5 Medicare rules to know before returning to work in retirement

If you’re thinking about returning to work after retiring, you’re in good company. The employment rate among older adults has been gradually rising since the 1990s, with the Pew Research Center estimating that 19 percent of adults age 65 and older were employed in 2023.

But there’s a lot to consider before rejoining the workforce. After all, the decision can impact two very important things: Your fixed retirement income and health insurance — aka your Social Security benefits and Medicare coverage.

5 Medicare rules to know before returning to work in retirement

Most people enroll in Medicare around their 65th birthday. You can choose to delay enrollment if you or your spouse are still working and covered under an employer’s group health insurance plan.

But what happens if you’ve stopped working and decide to unretire and head back to work?

You’ll have a few options. You can stick with Medicare, or you might choose to enroll in your employer’s group plan and keep Medicare at the same time. Or, depending on the size of the company you work for, you might drop Medicare Part B and/or Part D entirely once you’re covered under your employer’s plan.

Here’s what you need to know.

1. You can keep Medicare and enroll in employer coverage at the same time

You don’t have to disenroll from Medicare in order to sign up for a private health insurance plan offered by your employer. You can have both. Alternatively, you can continue your current Medicare coverage and ignore your new employer’s health insurance offerings entirely.

If you choose to get coverage from Medicare and a workplace plan, Medicare may pay your medical claims first, or it may act as the secondary payer. It mostly depends on the size of the company you work for.

• The group health plan pays first and Medicare pays second if the employer has 20 or more workers.
• Medicare pays first, and the group health plan pays second if the employer has less than 20 workers and isn’t part of a multiple-employer group health plan.

You can ask your company’s human resources (HR) department which situation applies to you.

Regardless of whether Medicare pays first or second, you’ll still keep paying the monthly Medicare Part B premium ($174.70 in 2024) in addition to the cost of employer coverage if you’re enrolled in both.

2. You can’t sign up for or contribute to an HSA

One health insurance plan is off the table if you decide to enroll in your company’s coverage — a health savings account. Medicare is clear on this: You can’t contribute to an HSA after Medicare Part A or Part B coverage begins.

Keep adding money to an HSA, and you could be charged a 6 percent IRS tax penalty on those funds until you take the money out of the account.

However, so long as you’re working, you can keep contributing to a flexible spending account (FSA) without penalty.

You can also withdraw funds from an existing HSA after you enroll in Medicare. In fact, you can use that money to pay Medicare deductibles, premiums, copayments and other out-of-pocket medical costs. You’re only penalized for adding new money to an HSA.

3. Decide if it makes sense to drop Part B

Original Medicare is made of two parts: Part A, which covers hospital stays and Part B, which covers doctor visits and other expenses.

Over 90 percent of beneficiaries don’t pay any monthly premiums for Part A because they paid into the system via payroll taxes when they were working. So it makes sense to keep your Part A coverage when you return to work — for most people, there’s no monthly cost for the coverage.

Part B is different. You’ll keep paying the monthly premium, even if you start working again and enroll in a workplace plan — unless you drop your Part B coverage.

Most people who drop Part B after going back to work do so to save money. But unenrolling can be tricky, and it isn’t an option for everyone.

If your company has less than 20 employees, you’ll likely get penalized for dropping your Part B coverage. And remember: Your workplace plan acts as the secondary payer at small companies. So if you drop Part B in this scenario, you’ll also face big health care coverage gaps.

If your company has more than 20 employees and your workplace plan covers everything Part B does, you might consider disenrolling from Medicare. However,  carefully compare the coverage details, out-of-pocket costs and provider networks for both plans before making any changes.

To disenroll from Medicare Part B, you’ll need to submit a form, CMS-1763. You can’t withdraw from Medicare online. You’ll need to submit the form in person at your local Social Security office or call the Social Security Administration. You can find instructions for dropping Part D prescription drug coverage on the Medicare website.

4. Don’t miss your special enrollment period

Dropping your Part B coverage when you return to work might save you money, but you’ll eventually want that coverage back once you stop working again.

Once you leave your job and head back into retirement, you’ll qualify for what’s known as a special enrollment period (SEP). It lasts for eight months beginning the month after your employer’s health coverage ends. You’ll have 63 days after your prescription drug coverage ends to sign up for a Part D plan.

To sign up for coverage during your special enrollment period, you’ll need to:

• Go to Apply Online for Medicare Part B During a Special Enrollment Period and complete forms CMS-40B and CMS-L564.
• Upload evidence of your workplace group health care plan coverage.
• When filling out CMS-L564, state, “I want Part B coverage to begin (MM/YY)” in the remarks section of the CMS-40B form or online application.

After you enroll in Medicare during your SEP, your coverage typically starts on the first of the following month.

If you miss your special enrollment period, you can sign up during the next general enrollment period, which takes place each year from Jan. 1 to March 31.

You don’t have to wait for your coverage at work to end to re-enroll in Medicare, though. You can sign up for Medicare at any time while you or your spouse are enrolled in an employer group plan. In fact, Medicare recommends signing up about a month before your workplace benefits end to avoid coverage gaps.

5. Watch out for late enrollment penalties

If you miss your Medicare special enrollment period, you could face stiff lifetime penalties. The longer you wait, the more you’ll have to pay for Medicare — and those added fees never go away.

There are two late enrollment penalties to be aware of:

• Part B: If you miss your eight-month SEP, you could face a 10 percent increase to your Part B premium for each 12-month period you could have enrolled but didn’t.
• Part D: If you go without creditable drug coverage for more than 63 days, you could face a penalty based on the number of months you delayed enrollment.

Let’s say you left your job and headed back to retirement in June 2022, but didn’t sign up for Part B until June 2024. That’s two full years, so you’ll pay a 20 percent penalty each month for as long as you have Medicare. In 2024, the Part B monthly premium is $174.70, so you’d pay an extra $34.94 per month (20 percent of $174.70) as a penalty, in addition to your $174.70 premium.

And remember, the standard Part B premium usually goes up slightly each year. So you’ll pay at least an extra $34.94 per month for as long as you have Part B.

Let’s say you dropped your Part D coverage. If you fail to enroll in Medicare Part D — or a Medicare Advantage plan that includes prescription drug coverage — after you retire, you could face another penalty.

Figuring out the Part D late enrollment penalty is a little more complicated than the Part B penalty. It’s calculated by multiplying 1 percent of the “national base beneficiary premium” ($34.70 in 2024) by the number of full months you went without Part D or creditable coverage. Medicare goes into more detail about the penalty on its website.

These penalties are easy enough to avoid. Be mindful of your special enrollment period when you leave your job, and don’t delay to re-enroll in Medicare once your employer coverage ends.

Other things to consider before heading back to work

Leaving retirement can impact other aspects of your financial life, too, from Social Security to 401(k)s. And there’s one more Medicare rule you should know, especially if you plan on earning a high salary from your encore career.

Impact on your Social Security benefits

If you’ve already started collecting Social Security retirement benefits, going back to work can impact how much you receive each month from Social Security.

How your benefits are impacted largely depends on your age:

1. Before full retirement age: If you’re younger than your full retirement age and you earn more than a certain amount each year, there’s a limit on how much you can earn while still receiving full Social Security retirement benefits. The Social Security Administration will withhold some of your benefits if you earn over this limit. However, this isn’t a permanent reduction. Once you reach your full retirement age, the SSA will recalculate your benefits to include the money they withheld while you were working.
2. At or after full retirement age: Once you reach your full retirement age (age 67 for those born in 1960 and later), there are no limits on how much you can earn and still receive your full Social Security benefits.

You can enroll in Medicare at age 65 even if you delay claiming Social Security benefits until your full retirement age or later. Here’s the best time to start collecting Social Security, according to experts.

Medicare surcharge on high income earners

If you return to work and earn over six figures, you could face what’s known as an income-related monthly adjustment amount, or an increase to your Medicare Part B and Part D premiums.

A single person earning more than $103,000 but less than or equal to $129,000 a year must pay an additional $69.90 a month for their Part B premium in 2024. Higher premiums kick in at incomes above $206,000 for married couples. A similar, smaller adjustment applies to Part D premiums. The Medicare website details the surcharge for different income thresholds.

You can contribute to a 401(k)

You can delay taking required minimum distributions from your 401(k) account if you’re still working. RMDs are a specific amount you must withdraw from your retirement accounts starting at age 72, or else face an IRS tax penalty.

This gives you the option of delaying taking money out of your 401(k) and continuing to defer growth into the future.

Another option is rolling over any old 401(k) or IRAs into your current job’s 401(k). By rolling funds over into a single plan, you can delay RMDs on that money too, giving it the opportunity to grow as you keep working. Be aware that not all plans allow rollovers, so be sure to check with your provider first.

Bottom line

When you head back to work in retirement, you can take your Medicare benefits with you. You aren’t required to switch to your job’s health insurance plan. Alternatively, you might find it beneficial to get coverage from both Medicare and your job.

But dropping Medicare Part B and prescription drug coverage completely can make things complicated. Speak with your company’s HR department or consider meeting with a financial advisor who specializes in retirement planning to weigh your options.