How to avoid the Medicare Part D penalty

To qualify for any form of Medicare, you must be at least 65 years old or, if you are younger, you must be in receipt of Social Security Disability benefits for two years, have End-Stage Renal Disease (permanent kidney failure requiring dialysis or transplant), or Lou Gehrig’s disease (ALS). Due to these eligibility requirements of age or health condition, people who qualify for Medicare are likely to take at least one prescription drug regularly. In fact, 85% of people aged 60 or older take prescription medications.

Medicare Part D is Medicare’s standard prescription drug coverage program. However, Part D is optional. Although you can enroll in Part D during the Fall Open Enrollment Period or if you qualify for a Special Enrollment Period, Medicare consumers who don’t sign up for Part D coverage during their Initial Enrollment Period could face a penalty that will add an additional fee to their Medicare premium each month.

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What is the Medicare Part D penalty?

The Medicare Part D late enrollment penalty is a potentially permanent addition to your monthly Part D premium, according to the Centers for Medicare and Medicaid Services (CMS). It applies if you do not enroll in Medicare Part D when you’re first eligible for Medicare and you don’t have another creditable prescription drug coverage plan prior to Medicare enrollment. People who qualify for the Extra Help low-income Part D subsidy or people who can prove they received inadequate information about whether their existing drug plan was creditable may also be exempt from paying the Part D late enrollment penalty.

What is creditable prescription drug coverage?

CMS defines creditable prescription drug coverage as a prescription drug plan that is expected to pay as much or more than the standard Medicare Part D plan. Many types of health plans are often considered creditable coverage, including employer-sponsored health insurance, VA coverage, and Tricare coverage for military families and retirees.

When is the Initial Enrollment Period?

The Initial Enrollment Period is three months before, the month of, and three months after turning 65 years old. You must sign up for Part D during this time or have creditable prescription drug coverage to avoid the Part D penalty. The Initial Enrollment Period varies for younger people with ALS or ESRD who qualify for Medicare. If you have a Part D late enrollment penalty and you have Medicare for reasons other than age, the penalty is removed once you turn 65 years old.

After initial enrollment, you can only enroll in Part D during an annual Open Enrollment Period (Oct. 15 through Dec. 7) or a Special Enrollment Period, which allows Medicare enrollment during certain special circumstances. However, in each of these cases, a Part D penalty will apply unless you’ve had creditable drug coverage for as long as you’ve been eligible for Medicare or unless you qualify for Extra Help.

This penalty was first introduced on Jan. 1, 2006 to encourage Americans to sign up for Medicare prescription drug coverage. As mentioned above, the penalty is a potentially permanent addition to your monthly premium and will continue for as long as you have Medicare coverage unless you qualify for an exception mentioned above.

How much does it cost?

The Part D penalty is calculated by multiplying 1% of the national base beneficiary premium times the number of full, uncovered months. Uncovered means that you didn’t have Part D or creditable coverage.

Medicare adds a percentage to your monthly premium based on the number of months you’ve been without a prescription drug benefit. A potentially permanent 1% increase is applied to premiums for each month without Part D after the Initial Enrollment Period.

For each month without coverage, you will owe 1% of the base beneficiary premium amount in addition to the base monthly premium.

Part D penalty example

Let’s say you became eligible for Medicare coverage on Jan. 1, 2017 but did not sign up for Part D prescription drug coverage at that time and you did not have creditable prescription drug coverage or qualify for Extra Help.

However, during the 2021 open enrollment, you enrolled in a Part D plan beginning Jan. 1 of this year.

Your monthly penalty amount is calculated using the base beneficiary premium—let’s say it’s $34.70. You went 60 months with Medicare coverage without a prescription drug plan. You can calculate your monthly penalty using this formula: 

0.60 (60% penalty for 60 uncovered months) 

x $34.70 (2024 national base beneficiary premium)

= $20.82 penalty each month (+ the usual Part D premium)

However, Medicare rounds the penalty to the nearest $0.10, which would make the monthly Part D penalty $20.80 extra per month (or $249.60 extra annually). You’d be responsible for paying this fee along with your usual monthly premium.

RELATED: How much does Medicare Part D cost in 2024?

Medicare Part D penalty exceptions

Fortunately, there are a few ways to avoid the Part D penalty:

1. Enroll in Part D when you’re first eligible.

This is the easiest way to avoid the Part D enrollment penalty. You can enroll in Medicare Part D within 63 days of becoming eligible without paying the cost of the late enrollment penalty. People with Original Medicare (Medicare Part A and Medicare Part B) can sign up through a stand-alone Part D prescription drug plan. Alternatively, you enroll in a Medicare Advantage plan (also called Part C) that includes drug coverage.

“Purchase Part D when you’re eligible for Medicare unless you have creditable drug coverage elsewhere,” says Melanie Musson, an insurance and finance writer for insuranceproviders.com. “It’s not worth waiting and getting slapped with a [potentially] lifelong penalty. If you don’t take any medications, consider an inexpensive, low-coverage option, but don’t skip it.”

2. Enroll in a Part D plan as soon as you’re no longer eligible for creditable prescription drug coverage.

You will not receive a penalty if you did not enroll in Part D during initial enrollment because you had other creditable drug coverage. However, you’ll want to enroll in Part D within 63 days of losing your other creditable drug coverage. In this case, Medicare will treat you as being covered for the length of time you were covered under your previous plan.

3. Keep a thorough history of creditable coverage

You will not be subject to the Part D penalty if you were covered under a creditable prescription drug plan during your months without Part D coverage. Keeping an accurate and up-to-date record of your drug coverage during the time you receive Medicare will be important to avoid the penalty. Be sure to note when your creditable coverage began and ended so you can accurately share your history with Medicare if requested. Save any documents your insurance company gives you in case you need them later.

4. Appeal the late enrollment penalty

In some cases, you may be able to appeal Medicare’s decision regarding the Part D late enrollment penalty. If at any time Medicare notices that you do not have creditable prescription drug coverage, they will notify you in writing.

To file an appeal, you must fill out and return a request for reconsideration. The process takes around 90 days to complete—after which you’ll be notified of Medicare’s decision. You can also try to demonstrate that you received bad information about creditable coverage.

5. Enroll in the Extra Help Medicare program

As you consider enrolling in a Part D plan, keep in mind that some Medicare beneficiaries may qualify for Extra Help to pay for prescription drugs. Extra Help is a program designed to help cover the costs of Part D-related costs, including premiums, deductibles, and prescription drug expenses. If you’re eligible, you won’t face the Part D penalty.

Eligibility is based on your income and applicable resources, so review the program’s guidelines carefully before applying. Extra Help annual income limits and resource limits are different for individuals and married couples, according to the U.S. Social Security Administration. Some Medicare beneficiaries may qualify for Extra Help automatically (Medicare beneficiaries who also receive SSI, Medicaid, or a Medicare Savings Program). It may be possible to qualify for Extra Help with higher assets, depending on your state of residence and whether you qualify for a Medicare Savings Program (Some states, like New York, do not have an MSP asset test). 

Note: A Medicare supplement policy (Medigap) will not help you avoid the Part D penalty. Medigaps are only applicable to Medicare Part A- and Part B-related healthcare costs.

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