Getting access to Medicare after years of paying into the system can feel like finally “making it.” However, once you begin receiving Medicare benefits, it’s important to understand that there are terms and conditions.
If you don’t pay attention to some of the rules, you could end up paying a penalty — and some penalties have long-lasting effects. Here’s what you need to know about different Medicare penalties and how to avoid them.
1. Penalty for post-Medicare HSA contributions
When you turn 65 and sign up for Medicare, you can no longer make contributions to a health savings account (HSA). Once you have Medicare, your contribution limit is $0; anything beyond that is considered an excess contribution.
If you have an excess contribution to your HSA, you might be subject to additional taxes and a penalty:
- You must include the excess contribution amount in your gross income on your tax return and pay taxes on the amount.
- A 6% excise tax is levied as a penalty on the excess contribution amount.
It’s possible to avoid the 6% excise tax if you withdraw your excess contributions and earnings and add them to your income on your tax form. You need to accomplish this before your tax due date. The earnings on your excess contributions need to be reported on your tax return as “Other income.” You still have to pay income tax on the amounts, but you avoid the excise tax.
How to avoid the HSA contribution penalty
Pay attention to when you become eligible for Medicare Part A and when you sign up. If you sign up for Medicare during your initial enrollment period (the period encompassing the three months before you turn 65 through the three months after you turn 65), you should make your last HSA contribution in the month before you turn 65. That way, you can avoid a penalty. It’s also possible to avoid a penalty if you make your last HSA contribution in the month before you turn 65 if you sign up within two months after your initial enrollment period ends.
Things become trickier if you wait to sign up for Medicare. If you decide to sign up after you turn 65, you have two options to avoid the penalty, depending on how long you wait:
- Less than six months after turning 65: Stop your HSA contributions the month before you turn 65.
- At least six months after turning 65: Stop your HSA contributions six months before you apply for Medicare.
As you can see, HSA contributions can get complicated if you’re eligible for Medicare. Your best approach to avoiding the penalty is to make sure your final contributions are made before the month you turn 65 and pay attention to your enrollment period.
2. Penalty for late enrollment in Medicare Part A
Medicare Part A is often known as hospital insurance. It covers hospital stays, skilled nursing, some home health care and hospice.
You’re expected to enroll in Medicare Part A when you’re eligible for your initial enrollment period. Except in certain circumstances, such as still being employed and having health insurance coverage that way, you could be subject to a late enrollment penalty if you miss this period.
With Medicare, you don’t just pay a one-time fee and then move on. Instead, your penalty is determined by how late you sign up. With Medicare Part A, the late enrollment penalty can add an additional 10% to your monthly premium. You pay this penalty each month for twice the number of years you didn’t sign up when you should have.
For example, if you didn’t sign up for Medicare Part A until a year after you were eligible, you’ll pay the penalty for two years.
How to avoid the Part A late enrollment penalty
Make sure to sign up for Medicare Part A during your initial enrollment period. You don’t have to worry about the penalty if you get signed up when you become eligible. You can also check to see if you’re eligible for a special enrollment period. Find that out before your initial enrollment period normally ends so that you’re prepared.
3. Penalty for late enrollment in Medicare Part B
Medicare Part B is designed for doctor and specialist services and covers outpatient and home health care. Unlike the penalty for Medicare Part A, which has an expiration date, the penalty for Medicare Part B is generally a lifetime penalty.
The penalty is 10% added to your premium for each year you should have signed up for Medicare Part B but didn’t. If you have a higher income, you might have a higher premium, making your penalty bigger.
For example, if you wait two years to sign up for Medicare, you could see your Part B premium increased by 20%. And that increase stays with your premium for life.
How to avoid the Part B late enrollment penalty
Find out when your enrollment period is and enroll on time. Avoid late enrollment, or find out if you qualify for a special enrollment period to keep from paying the penalty.
4. Penalty for late enrollment in Medicare Part D
Medicare Part D, prescription drug coverage, is another piece of the puzzle. You’re expected to join Medicare Part D when you enroll in Medicare. If you don’t enroll, you face a penalty of an extra 1% added to your premium for each month you don’t have coverage. This results in a penalty of up to 12% per year.
The longer you go without enrollment, the higher your penalty will be. Your penalty is applied for as long as you have Medicare Part D, even if you switch drug plans.
How to avoid the Part D late enrollment penalty
Depending on the situation, you might not need to enroll in Medicare Part D and can avoid the penalty. The two main situations that allow you to avoid the penalty are:
- You have drug coverage similar to Medicare Part D already.
- You qualify for Extra Help through Medicare.
If you don’t meet these conditions, you can avoid the Medicare Part D penalty by choosing a prescription plan when you enroll in Medicare.
If you disagree with a Part D penalty
If you receive a letter indicating that you’re being charged a Part D late enrollment penalty, but you think this is unfair and you shouldn’t be charged, you can request a review. You need to request your review within 60 days of the date on your penalty letter.
Your letter will come with a reconsideration request form to fill out. Fill it out and send copies of documentation proving your case, such as proof of a creditable drug plan you were enrolled in instead of Medicare Part D.