So, if your birthday is September 10, your IEP begins June 1 and ends December 31. You sign up through the Social Security Administration, either online, over the phone, or in person.

Final thoughts on Medicare and employment

It’s important you begin exploring your Medicare options before reaching your 65th birthday. Talk to your plan administrator to determine your current coverage and whether you should expect changes after your birthday. And, even if you won’t receive penalties for remaining with your employer-sponsored coverage, it’s smart to compare your options to determine what’s the best choice for you.

Additional resources

• ClearMatch Medicare: Find a Medicare Plan
• Medicare.gov: Costs
• Social Security Administration: Extra Help