A new Medicare rule could wind up forcing seniors to switch health insurance plans or face a significant penalty.

Many seniors who continue to work past 65 are still on their employer's health plan instead of the government-run Medicare.

However, a new update to Medicare coverage under the Inflation Reduction Act means seniors who delay joining Medicare could face additional hurdles when it comes to drug coverage.

Who Does It Affect?

Currently, seniors are able to avoid late penalties for Medicare Part D as long as their company's plan pays on average just as much as the traditional Medicare prescription drug plan.

Starting January 1, though, employer plans may no longer be accepted as a way out of the late penalties because they will no longer pay as much as the new and improved Part D coverage. January 1 is when out-of-pocket maximums will be set at $2,000, and some of the previously accepted creditable employer plans will no longer meet the qualifying threshold.

"The primary concern is that most employer group plans have combined health and prescription max out-of-pocket benefits which are generally higher than $2,000," Chris Fong, a Medicare specialist and the CEO of Smile Insurance Group, told Newsweek. "Thus, it would make the employer plan with max out of pockets higher than $2,000 unqualified as credible coverage and subject the Medicare eligible employee to the late enrollment penalty."

What It Means

Essentially, all the private company-offered plans that do not cap policyholders' out-of-pocket costs at $2,000 or less would no longer be eligible for seniors. That means seniors who stay on those plans could face the late enrollment penalty.

The late enrollment penalty goes into effect every month you are enrolled in Medicare if, after the initial enrollment period, you had 63 or more days without Medicare drug coverage or an employer-provided creditable drug coverage plan.

The exact penalty is calculated by multiplying 1 percent of the national base beneficiary premium, which was $34.70 for 2024, times the number of how many months you went without Part D or otherwise creditable coverage. The monthly penalty is then permanently put on your monthly Part D premium.

"The penalty is per month, is a lifetime penalty, and will only occur when they enroll into a Medicare plan covering prescriptions," Fong said. "I have seen people with penalties upwards of about 135 percent which amounts to an additional $46.85 per month when they enroll into a plan covering prescriptions."

What Seniors Need To Do

While the new Inflation Reduction Act stipulates that insurers must notify their Medicare-eligible customers if their prescription drug coverage is considered creditable or not, seniors should act now to avoid any confusion around the late penalty.

Experts recommend calling ahead of time to make sure your Part D insurance replacement remains creditable.

"With many seniors continuing to work well past the traditional age of retirement, the rule change is one those who fall into that group need to pay attention to carefully," Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, told Newsweek. "If you continue to work, and your employer provides you with health insurance, that plan must be up to the same level of financial support in some categories Medicare provides."

Beene said seniors are already facing high costs and so should be "mindful" of the changes to avoid any penalties.

"With healthcare costs already at near historic highs, you don't want to find yourself missing out on significant savings you should get with a healthcare plan," Beene said.