One of the biggest questions I hear from clients approaching retirement is about Medicare. It’s complex under the best of circumstances, but the rules get especially tricky if you plan to keep working past age 65. Many people assume Medicare starts automatically at 65, or that they can simply stay on their employer plan and sort it out later. In reality, the decision isn’t that simple. The wrong choice can lead to higher costs, gaps in coverage, or even penalties that last a lifetime.

That’s why Medicare Education Week (September 15–21) is such a timely reminder. If you’re still working as you approach 65, this is the perfect opportunity to get clarity on your options.

Here’s a straightforward overview to help you understand how Medicare works alongside employer coverage and how to make the choice that’s right for you.

Understanding Medicare Basics

Medicare is the federal health insurance program that provides coverage for most Americans once they reach age 65. It’s the cornerstone of healthcare for older adults in the United States. In fact, approximately 68.9 million people are enrolled as of May 2025, according to the Centers for Medicare & Medicaid Services.

Rather than being a single, one-size-fits-all plan, Medicare is divided into several parts, each designed to cover different aspects of your healthcare needs:

• Part A: Hospital Insurance. This covers inpatient hospital stays, skilled nursing facilities, hospice care, and some home health care. Most people don’t pay a premium for Part A if they’ve worked and paid Medicare taxes for at least 10 years.
• Part B: Medical Insurance. This covers doctor visits, outpatient services, preventive care, and durable medical equipment. Part B does have a monthly premium, which is adjusted based on your income.
• Part D: Prescription Drug Coverage. Offered through private insurers, Part D helps cover the cost of medications. Plans vary by cost and covered drug lists.
• Medicare Advantage (Part C). An alternative to Original Medicare, these plans are offered by private companies and combine Parts A and B (and often Part D), sometimes with added benefits like dental or vision.

Enrollment Windows

You first become eligible for Medicare at 65. Your Initial Enrollment Period is a 7-month window that starts three months before your birthday month and ends three months after.

Missing your enrollment window without qualifying for a Special Enrollment Period (SEP) can result in permanent penalties:

Part B Penalty

• 10% added to your premium for each year you delayed enrollment (unless you qualify for an SEP, such as having employer coverage).
• Higher income may also mean higher premiums.

Part D Penalty

• 1% of the national base premium for every month you went without creditable drug coverage (about 12% per year).
• Applies if you skip Part D when first eligible or go 63+ days without creditable coverage.
• Avoidable if you have creditable drug coverage or qualify for Extra Help.

The good news is that if you’re covered by an employer-sponsored plan at 65, you may qualify for a Special Enrollment Period that lets you delay Part B and Part D without penalty. However, the rules depend on your employer’s size and the type of coverage offered.

How Employer Coverage Works at 65

The relationship between Medicare and your employer’s plan depends largely on how many employees your company has:

• Large Employers (20+ employees). If you’re covered under a group health plan from a company with at least 20 employees, your employer plan is considered primary. This means Medicare can be secondary, covering costs your employer plan doesn’t. In many cases, people in this situation delay enrolling in Part B to avoid paying the premium unnecessarily.
• Small Employers (<20 employees). If your employer has fewer than 20 employees, Medicare becomes the primary payer once you’re eligible. That means you must enroll in Medicare at 65, or you could face gaps in coverage because your employer’s plan will only pay after Medicare pays.

Of course, not everyone’s situation fits neatly into the standard scenarios. Here are a couple other circumstances you might run into and what they could mean for your Medicare decisions:

• COBRA and Retiree Coverage. These do not count as “active employer coverage” for Medicare purposes. If you’re 65 and relying on COBRA or a retiree plan, you must still enroll in Medicare to avoid penalties and ensure full coverage.
• Union Plans. Some union-sponsored retiree health plans require you to enroll in Medicare as soon as you’re eligible. It’s important to always check your plan rules to avoid missteps.

Comparing Employer Coverage and Medicare

One of the biggest questions is whether you should stick with your employer plan, switch to Medicare, or use both. Here’s how to think through the options:

Costs

• Employer plans often subsidize premiums, making them less expensive for active employees than Medicare’s Part B and Part D premiums.
• Medicare doesn’t have an out-of-pocket maximum unless you enroll in a Medicare Advantage plan. Employer plans usually cap your annual out-of-pocket spending.
• For higher-income earners, Medicare premiums can be significantly more expensive due to Income-Related Monthly Adjustment Amounts (IRMAA).

Coverage

• Provider networks. Employer plans may be limited to in-network providers, while Original Medicare generally allows you to see any doctor nationwide who accepts Medicare.
• Prescription drugs. Employer plans vary in coverage. To delay enrolling in Medicare Part D, your employer plan must provide “creditable coverage,” meaning it’s at least as good as Medicare’s standard drug benefit. Your HR department can provide documentation.

Extra Benefits

Employer plans often include vision, dental, mental health, or wellness perks that Medicare doesn’t cover. You’ll want to account for these differences if you’re considering making the switch.

Factors to Consider Before Making a Decision

There’s no one-size-fits-all answer when it comes to choosing between Medicare and employer coverage. The right path depends on a mix of your personal circumstances, financial picture, and healthcare needs.

Here are some of the most important factors to consider:

• Cost of your employer plan. Compare your payroll deductions and out-of-pocket expenses to what you’d pay under Medicare.
• Your health needs. If you take multiple prescriptions or see specialists frequently, compare how each plan handles those costs.
• Coverage for your spouse. Employer plans often cover spouses, while Medicare does not. If your spouse depends on your employer plan, that could tip the scales.
• Retirement timeline. If you plan to retire in the next year or two, it may make sense to enroll in Medicare sooner rather than later.
• Health Savings Accounts (HSAs). Keep in mind that once you enroll in any part of Medicare, you can no longer contribute to an HSA, though you can continue using the funds.

Common Scenarios and Best Practices

Because Medicare and employer coverage interact differently depending on your circumstances, it helps to look at a few typical situations. These examples highlight how the rules play out in real life and can guide you toward the option that makes the most sense.

Scenario 1: Large Employer Coverage + Healthy Employee

If you work for a large company (20+ employees) and your health is good, your employer plan remains your primary coverage. In this case, many people enroll in Part A only (since it’s premium-free for most) and delay Part B to avoid paying the monthly premium until they retire.

Scenario 2: Small Employer Coverage

With a small employer (fewer than 20 employees), Medicare becomes your primary coverage at 65. Your employer plan only pays after Medicare, so to avoid gaps and penalties, you should sign up for both Part A and Part B when you’re first eligible.

Scenario 3: High Health Care Needs

If you have ongoing medical conditions, it’s important to run the numbers. Medicare, paired with a Medigap (supplemental) policy, may provide broader coverage and lower overall costs compared to your employer plan, even if you’re still working.

Scenario 4: Spouse Dependent on Employer Coverage

If your spouse is younger and relies on your employer plan, keeping that coverage may be the better option, even if Medicare looks cheaper for you personally. This ensures your spouse’s health insurance remains in place until they qualify for Medicare.

Scenario 5: Contributing to a Health Savings Account (HSA)

If you’re still contributing to an HSA, timing becomes especially important. Once you enroll in any part of Medicare (even just Part A), you can no longer make HSA contributions without facing tax penalties. In this case, you may want to delay Medicare enrollment entirely if your employer coverage is sufficient and carefully plan when to stop contributions before you sign up.

Steps to Take If You’re Approaching 65 and Still Working

A little planning now can save you from stress and potentially costly mistakes later. Here’s a practical checklist to guide you:

• Start with HR or your benefits department. Ask how your company’s health coverage coordinates with Medicare at 65 and whether your prescription drug coverage is considered “creditable.”
• Get it in writing. Request a formal statement confirming creditable drug coverage for Part D so you’ll have proof if Medicare ever asks.
• Do a side-by-side cost comparison. Use Medicare’s Plan Finder tool and review your employer’s Summary of Benefits and Coverage to see which option gives you the best value.
• Factor in your spouse or dependents. If they rely on your employer coverage, that could influence whether you stay on the plan a bit longer.
• Check your HSA contributions. Stop adding money at least six months before you apply for Medicare to avoid tax penalties.
• Seek expert guidance. A financial planner or Medicare specialist can help you weigh your options and build a plan that supports both your health needs and your long-term financial goals.

Medicare, Employer Coverage, or Both?

Medicare can feel complicated on its own, and layering employer coverage on top often adds another level of confusion. The good news is that with the right information and a little planning, you can avoid penalties, keep your costs under control, and choose the path that best supports your health and financial well-being.

And remember, you don’t have to sort through all of this on your own. At Align Financial, we’ll help you sort through your options and create a plan that ties your healthcare decisions to your broader financial goals. If you’re ready to explore your next step, reach out to see how we can support you and whether we’re the right fit for your needs.