Retiring Early? What You Need to Know About Medicare and COBRA

Many individuals dream of early retirement, envisioning days of leisure, travel, and pursuing long-held passions. However, one critical aspect of early retirement that can often be overlooked is covering the health care gap until you become eligible for Medicare at age 65. If you’ve been relying on your employer’s group health insurance, your coverage will likely end, leaving you responsible for the full cost of your premiums. Fortunately, early retirees have options that can help secure coverage before the traditional retirement age. Understanding the roles of Medicare, COBRA, and other health insurance options becomes pivotal for those considering hanging up their hats before traditional retirement age.

Understanding Medicare

Medicare is a federal health insurance program primarily designed for individuals aged 65 and older. However, it can also cover younger individuals with specific disabilities or health conditions like end-stage renal disease or amyotrophic lateral sclerosis (ALS).

Medicare is made up of several plans, usually referred to as “parts.” After enrolling in Original Medicare (Parts A and B), many decide to also enroll in a supplemental coverage plan. While supplemental coverage isn’t required, it does help cover expenses that are not paid by Original Medicare. Only 10% of enrollees choose to not enroll in supplemental coverage. With Medicare Advantage (Part C), Medigap (also referred to as Medicare Supplement), and Part D (prescription drug coverage), it can be confusing to determine which coverage is right for you.

Original Medicare (Parts A and B)

• Part A helps pay for hospitalization and is usually provided free because it is covered by your payroll taxes (although you will have to pay a deductible).
• Part B is optional, and you’ll pay a monthly premium. It helps to pay for outpatient medical services like doctor visits and health screenings.
• With both Part A and B, you can choose your own doctors.

Medicare Advantage (Part C)

• Offered by private insurance companies, these Medicare-approved plans are alternatives to Original Medicare. Similar to an HMO, the plan’s doctors and prescription drugs are often covered. However, the downside is limited provider networks and plan restrictions, including the need for prior authorization which may delay or impede important care.
• It’s important to note that you can’t enroll in both Part C and a Medigap plan – it’s one or the other.

Medigap

• Purchased from a private health insurance company, it will cover expenses not paid by Original Medicare.
• If you retire before 65, you won’t be immediately eligible for Medicare, unless you qualify due to a health condition. Thus, you’ll need an alternative solution for healthcare coverage in the interim.

Prescription Drug Coverage (Part D)

• Medicare-approved private plans that cover prescription drugs for people enrolled in Parts A and/or B.
• If you choose Medigap, you may also want to choose a standalone Part D plan to have drug coverage and avoid a Part D Late Enrollment Penalty.

Health insurance options for early retirees

COBRA

Retirees can take advantage of the Consolidated Omnibus Budget Reconciliation Act (COBRA), a federal law that allows individuals and their families to continue their employer-sponsored health insurance coverage for a limited period after employment ends. However, COBRA is designed to be secondary to Medicare and someone who is Medicare-eligible must sign up for Medicare, even if they would like to keep their COBRA coverage.

If you sign up for COBRA and are eligible for Medicare, your COBRA benefits are intended to be paid after Medicare pays, even if you haven’t signed up for Medicare. When you do sign up for Medicare, you could be subject to premium penalties for late enrollment. In addition, a COBRA carrier may be able to bill you for any benefits paid by mistake when Medicare should have paid first.

If someone is paying the cost of their COBRA insurance and is eligible for Medicare, then it would certainly be worth comparing the cost of their COBRA (premiums and benefits) to what they would receive if they were to cancel their COBRA and purchase a Medigap plan and standalone Part D prescription drug plan. Often, the premiums and benefits for the Medigap and standalone Part D prescription drug plan is much lower than the cost of one’s COBRA, and it’s an opportunity to unlock significant healthcare savings.

COBRA generally offers an 18-month continuation of coverage after the end of employment. In certain circumstances, like a disability, coverage can extend up to 36 months. While expensive, COBRA ensures you have the same level of health coverage you had under your employer’s plan, and it may be particularly beneficial if you have ongoing medical needs or are concerned about changing doctors. Before you elect COBRA, it’s important to compare benefits and costs (premiums, deductibles, copayments, and out-of-pocket maximums) with other coverage options. Alternative coverage options include:

Exchange-based plans: Under the Affordable Care Act (ACA), people who need coverage may be able to purchase insurance from a federal or state insurance exchange. Compare the costs and coverage of exchange-based insurance with your other options. Depending on your retirement income, you might qualify for subsidies, making this a cost-effective alternative especially when compared to COBRA.

Health Savings Account (HSA): If you’ve contributed to an HSA while employed, these funds can be used tax-free for qualifying medical expenses. Using funds from your HSA account can offset costs before Medicare kicks in. However, once you are eligible for Medicare and enroll, you can no longer contribute to an HSA, although you can withdraw your HSA funds to pay certain Medicare premiums and out-of-pocket medical expenses.

Short-term health insurance: These temporary plans offer coverage for a limited period, often less than a year. They’re generally less expensive but come with limited benefits. Coverage varies greatly depending on the plan and the insurance company you choose. These plans typically provide some level of coverage for preventive care, doctor visits, urgent care, and emergency care. Keep in mind that these plans are designed to fill short-term gaps in coverage and usually do not offer coverage for pre-existing conditions.

Spouse’s health insurance: If you are married, and your spouse is employed, you may be eligible to join their health insurance plan.

Early retirement requires meticulous planning, especially concerning health care. While Medicare provides a safety net for those 65 and older, the interim period demands careful consideration. Between Exchange-based plans, HSAs, and other strategies, you have options to ensure you’re covered. With the proper preparation, you can embark on your early retirement journey with confidence, knowing your health needs are in good hands.

For Medicare questions, Mercer Advisors has partnered with Chapter to provide personalized Medicare recommendations based on your specific health and financial needs. The service is free for our clients; talk to your advisor to learn more.

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