Medicare Advantage vs. Medigap, a Part D Penalty, and an HSA Mistake
Alice, 67, retired last year and is enrolled in Medicare Parts A and B. She has $200,000 of pension and IRA income and, because of a rental property sale, her 2023 modified AGI was $210,000; her 2024 income dropped to $75,000. She has rheumatoid arthritis requiring a $4,000-a-month biologic and wants to keep seeing a specialist at an academic medical center. Option 1 is a $0-premium Medicare Advantage HMO with a $1,900 in-network maximum but no out-of-network coverage and step therapy for the drug. Option 2 is Medigap Plan G at $150 a month plus a standalone Part D plan. She has never had creditable drug coverage and went 14 months between losing her employer plan and applying for Part D. She also kept contributing $300 a month to her HSA after her Part A coverage began.
1. Calculate Alice's Part D late enrollment penalty and explain whether it is permanent.
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The formula. 1% of the national base beneficiary premium, multiplied by the number of full-and-partial months without creditable prescription drug coverage, added to her Part D premium. (Using the 2025 base beneficiary premium of $36.78.)
Calculation.
- Months without creditable coverage: 14
- Penalty percentage: 14 × 1% = 14%
- 14% × $36.78 = $5.15, rounded to the nearest $0.10 = $5.20 per month
Is it permanent? Yes. The penalty is added to her Part D premium for as long as she is enrolled in a Part D plan; it does not expire and cannot be removed by switching plans. It is recalculated each year as the base beneficiary premium changes, so the dollar amount can rise even though the 14% factor is fixed.
Why she owes it. Her employer plan was not creditable (or ended without a creditable replacement), so the 14-month gap counts. If she had maintained creditable coverage - a qualifying employer plan, VA, TRICARE, or an HSA-qualified plan that is creditable - the gap would be excused.
No Part B penalty. She enrolled in Part B when first eligible, so she owes no Part B late enrollment penalty. A Part B penalty would have been 10% for each 12-month delay, also permanent.
2. Compare the two coverage options for her specific drug and specialist needs, and address her Part B premium.
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Medigap Plan G + standalone Part D.
- Plan G pays the Part B coinsurance and the Part B deductible ($257 in 2025), giving her any provider nationwide who accepts Medicare assignment - no network, no prior authorization, no specialist referral.
- Her drug spend: under the 2025 Part D redesign, plan cost sharing plus the manufacturer discount accrue toward a $2,000 annual out-of-pocket cap, so a $48,000-a-year biologic costs her at most about $2,000, even on a specialty tier.
- Cost: $1,800 Medigap + roughly $2,000 drug cap + $2,220 Part B premium = about $6,000 a year plus Part D premium and any IRMAA.
Medicare Advantage HMO.
- $0 premium and a $1,900 in-network maximum is attractive, and drug cost sharing in an MA-PD counts toward the Part D cap.
- But the academic center specialist may be out of network - non-emergency out-of-network care is simply not covered - and step therapy requires failing cheaper drugs before the biologic is approved, which is a clinical risk with active rheumatoid arthritis.
Judgment. Given an expensive specialty drug, an established specialist relationship, and the ability to pay, Plan G plus Part D buys predictability and access that the HMO cannot match. The HMO is the choice only if the specialist is in network and she accepts step therapy.
IRMAA. Her 2025 Part B and D premiums are based on her 2023 return ($210,000), so an income-related surcharge applies. Retirement is a life-changing event, so she can file form SSA-44 with her 2024 income ($75,000) to have the surcharge reduced or eliminated.
3. What is the problem with her HSA contributions after Medicare enrollment, and what can she still do with the account?
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The violation. HSA eligibility requires, among other things, that the individual not be entitled to Medicare. Enrollment in any part of Medicare - including Part A alone, even premium-free Part A - ends eligibility. Her $300-a-month contributions after her Part A coverage began are excess contributions.
Correction. She should stop contributing immediately and either:
- Withdraw the excess plus its earnings before her tax filing deadline (including extensions) - the earnings are taxable but no excise tax applies; or
- Leave it in and pay the 6% excise tax on the excess for each year it remains, which repeats annually until corrected.
Timing trap. If she had delayed Part A enrollment, the entitlement date can be retroactive up to six months, which would push the end of her eligibility earlier than she assumes and enlarge the excess amount.
What she keeps. The existing HSA balance remains hers and grows tax-free. She may use it for qualified medical expenses, including Medicare Part B and Part D premiums and Medicare Advantage premiums. She may not use it for Medigap premiums. After age 65, non-medical withdrawals are taxable but escape the 20% additional tax.