Medicare Penalties: What They Are and How to Avoid Them

Yes, that's right. You can be penalized by the Medicare program for not enrolling! These penalties add up quickly, so even if you are not eligible to enroll in Medicare quite yet, you should learn how Medicare penalties work and make a plan to avoid them.

How do Medicare penalties work?

You will incur late-enrollment penalties if you don’t enroll in Medicare when you first become eligible (around your 65th birthday). There is one way to postpone coverage, which we will discuss later. You can incur penalties for not enrolling in Parts A, B, and D. Each works differently, so let's explore each in more detail.

Medicare Part A Penalty

The Part A penalty is the least common Medicare penalty. If you’re eligible for premium-free Part A, you will never pay this penalty, even if you delay enrollment. Anyone who has paid Medicare taxes for ten years (or is married to someone who has) does not pay a premium for Part A.

However, if you are not entitled to premium-free Part A, this penalty could apply to you. If you don’t enroll when you first become eligible, you'll have a 10% penalty. Ten percent of your premium will be added to your base premium - whether you went without coverage for one year or ten years. The penalty applies for twice the number of years you delayed coverage. Let's look at an example.

John is not eligible for premium-free Part A. He only paid Medicare taxes for 31 quarters, so his Part A premium (as of 2023) is $278 per month. He is 68 now and is enrolling in Part A. His penalty is:

10% x $278 = $27.80

That makes his total premium for Part A $305.80, and he must pay this for six years. And remember, Medicare premiums typically increase yearly, so he will likely pay a little more over those six years.

Medicare Part B Penalty

The Part B late enrollment penalty begins after you have gone one year without Part B. The penalty is an additional 10% of your Part B premium for each 12-month period. You must continue to pay the penalty for as long as you have Part B, presumably for the rest of your life. Let's look at another example.

In addition to delaying his Part A coverage, John also delayed Part B coverage. He went a full 36 months without coverage, so his penalty is 30%. The current Part B premium is $164.90. John's penalty is:

30% x $164.90 = $49.47

That makes his Part B monthly premium $214.37. Keep in mind that the Part B premium typically increases yearly, so his penalty will also go up.

Medicare Part D Penalty

This is the penalty we see most often in Medicare, and it's easy to see why so many people end up paying it. Part D provides your drug coverage. If you aren't taking any medications, why enroll in Part D? Simply put, to avoid the penalty!

The Part D penalty is based on the number of months you went without drug coverage. You’ll start incurring a penalty after you’ve gone 63 months without drug coverage. You take 1% of the "national base beneficiary premium" and then multiply it by the number of months you went without coverage. (This amount changes each year and is currently $32.74.) Let's stick with our unlucky guy John. He went 36 months without drug coverage.

1% x $32.74 x 36 = $11.79

That $11.79 will be added to John’s Part D premium, which will depend on which Part D plan he chooses. Like the Part B penalty, he'll pay the Part D premium for as long as he has Part D. And since the national base beneficiary premium increases each year, so will his penalty.

If you have a Part C plan that includes drug coverage, you do not need a stand-alone Part D plan and will not incur any late enrollment penalties. In addition, if you are eligible for the Extra Help program, your Part D penalty is waived.

How to Avoid Medicare Late Enrollment Penalties

The best way to avoid Medicare penalties is to plan ahead! If you are turning 65 soon, begin your Medicare enrollment as soon as possible. Your Initial Enrollment Period (IEP) begins three full months before your birthday, so apply as soon as possible. Start searching for a licensed Medicare advisor who can help you with your applications and choose your plans early. That way, when it's time to enroll, you can simply submit the application and be on your way!

Now, there is one caveat to all of this. If you want to delay enrollment, you can do so as long as you have creditable coverage. “Creditable” coverage typically comes from an employer-sponsored group plan. However, not all employer plans are created equal.

For Medicare Parts A and B, if your company employs at least 20 people, your plan is creditable. If the employer has under 20 employees, you should speak with your HR department to find out if the plan is creditable or not. Generally, it is creditable if the plan offers at least as much coverage as Parts A and B. The insurance company will also send a notice of creditable coverage each year.

Medicare Part D has slightly different standards. Just because your group plan is creditable for Part B does not mean it is creditable for Part D. Again, work with your HR department to make this determination.

If you find out that you can delay enrollment without a penalty, it's a good idea to download a copy of CMS-L564. You'll need this form when you decide to enroll in Medicare, and it will be much easier to fill out while you're still employed. This form determines if you had creditable coverage and if your late enrollment penalty will be waived.

We can help you avoid Medicare penalties. It's never too early to start preparing for your transition into the Medicare program, so give our office a call today. We will help you develop a timeline for enrollment and follow up with you when it's time to submit your applications.