How Do I Avoid Medicare Premium Penalties?

The only way to avoid Medicare premium penalties is to enroll in a timely manner. Medicare charges a penalty for Part B and Part D enrollees, and some Part A enrollees, if they have a significant gap in their health care coverage. This can happen either because they didn’t enroll when they turned 65 or because they didn’t enroll when they lost their previous coverage.

These enrollment penalties are applied to your monthly premiums and, in some cases, can be a permanent increase. As a result, it’s extremely important to avoid getting hit with a penalty that can last for the rest of your life.

Here’s the basics you need to know — including how much it could cost you. And for additional help navigating Medicare and other retirement matters, consider consulting a financial advisor.

The Medicare program is split up into four sections, or “Parts.” They’re organized around coverage, and you enroll in each part individually.

Medicare Part A is traditional Medicare. This section covers hospital visits, in-patient care and home health care.

Medicare Part B is an expansion on traditional Medicare. This section covers doctor’s visits, outpatient care, medical equipment, and preventative services.

Medicare Part C is otherwise known as Medicare Advantage. With this section, you shop for subsidized private insurance that offers the coverage you would ordinarily receive from Parts A and B.

Medicare Part D is relatively new. It offers prescription drug coverage outside of an inpatient setting. 

Most Medicare coverage charges a monthly premium, and all Medicare coverage has out-of-pocket costs such as deductibles and copays. Those costs are typically based on your individual circumstances and the program you choose.

In addition to fixed costs, Medicare also charges a penalty if you delay enrolling. You can trigger these penalties in one of two ways: 

• Enrolling significantly after you become eligible, generally by turning 65, or
• If you have third-party health insurance when you become eligible for Medicare, delay enrolling after you no longer have coverage

The main purpose of these penalties is to ensure that you maintain continuous coverage instead of waiting until you are sick to sign up for health insurance. These penalties are applied as an increase to your monthly premiums. Per Medicare’s website, late enrollment penalties:

• Are added to your monthly premium.
• Are not a one-time late fee.
• Are usually charged for as long as you have that type of coverage (for most people, that’s a lifetime penalty). The Part A penalty is different.
• Go up the longer you wait to sign up – they’re based on how long you go without coverage similar to Medicare. 

For most people, penalties are calculated based on what’s called an Initial Enrollment Period. This is the window in which you are first eligible to enroll in Medicare. Typically, an individual’s Initial Enrollment Period begins three months before they turn 65 and ends three months after they turn 65. 

If you do not enroll in Medicare within your Initial Enrollment Period, you typically have to pay a late enrollment penalty based on this delay.

The main exception is if you have some other form of substantial health insurance during your Initial Enrollment Period. For example, if you have coverage through an employer or a spouse, you will not be penalized for failing to enroll when you become eligible. 

Instead, once you no longer have qualifying coverage, you will enter what’s known as a Special Enrollment Period. This typically lasts for two months after your previous coverage ends. If you do not enroll in Medicare within your Special Enrollment Period, again, you will typically have to pay a late enrollment penalty based on this delay. 

The only way to avoid these penalties is to enroll in Medicare in a timely manner. A financial advisor can help you weave Medicare and other important deadlines into your financial plan.

Each part of Medicare handles its penalties in a slightly different manner:

Most enrollees in Medicare Part A don’t pay premiums. This is typically because you or your spouse paid enough in Medicare taxes over your work history to qualify for free coverage. Regardless of the cause, if you do not pay premiums for Medicare Part A you will not pay a penalty for late enrollment.  

If you do pay Part A premiums you will pay an additional penalty for late enrollment. This is typically calculated as 10% of your total premium. It is applied for twice the time that you were eligible with no alternative coverage. For example, if you did not enroll for five years, the Part A penalty will be added to your premiums for 10 years. 

Most enrollees pay a premium for Medicare Part B. The average cost is $174.70 per month. 

If you do not enroll in Medicare when you are eligible, either during an Initial Enrollment Period or a Special Enrollment Period, you will be charged an additional 10% premium per year that you did not enroll. This increase will be based on your individual premium, which can be higher for particularly high-income households. 

The Part B penalty does not fall off. It applies to your entire time enrolled in Medicare, meaning that it will typically last for the rest of your life. The one exception to this is that you may, under some circumstances, be able to reduce or eliminate your penalty payments through a Medicare Savings Program.

For example, say that you were eligible and uncovered for three years. Since this is calculated on a full 12-month basis, this means you waited for between 36 and 47 months to enroll in Medicare Part B. Your premiums will go up by 30%. This increase will last for as long as you have Medicare Part B.

There are no standard enrollment penalties for Medicare Advantage, since this program works as a private coverage substitute or supplement to Parts A and B. Individuals have no obligation to enroll and any penalties will be applied based on the individual plan.

You will pay a Medicare Part D penalty if you do not enroll when you lose coverage, typically measured by either your Initial Enrollment Period or a Special Enrollment Period. The main exception to this is if you qualify for extra help due to limited income or resources. 

If you do not enroll in a timely manner, Part D will charge a penalty of 1% per month that you do not enroll. Like Part B, this penalty is indefinite and does not fall off. It is a permanent price increase that applies even if you change plans within Part D. As with Part B, under some circumstances you may be able to reduce or eliminate these penalties through a Medicare Savings Program.

For example, say that you wait for two full years before enrolling in the program. Your premiums will increase by 24%. This is applied based on your actual premiums, not an average, meaning that the penalty will scale based on your Part D plan and your household income. 

If you have more questions about Medicare, consider matching with a fiduciary financial advisor.

It is important to enroll in Medicare as soon as you become eligible. If you do not, you might be charged a penalty that is added to your monthly premiums. These penalties can last for years, and sometimes the rest of your life.

• Medicare is an essential part of retirement planning for most households. Even though you do need to pay for coverage, it will save you significantly over having to seek out private insurance once you retire. Here’s how you should begin to plan for what Medicare will, and won’t, cover. 
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