Medicare rules differ for small business owners and employees

They must enroll when they turn 65 or face lifelong penalties.

Financial advisers who work with owners or employees of small businesses that employ fewer than 20 workers should be aware of a special rule that affects these clients: They must enroll in Medicare when they turn 65 or face lifelong penalties.

Normally, workers age 65 and older can delay enrolling in Medicare, the government-run health insurance program for people 65 and older and certain people with disabilities, if they continue to have group health insurance through their employer or through their spouse’s employer.

If the employer has 20 or more employees, the group health plan generally pays first, according to Medicare.gov. But the rules are different for small businesses and the self-employed. In this case, Medicare is the primary payer and if you don’t sign up for Medicare at 65, it will be as if you have no insurance at all, warns the Medicare Rights Center.

Medicare Part A, which covers hospitalization, is free to workers and their spouses if the worker paid Social Security and Medicare payroll taxes for at least 10 years. Because there is no monthly premium, most Americans enroll in Medicare A at 65 even if they continue to work. However, once they enroll in Medicare, they can no longer contribute to a Health Savings Account although they can still use their HSA funds tax-free to pay for out-of-pocket medical expenses.

Most Americans jump at the opportunity to enroll in Medicare at age 65, but it can be a financial burden for people who continue to work beyond traditional retirement age. Postponing enrolling in Medicare Part B, which covers outpatient services and doctors’ bills, until group health insurance coverage ends can save workers money by eliminating the need to pay for duplicate health insurance.

Workers who take advantage of their employer’s (or spouse’s employer’s) group health insurance coverage have up to eight months after that coverage ends to sign up for Medicare Parts A and B penalty free. But if they want to enroll in an all-inclusive Medicare Advantage plan, also known as Medicare C, or a Medicare D prescription drug plan, they have only 63 days after the loss of employer healthcare coverage to enroll penalty free.

But for most people who do not have continued coverage through an employer’s group health care plan, the time to sign up for Medicare is during the initial seven-month enrollment period. This is the crucial enrollment period for small businesses and the self-employed. The initial enrollment period runs from three months before your 65th birthday, includes your birthday month and continues for three months after your birthday month. For example, if your birthday is in July, your initial enrollment period begins April 1 and ends October 31.

If you fail to enroll in Medicare during your initial enrollment period, you will be assessed a delayed enrollment penalty every month for the rest of your life. You would also have to wait until the next general enrollment period, which runs from January 1 through March 31every year, to sign up for Medicare with coverage beginning the following July 1.

The delayed enrollment penalty for Medicare B is 10% per year for every year you were eligible to enroll in Medicare but did not. So, if you waited until 70 to enroll in Medicare B, you would pay an additional 50% delayed enrollment penalty every month for the rest of your life. The Medicare Part D delayed enrollment penalty is 1% per month (12% per year) for every year you were eligible to enroll but did not.

In 2017, most new enrollees in Medicare Part B pay a standard premium of $134 per month. But high-income retirees, defined as an individual whose modified adjusted gross income exceeds $85,000 or a couple whose joint income tops $170,000, pay more. Medicare premium surcharges are based on the latest available tax return. In 2017, Medicare premiums surcharges are based on 2015 tax returns that were filed in 2016.

Monthly premiums that include high-income surcharges for Medicare B range from $187.50 to $428.60. Rates are per person so a retired couple where both spouses were age 65 or older would pay twice that amount depending on their joint income. Medicare Part D premiums that cover prescription drugs vary by plan but average about $35 per month in 2017. Surcharges for high-income retirees range from an additional $13.30 per month per person to an additional $76.20 per month per person.

Medicare beneficiaries who are still working for themselves or for a small business sometimes find their wages push them into Medicare surcharge territory. Once they retire, their income may drop below those levels that trigger additional monthly premiums. Medicare premiums are reset each year.

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Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.