The Medicare Penalty That Could Cost You $10,000 -- and How to Avoid It

If you're rapidly moving toward retirement, chances are, you're busy. Don't get so busy, though, that you allow details to fall through the cracks. Failure to sign up for Medicare could have a lasting impact on your finances.

When you're required to sign up for Medicare

The Initial Enrollment Period for Medicare lasts for seven months, beginning three months before you turn 65 and ending three months after that milestone birthday. For example, if you were born in July, your Initial Enrollment Period would be from April through October of the year in which you turn 65.

Mark your calendar. At 65, you're generally required to sign up for Medicare. At 67, you've likely hit your full retirement age (FRA).

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What happens if you don't sign up on time

While you can sign up for Part A anytime during the year in which you turn 65, missing your Medicare enrollment deadline for Parts B and D can trigger a permanent lifelong penalty. For each 12-month period you're eligible but don't enroll, your premiums will cost 10% more.

Let's say you're cruising the world for fun and totally forget to enroll until age 68. Because you're three years late, your penalty is 30%. Assuming you pay nothing for Part A but pay the base amounts for Parts B and D, your monthly premium should be $241.89 per month ($202.90 for Part B + $38.99 for Part D).

However, a 30% penalty will bump it to $314.46 per month. That's $870.84 more per year, and after 12 years, you'll have spent an additional $10,450 on penalties.

Exceptions to the rule

Health care in retirement is essential. However, it may be possible for avoid the Medicare enrollment penalty. For example:

Part B exemptions

• Employer-sponsored coverage: If you or your spouse is still working and has health coverage through an employer with 20 or more employees, you may not face penalties as long as you sign up for Medicare within eight months of that employer-sponsored coverage ending.
• Serious illness: If you have a serious health condition like ALS or end-stage renal disease, you may not be faced with a penalty.

Part D exemptions

• VA coverage: If you have health insurance through the VA, you can delay enrolling in Part D coverage without penalty. However, you still need to enroll in Part B during the initial seven-month enrollment period.
• Creditable drug coverage: If your current employer, union, or military health plan provides coverage that's as good as Medicare's standard drug plan, you may not be penalized for not enrolling in Part D at 65.
• Medicaid eligibility: If you're eligible for Medicaid coverage, you're protected from penalties.
• Extra Help subsidy: If you qualify for this low-income subsidy, you won't face a penalty.
• State-based program: If you live in one of the states that runs its own drug assistance program and that program is at least as good as Medicare's, you won't be penalized.

What to do if you miss the first deadline

If you miss your Initial Enrollment Period, immediately apply for Medicare during the General Enrollment Period, which is Jan. 1 through March 31. You may have better things to do, but detailing your retirement plans can help you keep your schedule straight and your money in your pocket -- where it belongs.

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