Medicare and Retiree Health Insurance: Part B, Penalties, and HSAs

Medicare and retiree health insurance work together as a two-layer system: once you stop working, Medicare becomes your primary coverage and the plan from your former employer or union pays second, covering some of what Medicare leaves behind. That order is set by federal law, not by the plan, and it has a hard consequence attached. You must enroll in Medicare Part B when you’re first eligible. The standard Part B premium in 2026 is $202.90 per month, and skipping enrollment because you have a retiree plan creates lifetime penalties and, in many cases, uncovered medical bills.¹

How the Two Plans Split the Bill

When you retire, your doctors and hospitals bill Medicare first. Medicare pays its share, and whatever remains goes to your retiree plan, which applies its own benefit structure to the balance. That typically means picking up deductibles, copayments, and coinsurance. If the retiree plan’s benefit for a given service is smaller than what Medicare already paid, the plan may owe nothing.²

The legal trigger is whether you have “current employment status.” A retiree plan, by definition, is tied to former employment, so it is automatically secondary to Medicare under the Medicare Secondary Payer rules.³ The arrangement is different if you’re still actively working at 65 for an employer with 20 or more employees; in that case the employer plan pays first and Medicare is secondary.⁴ The day you retire, that flips.

Why You Still Have to Enroll in Part B

This is where retirees get into trouble. Having a retiree health plan does not excuse you from Part B. Only coverage tied to current employment qualifies you for a Special Enrollment Period that lets you delay Part B without penalty. Retiree coverage does not count, and neither does COBRA.⁵

Your Initial Enrollment Period runs seven months: the three months before the month you turn 65, your birthday month, and the three months after. Miss it and you have to wait for the General Enrollment Period, January 1 through March 31, with coverage starting the month after you sign up.⁶

Many retiree plans state in writing that they won’t pay for care during any period you were eligible for Medicare but didn’t enroll.⁷ Some go further and calculate their payments as if Part B were already in place, which leaves you responsible for the roughly 80 percent Medicare would have covered. A single outpatient procedure in that situation can run into the thousands.

The Part B Late Enrollment Penalty

If you miss your Initial Enrollment Period without qualifying for a Special Enrollment Period, Medicare adds 10 percent to your Part B premium for each full 12-month period you could have been enrolled but weren’t. The surcharge is permanent.⁸

On the 2026 premium of $202.90, a two-year delay produces a 20 percent penalty of roughly $40.58, pushing your monthly cost to about $243.50. The dollar figure moves with each year’s standard premium, but the percentage never comes off.¹

Prescription Drug Coverage and the Creditable Coverage Notice

The same enroll-on-time logic applies to prescriptions. If your retiree plan includes drug coverage, it has to meet a federal standard called “creditable coverage” to shield you from a Part D late enrollment penalty. A plan is creditable when its actuarial value equals or beats standard Medicare Part D.⁹ Your plan administrator sends a notice each year, usually before October, confirming the status. Keep it.

If the notice says your coverage is not creditable and you go without a Part D plan anyway, you’ll owe a penalty of 1 percent of the national base beneficiary premium for every full month without coverage. The 2026 base is $38.99.¹⁰ Twenty-four months without creditable coverage adds roughly $9.36 to your Part D premium permanently.

One point of comparison matters when deciding whether to stay with retiree drug coverage: starting in 2025, Part D includes an annual out-of-pocket cap. For 2026, that cap is $2,100, after which covered prescriptions cost you nothing for the rest of the year.¹¹ If your retiree drug plan has a comparable or lower cap, there’s a real reason to keep it. If it doesn’t, Part D may be cheaper in a high-drug-cost year.

COBRA Is Not the Same as Keeping Your Job

COBRA continuation coverage looks like employer coverage, but Medicare treats it as former-employment coverage. It does not grant a Special Enrollment Period, and it does not pause the Part B clock.¹²

If you’re 65 or older when you leave a job, you have eight months to sign up for Part B without penalty, measured from the end of your employment or employer coverage, whichever comes first. Electing COBRA doesn’t reset or extend that window. And if you enroll in Medicare while on COBRA, the employer plan can legally terminate your COBRA coverage early.¹³ The cleanest path is to enroll in Part B during your Initial Enrollment Period and treat COBRA or retiree coverage as secondary from the start.

Stop HSA Contributions Before Medicare Starts

If you’ve been funding a Health Savings Account through a high-deductible health plan, enrolling in any part of Medicare drops your HSA contribution limit to zero. You can still use the existing balance tax-free for qualified medical expenses, but new contributions have to stop.¹⁴

Watch for the Part A backdating rule. When you apply for Part A, coverage can be retroactive up to six months, though never before the month you turned 65. HSA contributions made during those retroactive months become excess contributions, and the IRS charges a 6 percent excise tax on each excess dollar for every year it remains in the account.¹⁴ If you plan to delay Medicare, stop HSA contributions at least six months before your intended enrollment date.

IRMAA Surcharges for Higher-Income Retirees

Higher-income retirees pay more for both Part B and Part D through the Income-Related Monthly Adjustment Amount. Social Security looks at your modified adjusted gross income from two years earlier, so your 2024 tax return drives your 2026 premiums.¹⁵ New retirees often get caught here, because their last working year was higher-earning than retirement will be.

For 2026, modified adjusted gross income of $109,000 or less filing individually (or $218,000 jointly) means no surcharge. Above those thresholds, the Part B adjustment runs from $81.20 to $487.00 per month and the Part D adjustment from $14.50 to $91.00, depending on the bracket. At the top tier (individual income of $500,000 or more), the Part B premium alone reaches $689.90.¹

If your income has dropped since the tax year Social Security is using, you can appeal. Qualifying life-changing events include retirement or work reduction, death of a spouse, divorce, and loss of pension income. File Form SSA-44 and ask Social Security to use your more recent income instead.¹⁶ For someone who retired last year and watched their income fall, the appeal can save hundreds of dollars a month.

What Happens to a Spouse or Dependent

When the primary retiree hits 65 and moves to Medicare, family coverage often splits. A younger spouse typically stays on the employer’s retiree plan as regular commercial insurance, while the retiree’s own benefits wrap around Medicare. Some plans end dependent coverage entirely at that point, so read the Summary Plan Description carefully and know the exact cutoff dates.

When the spouse eventually reaches 65, many retiree plans require them to enroll in Medicare right away to keep any secondary benefits. Skipping enrollment can end their access to the plan’s provider network. Union plans sometimes continue survivor benefits for a spouse after the retiree dies, but those almost always require the surviving spouse to maintain their own Medicare enrollment.

If a younger spouse loses retiree coverage because the primary retiree enrolled in Medicare, that event qualifies the spouse and dependents for up to 36 months of COBRA.¹³ That can be a critical bridge for a spouse years away from Medicare eligibility, though COBRA premiums tend to be steep because the employer usually stops subsidizing them.

Employer-Sponsored Medicare Advantage Plans

Some employers deliver retiree coverage through a group Medicare Advantage plan instead of a traditional wrap-around policy. In that setup, your Medicare benefits and your retiree benefits come through a single plan. If the employer requires enrollment in their Medicare Advantage plan to keep retiree coverage, turning it down usually means forfeiting the benefit for good.

You always have the right to choose Original Medicare or a different Advantage plan on your own, but employer plans are typically one-way doors. Most employers won’t let you come back. Before deciding, compare the employer plan’s provider network, drug formulary, and out-of-pocket maximum against what you could buy independently. For retirees with significant medical needs, the employer-sponsored plan is often the better value because the employer still subsidizes part of the cost.

Making the Claims Coordinate

Once you have both Medicare and a retiree plan, your providers need to bill in the right order. Give your Medicare Number to your former employer’s benefits department or plan administrator so they can set up a coordination-of-benefits record with the Benefits Coordination & Recovery Center, the federal entity that tracks which payer owes what.¹⁷

Ask whether automatic crossover is in place. Crossover lets Medicare send claim data straight to your retiree plan after processing a bill, so you don’t have to submit paperwork manually to get the secondary payment. Check your Medicare Summary Notice after a claim to confirm it was forwarded to the secondary carrier.¹⁸

If claims start getting denied or providers ask for payment upfront, check the coordination-of-benefits record first. An inaccurate record can make it look like another insurer is primary when Medicare should be, or the other way around. Errors can be corrected through the Benefits Coordination & Recovery Center. Keeping that record clean is the difference between claims flowing automatically and spending hours on the phone untangling billing mistakes.

1
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
2
Centers for Medicare & Medicaid Services. Medicare Secondary Payer Manual – Chapter 3
3
Centers for Medicare & Medicaid Services. Medicare Secondary Payer Manual – Chapter 1
4
Centers for Medicare & Medicaid Services. Medicare Secondary Payer Working Aged Introduction
5
Medicare.gov. When Can I Sign Up for Medicare
6
Social Security Administration. When to Sign Up for Medicare
7
Medicare.gov. Retiree Insurance and Medicare
8
Medicare.gov. Avoid Late Enrollment Penalties
9
eCFR. 42 CFR 423.56 – Submitting Creditable Coverage Disclosure Information
10
Centers for Medicare & Medicaid Services. 2026 Medicare Part D Bid Information and Part D Premium Stabilization Demonstration Parameters
11
Centers for Medicare & Medicaid Services. Draft CY 2026 Part D Redesign Program Instructions Fact Sheet
12
Medicare.gov. COBRA Coverage
13
U.S. Department of Labor. FAQs on COBRA Continuation Health Coverage for Workers
14
Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
15
Medicare.gov. 2026 Medicare Costs
16
Social Security Administration. Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event
17
Centers for Medicare & Medicaid Services. Coordination of Benefits and Recovery Overview
18
Medicare.gov. Medicare Coordination of Benefits – Getting Started