Personal Finance

Dropping Medicare for employer health coverage may trip you up

Key Points
  • By 2026, about 30% of individuals ages 65 through 74 — and about 11% of the 75-and-over crowd — are expected to be in the labor market.
  • If you are going back to work and your employer's health-care plan qualifies as acceptable primary coverage, you are permitted to drop Medicare and re-enroll down the road.
  • Just because you can, it doesn't mean you should.

For some retirees who are on Medicare, the workforce ends up beckoning them back — and one result can be employer-sponsored health insurance.

While that coverage could mean you (and your spouse) are able to drop parts of Medicare and pick them back up again down the road without paying penalties, the move might come with snags.

"The process is straightforward, but there are a few consequences people should be aware of," said Medicare expert Patricia Barry, author of "Medicare for Dummies."

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While the current number of retirees who re-enter the workforce is hard to come by, roughly 26.8% of people age 65 through 74 are in the labor market, according to the latest available data from the Bureau of Labor Statistics. That's projected to reach 30.2% by 2026. For the 75-and-older crowd, the share is 8.4% and expected to grow to 10.8% by 2026.

Most people sign up for Medicare when first eligible at age 65, either because they no longer are working or don't have qualifying coverage through a job. Roughly 52.2 million Americans age 65 or older are on Medicare. Another 8 million or so beneficiaries are younger people with disabilities.

Most retirees pay no premiums for Medicare Part A, which provides hospital coverage. Part B, which covers outpatient care, comes with a standard monthly premium of $135.50 for 2019 (although higher earners pay more). Part D, which provides prescription drug coverage, has a 2019 base premium of about $33. Higher earners pay more for that coverage as well.

Some people choose to go with an Advantage Plan and receive their Medicare Parts A, B and D benefits (and often extras like dental and vision) through that option. Those plans also often come with a premium.

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Assuming you are receiving Part A for free, there are two things to be aware of that could put a snag in your plan in your plans to drop Medicare and switch to a employer plan. (And remember, Medicare rules are different for small firms.)

For starters, if a health savings account, or HSA, comes with the employer's group coverage — in other words, it's a "high-deductible" health plan — you cannot make contributions to an HSA while on Medicare, even if only Part A.

For 2019, a high-deductible health plan is one with a deductible of at least $1,350 for an individual and $2,700 for a family, with maximum annual out-of-pocket costs (not counting premiums) of no more than $6,750 and $13,500, respectively. That excludes out-of-network costs.

HSAs come with a triple tax benefit, however: Contributions are tax-deductible, earnings are tax-free and withdrawals also are untaxed as long as they are used to cover qualified medical expenses. Annual contributions to HSAs for 2019 are limited to $3,500 for someone with individual coverage and $7,000 for family coverage. People age 55 or older can put an extra $1,000 in per year.

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If you think that dropping Part A so you could contribute to an HSA might be an option, be aware that going that route would mean having to repay the government for any medical services you received under Medicare, Barry said. And if you were getting Social Security benefits, you'd need to give back that money, as well.

Additionally, if you use a supplemental policy — also called Medigap — alongside Parts A and B, you'd have to drop that coverage. That's even if you just opt out of Part B.

And, Barry said, it might be difficult to get another policy down the road.

When you first sign up for Medicare, you get six months to buy a Medigap policy without the insurer charging you more or denying coverage due to your health status or pre-existing conditions. So if you drop it and re-apply later, the insurer can consider your health when deciding whether to cover you or charge you more (unless you live in a state that offers guaranteed coverage).

Separately, people who must pay premiums for Part A cannot voluntarily disenroll from Part B without also disenrolling from Part A, Barry said.

Meanwhile, if you were to switch to your employer's plan, be aware that there are rules for re-enrolling in Medicare at some point.

As long as your employer-sponsored health care is considered qualifying coverage by the government, you get an eight-month window to re-enroll in Part B when you stop work or lose the group coverage.

"If you miss that eight months, you have to wait for general enrollment, which is January through March, and then the coverage isn't effective until July," said Elizabeth Gavino, founder of Lewin & Gavino in New York and an independent broker and general agent for Medicare plans.

If you somehow both miss your eight-month window and go too long without acceptable coverage, you could face a late-enrollment penalty: It's 10% of the monthly Part B base premium for each full year you should have been enrolled but were not.

If you're going to enroll in an Advantage Plan, that also can be done during your eight-month special enrollment period.

If you're going to stick with basic Medicare (Parts A and B), you'd get two months to get a standalone Part D prescription drug plan once workplace coverage ends. If you miss that window, you could face a late-enrollment penalty. That amount is 1% of the national base premium for each full month that you could have had coverage but didn't.

Additionally, the Social Security Administration will want to talk to you before you make the decision to drop Medicare. While you can download the necessary form for voluntary disenrollment from Part B, the agency requires either an in-person or on-phone consultation with one of its officials while you fill out the form.

"They want to make sure the person understands the consequences for dropping coverage," Gavino said.

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