It seems a month doesn’t go by without hearing from someone who made a Medicare enrollment mistake. In the past, I have addressed the big problems that COBRA continuous coverage can create for those who work past age 65. Now, it’s time to deal with a COBRA cousin that is just as dangerous – a severance package.
A severance package is a bundle of benefits offered to employees who lose their jobs, due to termination, lay off or buy out. It often includes financial compensation, and continuation of some benefits, such as health insurance, for a certain period of time. The big question for those who accept this package: Must I enroll in Medicare? The answer is fairly straight forward but often difficult to understand or implement.
The first opportunity to enroll in Medicare for most people is at age 65, during the Initial Enrollment Period. However, those who are still working and have an employer group health plan can delay enrollment if they qualify for a Part B Special Enrollment Period (SEP). This is an eight-month window for enrolling without penalty or delay. This SEP has two important criteria that create confusion when a severance package appears.
1. The group health plan is based on the current employment of the individual or spouse.
The italicized words are the ones that tend to create confusion. Current employment means working as an employee, not just working and collecting a paycheck.
I spoke to a 69-year-old man whose status was changing. He was going to continue doing the same work and have the same health coverage but, next month, he would become an independent contractor. HR and insurance representatives said it was legal for him to have the coverage. And because he would still be working, he believed he does not need Medicare now.
The legality of the coverage is not the issue; it is his employment status. An independent contractor is considered self-employed; he does not have an employer. So, the health plan is not based on his current employment (it is just a benefit) and he needs to enroll in Medicare now.
A recent client had a buyout of his company shares in November 2024. His severance package included 12 months of insurance and a paycheck every two weeks – same deal he had as a shareholder of the company. His financial advisor recommended he start checking out coverage for December 2025. He didn’t feel any urgency but his advisor said the process takes some time. He made an appointment for July 25.
He now realizes how lucky he was. His employment ended November 30 and his Part B SEP began the next day. His Part B enrollment deadline was July 31. He had only six days to submit his application. If he had waited until his coverage ended in November, he would have missed his window and could not enroll until the General Enrollment Period in January. He would have had at least a two-month gap in coverage.
One Tip to Avoid Trouble
Want to prevent problems when continuing with a severance package after age 65? Sign up for Part B so it takes effect as soon as the employment ends – no matter how long you continue to work or when the severance package benefits end.
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