The Medicare Late-Enrollment Penalty: What It Costs and Why

Most of what gets written about Medicare costs is about the income-related surcharge. That one is worth understanding, and it is also the forgiving one: it is recalculated every year, so a single high-income year raises your premium for one year and then it comes back down, and if your income fell because of a life event there is a real appeal.

The late-enrollment penalty is the opposite of that in every respect. It is not recalculated. There is no appeal on the ordinary facts. And it is charged for as long as you hold the coverage.

It is the only permanent, un-appealable cost in the Medicare system, and it is almost entirely avoidable by knowing two things.

What the penalty actually is

Under 42 U.S.C. §1395r(b), the Part B premium “shall be increased by 10 percent of the monthly premium so determined for each full 12 months (in the same continuous period of eligibility) in which he could have been but was not enrolled.”

Three things in that sentence do the work.

Ten percent, per full 12 months. Not ten percent once. Two years late is twenty percent, four years late is forty.

“Full” 12 months. Partial periods do not count, and this is the one place the rule is generous. Twenty-three months late counts as one period. Twenty-five months counts as two. The difference between those two dates is a permanent ten percent of your premium, forever, and nothing announces it.

“Increased” — with no end date in the sentence. The increase attaches to the premium, not to a catch-up balance. You do not pay it off. As long as you have Part B, you pay the higher premium.

Part D works the same way on its own separate clock, and Part D is the one people miss more often, because a person who does not take medication does not feel any urgency about drug coverage.

Deadline one: the seven months around your 65th birthday

Medicare eligibility on the age route begins at 65 — 42 U.S.C. §426(a). Under-65 eligibility exists through disability or end-stage renal disease, so 65 is not the only way in, but it is the one these deadlines are built around.

Your initial enrollment period is set by 42 U.S.C. §1395p(d): it “shall begin on the first day of the third month before the month in which he first satisfies such paragraphs and shall end seven months later.”

So it is seven months long — the three months before the month you turn 65, that month, and the three after. Enrolling in the first three is what gets coverage started without a gap. Enrolling in the last three is still on time, but coverage starts later.

If you are not working, or you are working somewhere small, this is your deadline and there is nothing else to think about.

Deadline two, and the question that decides which one applies to you

If you are still working at 65 and covered by the employer’s plan, whether you can safely delay comes down to one number: how many people work there.

Under 42 U.S.C. §1395y(b)(1)(A)(ii), the rule making the group plan the primary payer does not apply “unless the plan is a plan of, or contributed to by, an employer that has 20 or more employees for each working day in each of 20 or more calendar weeks in the current calendar year or the preceding calendar year.”

Twenty or more employees: the group plan pays first, Medicare is secondary, and delaying Part B is safe and normal.

Fewer than twenty: Medicare is the primary payer whether or not you enrolled. If you did not enroll, there is no primary payer. Your group plan has been paying second on claims where nothing was paying first, and you are running a penalty clock the whole time.

Nobody in this arrangement has a reason to tell you. The employer’s plan has no reason to know your age. Medicare has no reason to know your employer’s headcount. The two facts sit in different places and the person who needs them both is you.

Small professional practices, family businesses and consultancies are where this happens. It is not an unusual situation for a well-paid person in their late sixties.

If it helps to have the numbers in one place, I keep them all in the Ultimate Retirement Guide.

When you leave: eight months, and the COBRA trap

When employment or the employer coverage ends, a special enrollment period opens. Under 42 U.S.C. §1395p(i)(3)(A), it runs “ending with the last day of the eighth consecutive month in which the individual is at no time so enrolled” in an employer group health plan by reason of current employment status.

Eight months, not seven. That difference alone catches people who half-remember the first rule.

COBRA does not extend it. This is the single most common route into the penalty, and the reason is that COBRA feels like a continuation of the same insurance. It is the same network, the same card, often the same claims. But it is not coverage based on current employment status, which is what the statute requires, so the eight-month clock starts when the job ends rather than when COBRA runs out.

COBRA typically runs eighteen months. The window is eight. Somebody who takes COBRA, uses it, and then thinks about Medicare when it expires is already ten months past the deadline.

The other window that closes quietly

There is a third deadline that is not a penalty, and it is worth knowing because it also happens once and does not come back.

Under 42 U.S.C. §1395ss(s)(2)(A), an insurer offering a Medicare supplement policy “may not deny or condition the issuance or effectiveness of a medicare supplemental policy, or discriminate in the pricing of the policy, because of health status” for an application submitted “prior to or during the 6 month period beginning with the first month as of the first day on which the individual is 65 years of age or older and is enrolled for benefits under part B.”

Six months, starting when you are both 65 or older and enrolled in Part B. During it, your health cannot be used against you. In most states, after it closes, it can.

Which supplemental policy to buy is a separate question and not one this page answers. The timing is the part that is a deadline.

What do people get wrong about this?

• “I have good insurance at work, so I’m fine.” Only if the employer has twenty or more employees. The quality of the plan is not what the rule turns on.
• “COBRA counts.” It does not. The clock started when the job ended.
• “Retiree coverage counts.” It does not either. It is not based on current employment status.
• “I’ll pay it off when I catch up.” There is nothing to pay off. The premium itself is permanently higher.
• “I don’t take any prescriptions, so Part D can wait.” Part D has its own penalty on its own clock. What avoids it is holding drug coverage that counts as creditable — and the plan has to tell you in writing, once a year, whether yours does. A plan you are happy with is not automatically creditable.
• “Twenty-three months and twenty-five months are about the same.” They are one full period apart, which is ten percent of a premium for life.

When this does not apply to you

• If you enrolled during your initial period, none of this is your problem.
• If you delayed while covered by an employer with twenty or more employees and enrolled inside the eight-month window after leaving, you owe nothing. That is the rule working as designed.
• If you are not yet 65 and not close to it, this is a calendar item rather than a decision. The decision arrives about four months before your 65th birthday.

Where this fits

The deadlines are the permanent half of what Medicare costs. The income-driven half — the surcharge, how the two-year look-back works, and how a withdrawal today prices a premium later — is at Healthcare in Retirement, and what IRMAA is is the place to start on it.

If you are planning the retirement date itself, the enrollment window and the income you report that year are two separate consequences of the same decision, and they are easier to get right together than one at a time.