What Are Your Medicare Options if you Retire BEFORE age 65 vs AFTER age 65
April 16, 2019
While working, people generally have employer-sponsored insurance. Some 58% of people in the U.S. today get their health insurance through an employer, either their own, a spouse’s, or a parent’s, if they are under 26. Employers subsidize the premiums, so employees pay far less than the full cost of the insurance. Premiums for family coverage averaged $19,616 in 2018, according to the Kaiser Family Foundation 2018 Employer Health Benefits Survey, but employees paid just 29% of that, or $5,547 ($462 per month). The subsidy was even greater for single coverage: employees paid just 18% of the $6,896 annual premium, or $1,186 ($99 per month). These are averages, so any one situation could be different.
Retirement before age 65
If you retire before the Medicare-eligible age of 65, you may have several options:
Retiree insurance. Only 18% of large firms offered retiree insurance in 2018, compared to 66% in 1988, according to the Kaiser survey. Of those that do offer retiree insurance, it’s mainly for early retirees (91%), as opposed to Medicare-eligible retirees (67%). Because of the employer subsidy and quality of the coverage, retiree insurance is usually a good deal for those lucky enough to have access to it.
A spouse’s plan. If clients lose employer coverage due to retirement, and if their spouse is still working, they may be able to get onto the spouse’s plan. Again, the employer subsidy and quality of the coverage usually make this a good deal. If both retiree insurance and spousal coverage are available, compare the two. Consider premiums, deductibles, co-payments, and coinsurance to determine potential out-of-pocket costs under each plan.
Individual insurance. If employer insurance is not available, one can buy individual insurance on the exchanges. It won’t be cheap. The average unsubsidized premium for a silver plan for a 60-year-old is $1,140 per month. For a gold plan it’s $1,300.
Once early retirees turn 65, they become eligible for Medicare.
If you have chosen retiree insurance, you will enroll in Medicare Parts A and B at 65. If you can stay on the retiree plan, it will serve as supplemental insurance (plan terms will change now that Medicare becomes the primary payer). If a medical bill is incurred, Medicare will pay first according to its plan limits, and the retiree plan may fill in some of the gaps, such as the deductible and the 20% coinsurance. If the retiree plan also offers creditable prescription drug coverage, individuals may not need to enroll in Medicare Part D (the plan will let them know if Part D enrollment is necessary) and may get better coverage than Part D plans available on the open market. (But it never hurts to shop around to be sure.)
If you are on a spouse’s plan when you turn 65, and if the spouse is still working, they may remain on the employer plan. If the spousal plan covers 20 or more employees and is a good plan, with an employer subsidy and comprehensive coverage, you do not need to enroll in Medicare at age 65. you can stay on the employer plan and delay enrolling in Medicare until you go off that plan. However, once people turn 65, they can enroll in different parts of Medicare depending on how it rounds out (or replaces) the employer plan.
For example, they can enroll in Part A only, which is free and may offer better hospital coverage than the employer plan. They might even enroll in Part B and pay the $135.50 monthly premium, especially if the plan deductible is rather high. (The Medicare Part B deductible is only $185 in 2019.) Depending on their drug regimen, they might find a Part D drug plan on the open market that beats the employer’s drug coverage. (Note that if they enroll in Part D, they must also enroll in at least Part A.)
Each part should be looked at separately, and the employer plan compared to plans available on the open market. There are two caveats: (1) If the employer plan is paired with an HSA, once they enroll in Medicare, there can be no further HSA contributions. (Note: Because Medicare offers better coverage than the high-deductible plans that are usually paired with HSAs, it may be worth giving up the HSA to get Medicare.) (2) The Part B monthly premium may be more than $135.50 if joint income is over $170,000 and subject to the income-related monthly adjustment amount (IRMAA). Be sure to take these additional costs into account.
If you have individual health insurance when you turn 65, you will be ecstatic to go onto Medicare. You should apply for Parts A and B three months before your 65th birthday; Medicare will go into effect on the first day of your 65th birthday month. You should decide whether you want Original Medicare with a Medigap plan and standalone drug plan, or a Medicare Advantage plan; you must do the required shopping in time to enroll in the chosen plan(s) by the first of the month that you turn 65.
Retirement at or after age 65
If you are still working when you turn 65, you may stay on the employer plan if it covers 20 or more employees. It is illegal for employers with 20 or more employees to force age-65 employees onto Medicare by offering them a lesser plan than the one offered to younger employees. But now that Medicare is available, each person turning 65 should compare the employer plan to Medicare.
Whereas the employer plan is subsidized by the employer, Medicare is subsidized by the government. In most cases the health care itself—that is, where the client goes to seek health care services—need not change. What’s different is who pays and how much they pay. Actually, with health care pricing as crazy as it is, no one really knows how much insurance pays. That’s why our focus is on how much each person pays—that is, how much he will pay out-of-pocket for premiums, deductibles, copayments, coinsurance, and the full cost of noncovered services and drugs.
Note: If you are covered by a plan that covers fewer than 20 employees when you turn 65, you should enroll in Medicare. Plans that cover fewer than 20 pay secondary to Medicare, and the individual must be enrolled in Medicare in order for the plan to pay its share. In other words, if Medicare does not pay primary (because one is not enrolled in Medicare), the plan may not pay anything at all.
Some of these plans volunteer to pay in the absence of Medicare, but they are not required to do so, and they could back out of that agreement at any time. After enrolling in Medicare, you should check with the insurer to see if it offers a plan that can serve as Medicare supplement insurance, then compare that plan to what you can get on the open market.
Before going into the analysis between employer plans and Medicare, the first thing to check is the spouse’s coverage under either option. Is the spouse on the client’s plan? Does the client need to stay on the employer plan in order for the spouse to be covered? If you go off the employer plan and onto Medicare, does the spouse have other options, such as their own employer insurance?
The spouse may be able to go onto COBRA for as long as 36 months after you leave the plan to go onto Medicare, but this would require the spouse to pay the full, unsubsidized premium. Also, COBRA may not be available to the spouse if the employer plan covers fewer than 20 employees. If the spouse’s only option would be individual insurance under the ACA, those extra costs would need to be factored into the analysis.
Insurance vs. Medicare after 65
Employer insurance is generally considered to be more comprehensive than Medicare, and many simply assume they will stay on the employer plan after age 65 if they are still working. But it behooves everyone turning 65 to compare the employer plan to what they can get on the open market with Medicare.
For example, the average employer plan in the Kaiser survey has a cost-sharing premium (i.e., the employee’s share) of $99 per month and a deductible of $1,573. The average copayment is $25 to see a primary care physician and $40 to see a specialist. If outpatient surgery is needed, the average coinsurance rate is 19% and the average copayment is $151. If hospitalization is needed, the average coinsurance rate is 19%; the average copayment is $284 per hospital admission, and the average per diem charge is $327. For prescription drugs the average copayment is $11 for first-tier drugs, $33 for second-tier drugs, $59 for third-tier drugs, and $105 for fourth-tier drugs.
What makes employer insurance hard to analyze is that out-of-pocket costs will depend on how sick a person is. Someone healthy whose plan allows for no-cost screenings and checkups could conceivably pay no more than the monthly premiums—$1,188 per year, on average. At the other extreme might be a serious health event that pushes one into the plan’s out-of-pocket maximum of $7,350 (the maximum for nongrandfathered plans under the ACA).
Medicare is designed for those with health issues
Medicare, when supplemented with additional insurance, is designed for people to be sick. The monthly premiums are higher, but when someone is fully covered, out-of-pocket costs are minimal. For $375 per month ($135.50 for Part B, $200 for Medigap Plan F and $40 for a drug plan), or $4,500 a year, pretty much all health care costs are covered, except for the things Medicare doesn’t cover, such as dental, vision, and hearing. It is possible to pay less with a Medicare Advantage plan—some plans have zero premiums but charge copayments or coinsurance if services are utilized. Medicare may cost more if the client is subject to the IRMAA.
What if the employer plan is an HSA paired with a high-deductible health plan (HDHP)? These plans are definitely designed for healthy people: the premiums are low, and if little or no health care costs are incurred, the money can stay in the HSA to keep growing tax-free. Under IRS rules, HSA contributions cannot be made for a person enrolled in Medicare. This means healthy individuals who love their HSAs should not enroll in Medicare.
However, once they start any kind of Social Security benefit, they are required to enroll in Part A and HSA contributions must stop. This means everyone age 70 or older—assuming they won’t want to leave Social Security money on the table—may not contribute to an HSA. Individuals who were born before January 2, 1954 and eligible to file a restricted application for spousal benefits when they turn full retirement age may also want to give up their HSAs in exchange for the Social Security income. They can keep the HSA and use it for qualified medical expenses; they just can’t contribute to it after starting Social Security and going onto Medicare.
Indiviuduals who have chosen to stay on their employer plan after age 65 should periodically re-evaluate the plan in light of Medicare availability. Worsening health, or a change in the employer plan, could subject one to hefty coinsurance amounts. People can switch to Medicare at any time after turning 65. They do not need to wait until they leave employment. Each year, when they are presented with their employer plan options, they should also look at Medicare to see how it compares.
Eventually, nearly everyone enrolls in Medicare—unless they keep working forever! As individuals prepare to retire, they should plan to have their Medicare start when the employer coverage ends so there are no gaps in coverage. This means enrolling in Medicare three months before they want it to start and lining up supplemental insurance and drug plan (or Medicare Advantage plan) so it starts at the same time.
Although terminating employees can take advantage of COBRA to maintain employer coverage for up to 18 months, this is not a good idea. For one, unsubsidized COBRA premiums are much higher than the government-subsidized Medicare premiums, even when supplemental insurance is added.
Also, the special enrollment period that allows people over 65 to delay enrollment in Medicare ends eight months after leaving employment. People who comes off COBRA after 18 months will be outside their special enrollment period and will need to wait until the next general enrollment period (January 1 to March 31) to enroll in Medicare, and coverage won’t start until the following July. HR people who are not aware of these rules often advise terminating employees to go onto COBRA; make sure you go onto Medicare instead.
Again, consider the spouse. If your spouse has been covered on your plan, and if you retire and go onto Medicare, your spouse will need to arrange for separate insurance. As noted above, spouses may have their own employer insurance. Or they may be over 65 and eligible for their own Medicare. Or they might go onto COBRA or buy their own health insurance in the marketplace. Just make sure your spouse gets their insurance lined up before you retire.