Retiring before age 65 can leave a gap between your employer health coverage and Medicare. If you are planning to retire early, it is important to know how you will stay insured during that time and when you need to enroll in Medicare.
The good news is that you have options. The right choice depends on your former employer, your household income, your health care needs, and how long you need coverage before Medicare begins.
What Happens to Your Health Insurance When You Retire Early?
If your health insurance comes from your job, retiring usually means that coverage will end. However, the date it ends depends on your employer. Some plans end on your last day of work, while others may continue through the end of the month.
If you retire before you are eligible for Medicare, you will need other health coverage until Medicare begins.
Two common options are Consolidated Omnibus Budget Reconciliation Act (COBRA) and an individual Marketplace health plan. Some employers also offer retiree health coverage.
Before you retire, ask your employer when your current coverage will end and whether COBRA or retiree coverage will be available.
COBRA Coverage
COBRA may allow you to temporarily continue the same group health coverage you had while working.
The main difference is cost. After you leave your job, you may be responsible for the full premium instead of sharing the cost with your employer. An administrative fee may also apply.
COBRA can be useful if you want to keep the same coverage for a period of time, but there is an important Medicare rule to understand.
COBRA is not considered coverage based on current employment for the purpose of delaying Medicare Part B.
If you have COBRA when you become eligible for Medicare at 65, do not assume you can wait until COBRA ends to enroll in Medicare. You generally need to enroll in Medicare during your Initial Enrollment Period to avoid possible late-enrollment penalties.
Individual Marketplace Coverage
Another option is an individual health plan through the Marketplace. Colorado's state health insurance marketplace is called Connect for Health Colorado.
If you retire before age 65 and lose employer-sponsored health coverage, that loss of coverage is generally considered a qualifying life event. This may allow you to enroll in Marketplace coverage outside the annual Open Enrollment Period.
This type of Special Enrollment Period applies to Marketplace coverage, not Medicare. It is separate from Medicare's enrollment periods and does not change when or how you enroll in Medicare when you become eligible.
Depending on household income and other eligibility requirements, financial assistance may be available for Marketplace coverage.
Marketplace coverage can provide health insurance between early retirement and Medicare eligibility. As you approach 65, it is important to understand when your Medicare coverage will begin and coordinate the end of your Marketplace coverage.
Employer Retiree Coverage
Some employers offer health insurance to former employees after retirement.
If this coverage is available to you, find out exactly how it works before making a decision. Ask what happens when you become eligible for Medicare, whether the retiree plan continues, and whether Medicare must become your primary coverage.
Retiree plans can work differently from one employer to another, so it is important to review the specific rules of your plan.
Turning 65: Your Medicare Initial Enrollment Period
If you retired before 65 and are using COBRA, Marketplace coverage, or retiree coverage, you will generally enroll in Medicare during your Initial Enrollment Period.
This is not a Medicare Special Enrollment Period.
Your Initial Enrollment Period lasts seven months. It begins three months before the month you turn 65, includes your birthday month, and continues for three months afterward.
If you want Medicare to begin when you first become eligible, it is a good idea to start the enrollment process during the three months before your 65th birthday.
If your birthday falls on the first day of a month, Medicare generally uses a different start date, with coverage beginning the first day of the previous month.
Do Not Confuse Part B and Part D Rules
This is an area where people can easily get confused.
For Medicare Part B, having health insurance does not automatically mean you can delay enrollment without a penalty. The Special Enrollment Period that allows many people to delay Part B generally applies when you or your spouse are still working and you have group health coverage based on that current employment.
COBRA and individual Marketplace coverage are different.
Medicare Part D has a separate rule. For prescription drug coverage, the important question is whether your existing drug coverage is considered creditable.
Creditable drug coverage is coverage expected to pay, on average, at least as much as Medicare's standard prescription drug coverage. Your current plan should tell you whether its drug coverage is creditable. Keep that notice with your records.
Even if you do not currently take prescription medications, going too long without Part D or other creditable drug coverage after you become eligible for Medicare can result in a late-enrollment penalty later.
Coordinate Your Coverage Before Medicare Begins
Do not assume your COBRA, Marketplace, or retiree coverage will automatically end when Medicare starts.
Once you know your Medicare effective date, contact your current health plan or benefits administrator. Find out when your existing coverage should end and what you need to do to terminate or coordinate it.
The goal is simple: avoid ending your current coverage too soon, but also avoid paying for coverage you no longer need.
If you have retiree health coverage, do not cancel it until you understand how it works with Medicare. Some retiree plans continue after age 65 and provide secondary coverage after Medicare pays.
What If You Have an HSA?
If you contribute to a Health Savings Account, or HSA, Medicare requires some additional planning.
Once your Medicare coverage begins, you can no longer contribute to an HSA. There are also situations where Medicare Part A can be retroactive, which can affect when HSA contributions need to stop.
Because the timing can vary depending on when you enroll in Medicare, review the HSA rules before making your final contribution.
You can still use money already in your HSA for qualified medical expenses after enrolling in Medicare.
Choosing How You Receive Your Medicare Coverage
After you enroll in Medicare Part A and Part B, you will decide how you want to receive your Medicare coverage.
One option is Original Medicare. This includes Part A and Part B. You may also choose a Medicare Supplement, or Medigap, policy to help with certain costs that Original Medicare does not pay. Prescription drug coverage is generally added through a separate Part D plan.
The other option is Medicare Advantage. These plans are offered by Medicare-approved insurance companies and provide your Part A and Part B benefits through the plan. Many Medicare Advantage plans also include Part D prescription drug coverage and may include additional benefits.
Your pre-65 coverage does not determine which Medicare option you must choose.
Help with Medicare Costs
If your income and resources are limited when you become eligible for Medicare, you may qualify for additional help.
Colorado has Medicare Savings Programs that can help eligible Medicare beneficiaries with certain Medicare costs. The amount of help depends on which program you qualify for.
You may also qualify for Extra Help, a Medicare program that helps eligible people with Medicare prescription drug costs.
Some people qualify for Extra Help automatically. For example, If you qualify for QMB, SLMB, or QI, you automatically qualify for Extra Help with Medicare prescription drug costs.
Planning Ahead Makes the Transition Easier
Retiring before 65 does not have to make your transition to Medicare difficult. What matters is understanding that your pre-65 health coverage and your Medicare enrollment are two separate pieces of the process.
Before retiring, find out exactly when your employer coverage ends and what options you have to replace it.
As you approach 65, pay close attention to your Medicare Initial Enrollment Period. Do not assume COBRA, Marketplace coverage, or another type of insurance gives you the same Medicare enrollment rights as coverage from current employment.
A few months of planning can help you avoid a coverage gap, a late-enrollment penalty, or paying for coverage you no longer need.