James Sullivan
James Sullivan

The Medicare and COBRA Trap

How CPAs can best advise their unsuspecting elderly clients so that they are not left without crucial health insurance coverage.

September 14, 2009
by James Sullivan, CPA, PFS

With more clients continuing to work past age 65 (either due to personal preference or economic circumstances) it is important to understand how Medicare coverage coordinates with employer provided health coverage and — when circumstances warrant Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage. In this article we take a look at the problems that can arise when COBRA is elected after age 65. Though a Medicare-eligible individual can have both COBRA and Medicare coverage, therein lies a trap. This trap can catch unsuspecting seniors leaving them without crucial health insurance coverage for an extended period of time. Here is how it happens.

IEP, SEP and GEP: The Alphabet Soup of Medicare Enrollment

Medicare eligibility remains age 65 even though the full retirement age under Social Security is over age 65 for those individuals born after 1937. For example, if you were born in the years 1943 through 1954 your full retirement age is now 66 (although actuarially reduced benefits are still available at age 62). For those baby boomers born in 1955 or later, the full retirement age gradually increases to age 67. This difference has caused some confusion. Anyone born after 1937 and waiting to sign up for Social Security until their full retirement age (or later in order to earn Delayed Retirement Credits), must remember to make an election to enroll in Medicare during their Initial Enrollment Period (IEP). The IEP is a seven month period beginning three months before and ending three months after the month in which they turn age 65. If the IEP is missed there is no “redo”. The Medicare eligible individual may, however, be able to enroll during an eight month Special Enrollment Period (the SEP generally applies to individuals who had, but lost, group health insurance coverage but the lapse of the COBRA continuation period does not count as the loss of group health insurance for this purpose) or during the General Enrollment Period (the GEP lasts from January 1 through March 31 each year with coverage beginning on July 1).

It is the loss of the IEP and the SEP and reliance on the GEP that can result in an extended period in which coverage under Medicare Part B is not available. This is best described as a trap for unsuspecting older clients who elect COBRA health insurance continuation coverage after age 65. Assuming their IEP has passed, they are not eligible for the SEP when their COBRA continuation period ends and must rely on the GEP.

The Trap Is Set and Sprung

Recall that, in general, Medicare Part B covers doctor bills while Part A covers hospital bills. There is no premium for coverage under Part A for the vast majority of Medicare participants because the enrollment rules are more liberal. Thus there is no economic incentive for electing out of Part A until it is needed. Part B is different. The monthly premium begins at $96.40 and its means are adjusted the participant pays more as their income increases. As a consequence, enrollment in Part B is more restrictive in order to avoid participants opting out of coverage. There are enrollment period restrictions and a surcharge for late enrollment unless an exception applies.

Many individuals who continue to work after age 65 may elect not to enroll in Medicare due to coverage under an employer’s health plan. If they become eligible for COBRA they may elect continuation coverage without electing to participate in Part B (whether or not this makes financial sense is a separate issue). Now, the trap is set.

Here is an example of how the Medicare/COBRA trap may be sprung:

  • Barbara, age 67, elects COBRA coverage beginning February 1, 2008. She does not plan on collecting Social Security until age 70. She enrolls in Medicare Part A but decides not to elect participation in Part B. Barbara was born in May 1940; her IEP ended on August 31, 2005. She will have to rely on either the SEP or the GEP to enroll in Part B when COBRA ends.
  • The lapse of the COBRA continuation on July 31, 2009 does not count for purposes of triggering the SEP (Medicare & You 2009, page 24).
  • That leaves only the GEP. While she may enroll in Part B during the period January 1 through March 31, 2010, coverage does not begin until July 1, 2010. Her COBRA coverage ended July 31, 2009 leaving her without coverage under Medicare Part B from August 1, 2009 until June 30, 2010.


There are insurance companies that offer temporary “Medicare bridge” policies for those who find themselves in such circumstances. The policies, however, are limited (for example, they do not cover preexisting conditions and usually impose a limit on total benefits paid under the policy). It is much better to assist your client with avoiding the Medicare/COBRA trap altogether by helping them understand the Medicare enrollment rules if they plan on working beyond age 65.

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James Sullivan, CPA, PFS, MAS, is Investment Counselor at Core Capital Solutions LLC and has almost 25 years of experience in individual tax, investing and personal financial planning. Before joining Core Capital Solutions LLC as an Investment Counselor, he spent over 20 years at Arthur Andersen LLP specializing in financial planning, investments and individual tax planning. His primary focus today is assisting his clients enhance their overall retirement through proper investing, goal setting and tax planning.