How to Avoid Paying a Medicare Late Enrollment Penalty

Medicare late enrollment penalties are no joke. They can increase your monthly premium substantially for the rest of your life.

That’s right — if you miss the window, the government can penalize you each month for as long as you have Medicare coverage.

It’s essential to understand your Medicare options and how these late enrollment penalties work so you can avoid costly premiums in retirement.

When Are You Supposed to Sign Up for Medicare?

You can only sign up for Medicare at certain times.

Your initial enrollment period is a seven-month window around your 65th birthday.

It begins three months before you turn 65 and extends three months after your birth month.

If you’re already receiving Social Security retirement benefits, you’re automatically enrolled in Medicare when you turn 65.

Some people choose to delay Medicare if they’re still working.

However, the best way to avoid Medicare late enrollment penalties is to sign up for coverage when you’re first eligible.

Medicare Part B Late Enrollment Penalty

Medicare Part B helps cover your doctor’s visits, preventative services, outpatient care, medical equipment and more.

If you don’t enroll in Medicare Part B during your initial enrollment period, you’ll face a 10% penalty for each 12-month period you delayed enrollment.

Once you get hit with a Part B penalty, you’re usually stuck with it for as long as you have Medicare Part B. For most people, that’s the rest of their life.

Here’s an example. 

• Let’s say you don’t sign up for Part B until four years after you’re first eligible.
• You’ll face a premium penalty equal to 40% of your premium in addition to your regular monthly payment.
• You’ll keep paying that higher amount for as long as you have Medicare Part B.

In 2023, the Part B premium is $164.90. If you waited four years to sign up, you’d owe $65.96 (40% of $164.90) on top of the standard Part B premium.

And remember, the standard Part B premium typically increases slightly each year. So you’ll pay at least $230.86 per month for as long as you have Part B coverage.

How to Avoid the Medicare Part B Late Enrollment Penalty

You can delay enrollment in Part B (and avoid the penalty) if you’re enrolled in creditable coverage.

Creditable coverage for Part B is limited to enrollment in:

• Group health insurance plan at work through your employer or your spouse’s employer.
• Group health insurance from a union.
• Federal Employees Health Benefits.

If you have health insurance from a small company with fewer than 20 employees, you’ll likely need to enroll in Part A and Part B when you turn 65. Small workplaces aren’t required to continue your health care coverage once you’re eligible for Medicare.

Being covered by an Affordable Care Act plan from the Health Care Marketplace doesn’t count as creditable coverage for Part B. Neither does VA health care benefits.

Special Enrollment Period

After your employment-based coverage ends, you’ll qualify for a special enrollment period.

A special enrollment period is for people who didn’t sign up for Medicare Part B during initial enrollment because they had health insurance through their employer, union or spouse.

The eight-month special enrollment period begins the month after your employment ends or the group coverage plan ends (whichever comes first). During this time, you can sign up for Medicare without facing a premium penalty.

Medicare Part D Late Enrollment Penalty

Technically, enrolling in Medicare Part D prescription drug coverage is voluntary.

However, if you delay enrollment in Medicare Part D — or a Medicare Advantage plan that includes drug coverage — you could be hit with a penalty if you enroll later.

And you’ll pay the penalty for as long as you have Medicare Part D.

You’ll also owe a late enrollment penalty if at any time after signing up for Part D, there’s a coverage gap of 63 or more days in a row when you didn’t have a Medicare drug plan or other creditable prescription drug coverage. This can happen if you drop your current Part D plan and fail to sign up for a different one.

Even if you don’t take any medication now, you should join a Medicare prescription drug plan when you turn 65. Many Medicare plans offer little to no monthly premiums.

How Much Is the Part D Late Enrollment Penalty?

The Part D late enrollment penalty depends on how long you went without a Medicare prescription drug plan or other creditable drug coverage.

Medicare calculates the Part D penalty by multiplying 1% of the “national base beneficiary premium” ($32.74 in 2023) times the number of full months you went without Part D or creditable coverage.

That number is rounded to the nearest 10 cents and then added to your monthly Part D premium.

The national base beneficiary rate usually increases slightly each year, so your penalty amount may also change each year.

Here’s an example. 

• Sarah’s initial enrollment period ended Sept. 30, 2019. She didn’t join a Medicare drug plan and she isn’t covered by any other credible source.
• Sarah signs up for Medicare Part D in late 2022 and her coverage begins Jan. 1, 2023. She went 39 full months without prescription drug coverage.
• Sarah’s penalty is 39% (1% for each of the 39 months) of $32.74 — the national base beneficiary premium for 2023.
• This equals a penalty of $12.77 each month.
• Since the monthly penalty is always rounded to the nearest 10 cents, Sarah will pay $12.80 each month in addition to her plan’s monthly premium.

How to Avoid the Medicare Part D Late Enrollment Penalty

You can avoid the Part D penalty if you’re covered under an employer’s prescription drug plan that’s expected to pay, on average, at least as much as Medicare’s standard drug coverage.

You can also avoid it if you maintain creditable prescription drug coverage from any of the following:

• A current or former employer or union
• TRICARE
• Indian Health Service
• Department of Veterans Affairs
• Individual health insurance

If you’re not sure if your current drug plan counts as creditable coverage, check with your plan provider.

Once you’re no longer enrolled in creditable prescription drug coverage, you have 63 days to sign up for a standalone Part D plan or a Medicare Advantage plan with prescription drug coverage.

When you enroll in Medicare drug coverage, tell the provider about your previous creditable coverage. Otherwise, you may still get slapped with a late enrollment penalty.

Finally, people who qualify for the Extra Help program won’t pay a penalty when they sign up for a Medicare drug plan.

Extra Help is Medicare’s prescription subsidy program for people with low incomes. If you qualify for Medicaid services, you generally qualify for the Extra Help program.

Medicare Part A Late Enrollment Penalty

Ninety percent of people don’t pay a premium for Medicare Part A, which covers hospital stays and skilled nursing facilities.

If you paid Medicare payroll taxes for at least 10 years, you qualify for premium-free Medicare Part A. There’s no late enrollment penalty in that situation.

But if you’re in the 10% of people who are required to buy Part A and you don’t sign up when you’re first eligible, your monthly premium can go up 10%.

You’ll have to pay the higher premium for twice the number of years you didn’t sign up.

So if you didn’t sign up for Part A for two years after you were first eligible, your Part A premium will be 10% higher for the next four years after you enroll.

Here’s an example: 

• You were first eligible for Medicare on Jan. 1, 2021 and you don’t qualify for premium-free Part A.
• You didn’t enroll in Part A until Jan. 1, 2023.
• In 2023, people who buy Part A pay a premium of either $278 or $506 per month, depending on how long you or your spouse worked and paid Medicare taxes.
• Your Part A premium will either be $305.80 or $556.60 per month for the next four years.
• After four years, the 10% penalty goes away.

If your state pays your Part A premiums through a Medicare Savings Program, you’re not liable for late penalties.

Why Does Medicare Charge Late Enrollment Penalties?

Medicare relies on healthy people to pay into the program to help offset the higher health care expenses of unhealthy people.

If everyone waited to sign up for Medicare until they needed it (aka their health declined), Medicare would be unable to keep up with costs.

That in turn would increase the price of premiums for everyone enrolled in Medicare.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.