Q: I am currently employed and have health benefits. As of December 31, I’ll longer be employed, and my company has offered to pay my Cobra benefits for 8 months. Do I have to sign up for Medicare on January 1 and have Medicare as my primary coverage? Or can I wait without penalty and sign up for Medicare when my Cobra is over?
Also, I understand that the fee for Medicare is based on your salary two years earlier. Will my Medicare premium be adjusted downwards in two years, after my salary is no longer substantial? --CD, via email
A: Depending on when you turn 65, it can indeed be a costly mistake to postpone your Medicare application until your Cobra coverage expires.
To explain why, let's start with the general Medicare enrollment rule for people who are employed:
If you're covered for health insurance through a company with 20 or more workers for whom you or your spouse is actively working [my emphasis added], that group coverage is primary even after you turn 65. But you must sign up for Medicare not later than eight months after the termination of your employer-sponsored coverage or your job, whichever comes first.
People often assume that this means after they leave a job, they can stay on Cobra for at least eight months before applying for Medicare. It’s an easy mistake to make – but it is a mistake!
The key words in the rule are 'actively working'. True, with Cobra you're still insured in your former employer's group plan -- but you're no longer actively working. The result is that as soon as you turn 65, your Cobra coverage becomes secondary to Medicare.
Anyone who will turn 65 while on Cobra should enroll in Medicare the month before his or her birthday. Medicare coverage begins the month after you enroll. By signing up the month before your birthday, you avoid any gap in coverage.
Three bad things can happen if you postpone your Medicare enrollment while you're on Cobra:
The first is that after you turn 65, you'll be without primary health insurance. People usually learn this in a very unpleasant way: Their Cobra policy suddenly rejects their medical claims on the grounds that Medicare should be their primary coverage.
The second is that it may not be possible to sign up for Medicare as soon as you get this bad news. If you didn't enroll in Medicare within the three months before or the three months after your 65th birthday, your next opportunity is general enrollment, which takes place between January 1 and March 31, for coverage that starts July 1. In other words, depending on the timing, you could face up to 15 months without health insurance.
The third is that you pay more for Medicare when you enroll late. Your Medicare Part B premium is permanently 10% higher for each 12 months that have elapsed since your original enrollment deadline. If you enroll two years late, you'll always pay 20% more for Part B coverage.
The Part B monthly premium is currently $110.50 for individuals with income up to $85,000 and married couples with income up to $170,000. As you say, more affluent taxpayers pay more. (You'll find the details here.) The highest monthly premium is $353.60, currently paid by individuals and married couples whose respective income is $214,000 and $428,000.
The Social Security Administration uses the income reported on your tax return two years earlier to determine your premium -- so your 2013 premium will be based on your 2011 income.
One suggestion: It sounds as if your employer has offered to pay for eight months of Cobra coverage as part of your severance. If it would be more helpful to you, why not ask if the company will instead pay the same amount towards your Medicare Part B premiums?
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.