COBRA Reimbursement Pitfalls at Retirement

COBRA Reimbursement Pitfalls At Retirement

by: Eric Steinlage

The last few years, I have seen an increase with large employers offering top employees a COBRA severance package when they decide to finally retire. This is often done to entice the employee to “stick around” for another year to train the employee taking over the retiree’s responsibilities. The employer will generally pay for up to 18 months of COBRA with little to no cost for the retiree.

This situation can cause headache for the retiree when they come off the COBRA plan and try to find their own coverage. Most people are eligible for Medicare Part A and Part B at age 65 but, due to people working later, it is not uncommon for people to postpone Part B at age 65. This is due to their group plan offering better and more affordable coverage or “creditable coverage” to Medicare. This is a valid reason for someone to postpone Medicare Part B and not have to pay the Medicare Part B late enrollment penalties when they leave the group plan in the future. Medicare uses the term “ active employee” to determine if the employer plan is considered “creditable coverage.”

The problem arises when a retiree is offered a COBRA reimbursement to ”stick around” is that COBRA is not considered “creditable coverage” once the employee-employer relationship is terminated. Medicare dictates that once “active employment” is terminated, the retiree has an eight month window to sign up for Medicare Part B without delay or penalty.

If someone goes past the eight month window, they are now subject to Part B late enrollment penalties and cannot sign up for Part B until the Medicare General Enrollment period or GEP each year. This enrollment window runs from Jan 1st till March 31st each year and will only allow you a July 1st effective date for Part B.

The advice I give my clients in the above situation is to enroll in Medicare Part B once active employment ends at retirement and pick up a Medicare Supplement or Medicare Advantage plan at that time. I have seen a number of my clients have success negotiating a lump sum payment equal to what the COBRA reimbursement would have been had they kept COBRA. This amount will generally pay for multiple years of Medicare premiums and get around the pitfalls with signing up for Medicare Part B when you need it.

Feel free to call us with any questions.