Retirees comparing annuity and dividend income options

Annuity Income vs. Dividends: Which Pays Better in Retirement?

Annuity income is a contractual payment from an insurance company. Dividend income is a payment a company’s board can raise, hold or cut at any time. That one difference drives almost everything else: how predictable the check is, how much growth you keep, how easy it is to get your money back and how the IRS taxes it. Neither is better in every case. The right answer depends on which bills the income has to cover.

Paulbinsurance
Understand Your Retirement Options
Paulbinsurance’s independent agents help Medicare consumers understand options, including annuities, with an education-first approach to informed decisions.

TL;DR

  • An annuity is a contract in which an insurer agrees to make periodic payments in exchange for a lump sum or a series of payments. Dividends carry no such promise.
  • Annuities trade growth and liquidity for certainty. Dividend stocks keep growth and liquidity but carry market risk.
  • Taxes differ: annuity payments are generally taxed as ordinary income, while qualified dividends often get capital gains rates.
  • Many retirees pair the two: an annuity for essential bills, dividend stocks for extras and legacy.
  • Check the insurer’s financial strength, fees and surrender terms before you commit, because many annuity purchases cannot be undone.

Table of Contents

What each one actually is

An annuity is a contract between you and an insurance company. You pay a lump sum or a series of payments, and the insurer agrees to send you income, either right away or at a future date. The income can last for a set term or for life.

A dividend is a share of profit that a company chooses to distribute to its stockholders. You own a piece of the business, and the dividend is a result of how the business is doing. It is not a payment owed to you the way an annuity check is.

That is why a retirement planner treats them as different tools. Annuity income is closer to a pension you buy. Dividend income is closer to rent from a property whose rent can change.

Guarantees: the core trade-off

Annuity income is typically guaranteed by the issuing insurer for life or a set term. Dividend payments are never contractually guaranteed, and they can be reduced or eliminated based on company performance.

Two cautions belong on the annuity side of that picture.

  • The guarantee is only as strong as the insurer. The obligations under an annuity contract depend on the firm’s financial strength and claims-paying ability. Investor.gov notes that if the insurer runs into financial trouble, it may not be able to meet its payment obligations. Look up the company’s ratings before you buy.
  • Guaranteed does not mean inflation-proof. A fixed payment buys less each year unless the contract includes an increase feature, and those features usually lower the starting payment.

On the dividend side, a long record of increases is encouraging, but it is a history, not a promise. A stock can also fall in price at the same moment the dividend is trimmed, which is the worst time to need cash.

Growth and inflation

Dividend stocks give you something a standard income annuity does not: the chance that both your income and your principal grow over decades. If you retire at 65 and live to 95, a dividend that rises over time can matter a great deal. Annuities generally limit liquidity and growth in exchange for the guarantee.

The flip side is sequence risk. If the market drops early in retirement and you are drawing on your portfolio, you may be forced to sell shares at low prices. Guaranteed income takes that pressure off, because the check arrives whatever the market does.

Access to your money

This is where the two differ most in daily life.

  • Dividend stocks are liquid. You can sell shares on any trading day, though the price may be lower than you hoped.
  • Annuities are not. FINRA describes buying a deferred income annuity as typically irrevocable: you give up access to the money in return for promised future payments.

Deferred contracts also tend to pay more. FINRA explains that payouts from deferred income annuities are generally larger than those from immediate annuities, in part because the insurer can invest your premium during the waiting period. The longer you wait and the less flexibility you keep, the bigger the check can be.

Other annuity types, such as fixed or variable deferred annuities, often carry surrender charges if you withdraw too much too soon. We cover those in detail in our guide to annuity surrender charges.

Fees

Dividend stocks held directly cost little beyond trading and any advisory fee. Annuities vary widely. Investor.gov states that fees reduce the value of an annuity, whether they are stated outright or built into the contract. Variable annuities and those with optional riders tend to have the most layers: administrative charges, investment management fees and charges for the insurance guarantees.

A simple income annuity usually has no annual fee line at all, because the cost is baked into the payout rate. That makes comparing quotes from several insurers the best way to see what you are really paying. If you are weighing contract types, our breakdown of fixed versus variable annuities walks through the checks that matter.

Taxes

Tax treatment is not the same, and it can change how much of each check you keep.

Feature Annuity income Dividends
Source of payment Insurer’s contract obligation Company’s discretion
Typical tax treatment Generally ordinary income Qualified dividends often taxed at capital gains rates; others at ordinary rates
Growth before payout Tax-deferred Dividends taxed in the year received in a taxable account
Early access 10% penalty possible before age 59½ No age-based penalty on taxable account sales
Return of principal Part of each nonqualified payment may be tax-free Not applicable

Per SmartAsset, qualified dividends often benefit from capital gains rates while annuity payments are typically taxed as ordinary income. Two details soften the annuity side.

  1. Annuities offer tax-deferred growth until you withdraw money or start receiving payments.
  2. For an annuitized nonqualified contract, part of each payment is considered a tax-free return of your original investment. Annuities held inside an IRA work differently, since that money was typically never taxed going in.

The early-withdrawal rule matters too. Withdrawals from annuities before age 59½ may face a 10% tax penalty. If you are near that age, read our guide to annuity tax rules for retirees before moving money. Your own bracket, your state and your other income decide the real result, so run the numbers with a tax professional.

One more Medicare-specific point: higher taxable income can raise what you pay for Medicare Part B and Part D through income-related adjustments, so how and when income arrives matters. A licensed agent or tax preparer can model that for your situation.

Which income fits which expense

A useful way to decide is to sort your spending into two buckets.

Essential costs: housing, food, utilities, insurance premiums, medications and anything that cannot be skipped in a bad year. Income annuities are often suggested for this layer because the payment is contractual rather than discretionary.

Flexible costs: travel, gifts, hobbies, home upgrades and money you hope to leave to family. Dividend stocks can suit this layer because the income can flex and the principal can keep growing.

A quick worked example, with made-up round numbers to show the method. Say your essential spending is $3,500 a month. Social Security pays $2,300. That leaves a $1,200 monthly gap. You could ask whether guaranteed income, from an annuity, could cover some or all of that gap, and let dividends and other savings handle the rest. If the gap is small, you may not need an annuity at all. If it is large and you have no pension, the case for guaranteed income gets stronger.

Monthly spending, Social Security, and income gap

The same logic applies to healthcare. Premiums for Medicare Part B, a Medigap policy or a Part D plan arrive every month and rise over time, so some people match them with steady income. Our guide on using annuities to cover healthcare costs shows how that works.

Why many retirees use both

The choice is rarely all or nothing. Retirees commonly combine annuities and dividend stocks, using the annuity for a baseline of guaranteed income and the stock portfolio for growth and flexibility.

That approach has practical benefits:

  • You are less likely to panic-sell in a downturn, because your essential bills are covered.
  • You keep money available for emergencies and large one-time costs.
  • You retain growth for the years when inflation erodes fixed income.
  • You are not betting your whole retirement on one insurer or one set of companies.

If you want a step-by-step look at building the baseline, see our guide on creating guaranteed income in retirement.

What a $100,000 annuity pays

There is no single answer, and you should be wary of any article that gives one number. The monthly check depends on your age when payments start, whether payments begin now or later, whether the contract covers one life or two, any guaranteed period, any inflation feature and the interest rates when you buy. The same premium can produce quite different checks from different insurers on the same day, which is why quotes from several companies matter. Our page on annuity rates for retirees explains how those factors move the number.

For dividends, the equivalent question is yield. A portfolio yielding a given percentage would pay that share of its value in a year, but the yield moves with share prices and can fall if companies cut payouts.

Checks before you choose

Before putting money into either, work through this list.

  1. Check the insurer. FINRA advises consumers to investigate the financial stability of the company backing an annuity before buying. Look at independent ratings and your state’s guaranty association limits.
  2. Read the fee schedule. Ask for every charge in writing, including rider fees.
  3. Understand the surrender period. Find out how much you can take out without a charge and for how long the charge applies.
  4. Confirm the tax treatment. Ask whether the money is qualified or nonqualified, and how payments are taxed.
  5. Test the dividend side. Look at how much of earnings the company pays out, how many years of dividends have held up and how concentrated your portfolio is in one sector.
  6. Keep reserves. Do not annuitize money you may need for emergencies, long-term care or a home repair.

Our perspective

We have helped Medicare consumers since 2007, and the same pattern shows up again and again: people make better choices when they understand their options first. Retirement income is no different. We do not think annuities are good or bad, and we do not think dividend stocks are risky or safe in some absolute sense. They do different jobs.

Our perspective — overview diagram

What we see most often is a retiree who has been told one product is the answer. A stock-only plan can leave a household exposed in the exact year they need to sell. An annuity-heavy plan can leave a household with no cash when a surprise comes. The better conversation starts with the monthly gap, the health coverage you have lined up and how much flexibility you want to keep, and only then picks the tools.

Because we are independent and work with more than 40 carriers, we are not tied to one company’s product. We would rather you leave a conversation understanding why a contract does or does not fit than sign something under pressure. Dividend stock selection is outside what we do, so for that part of the plan we suggest a fee-only financial planner or your own advisor. For the guaranteed-income part, and for how it fits with your Medicare coverage, we are glad to help.

— Paul

Talk through your options with us

If you are comparing guaranteed income to market income, we can walk you through annuity options from multiple carriers, show how a contract would fit next to your Social Security and Medicare costs and explain every fee and surrender term in plain English. There is no pressure to buy. You can also visit our home page to see everything we help with, from Medigap to Part D.

FAQ

What is the difference between an annuity and a dividend?

An annuity is a contract in which an insurance company agrees to pay you income in exchange for a lump sum or a series of payments. A dividend is a distribution of profit by a company to its shareholders, and the company can raise, cut or end it. The annuity payment is a contractual obligation, while the dividend is not.

Are annuity payments taxed differently from dividends?

Often, yes. Annuity payments are typically taxed as ordinary income, though part of each payment from a nonqualified annuitized contract is a tax-free return of your original investment. Qualified dividends often receive capital gains rates. Your bracket and account type change the outcome, so ask a tax professional about your numbers.

Can I lose money with an annuity?

Yes, in certain ways. Fees reduce an annuity’s value, early withdrawals can bring surrender charges and a 10% tax penalty before 59½, and the guarantee depends on the insurer’s ability to pay. Checking the company’s financial strength and reading the surrender terms reduces these risks.

Should I use an annuity, dividend stocks or both?

Many retirees use both: an annuity for essential expenses that need certainty and dividend stocks for discretionary spending and legacy goals. If your Social Security and any pension already cover your essentials, you may need little or no annuity income. A licensed agent and a financial planner can help you size each piece.

Sources

What Is Medicare Part B and What Does It Actually Cover?

The complete guide to Medicare’s medical insurance — every service it covers, exactly what it costs in 2026, how it works with group insurance and VA benefits, and the excess charges most people have never heard of until they get a surprise bill.

The Short Answer

Medicare Part B is medical insurance — it covers doctor visits, outpatient care, preventive services, durable medical equipment, and more. Unlike Part A, Part B is not premium-free for anyone: everyone pays a monthly premium (202.90in2026formostpeople),anannualdeductible(283), and 20% coinsurance on most covered services, with no yearly cap on that 20% under Original Medicare alone. Whether you need to enroll at 65, and whether delaying is safe, depends heavily on your employment status and your employer’s size — getting this wrong is one of the most consequential and permanent mistakes in all of Medicare.

Key Takeaways

  • Part B is never premium-free — everyone pays a monthly premium, and higher earners pay significantly more through IRMAA.
  • The 20% coinsurance under Original Medicare alone has no yearly cap — this is the single biggest financial risk in Medicare, and it’s the reason Medigap and Medicare Advantage exist.
  • Whether you can safely delay Part B without a penalty depends on your employer’s size: 20+ employees generally allows delay; fewer than 20 generally does not.
  • Missing your enrollment window triggers a permanent 10% penalty for every 12-month period you went without coverage.
  • Veterans can and generally should enroll in Part B even with VA benefits, since Medicare and VA coverage don’t coordinate — each only pays for care received within its own system.
  • “Excess charges” from non-participating providers can add up to 15% on top of what Medicare approves, and only some Medigap plans protect you from them.

What Part B Actually Covers

While Part A handles hospital room and board, Part B is the half of Original Medicare that covers medical care and most services delivered outside a hospital admission — doctor visits, outpatient procedures, and ongoing medical needs.

What’s covered

  • Doctor visits — primary care and specialists
  • Outpatient surgeries and procedures
  • Diagnostic lab work, X-rays, and MRIs
  • Emergency room visits
  • Ambulance services
  • Outpatient mental health care
  • Physical, occupational, and speech therapy
  • Chemotherapy and radiation received in an outpatient clinic
  • Durable Medical Equipment (DME) — wheelchairs, oxygen equipment, blood sugar monitors, walkers, and similar equipment
  • Ambulatory surgical center services

Preventive services: the part Medicare gets genuinely right

Most preventive services are covered at 100%, with no deductible and no copay, as long as your provider accepts Medicare assignment. This includes:

  • Your one-time “Welcome to Medicare” wellness visit, available within your first 12 months on Part B
  • Annual wellness visits after that
  • Flu shots and most other recommended vaccines
  • Mammograms
  • Colonoscopies and other cancer screenings
  • Diabetes and cardiovascular screenings
  • Many other screenings recommended by the U.S. Preventive Services Task Force

Paul’s Honest Take: This is one of the most underused parts of Medicare, full stop. I’ve had clients who paid for a private physical every year out of habit and never realized their annual wellness visit through Medicare was completely free. If you haven’t used your Welcome to Medicare visit or your annual wellness visit, that’s real value sitting on the table.

What’s NOT covered

  • Routine dental care — cleanings, fillings, dentures, extractions
  • Routine vision exams and eyeglasses
  • Hearing aids (though diagnostic hearing tests ordered by a doctor may be covered)
  • Long-term custodial nursing home care — help with daily living activities, as opposed to short-term skilled or medical care
  • Routine prescription drugs you pick up at a retail pharmacy — that’s Part D’s job, not Part B’s
  • Cosmetic surgery, unless medically necessary (such as reconstruction after an accident or mastectomy)
  • Most care received outside the United States, with very limited exceptions
  • Routine foot care, such as nail trimming, in the absence of a qualifying medical condition
  • Acupuncture, except for a narrow, specific chronic low back pain benefit
  • Concierge medicine fees and membership-style charges some practices add on top of standard care
  • Long-term care insurance-style services, including most home-based personal care that isn’t tied to a skilled medical need

Paul’s Honest Take: The dental and vision exclusions are the ones that surprise people most, especially since they’re such routine parts of healthcare for most adults. This is exactly why so many Medicare Advantage plans build dental, vision, and hearing benefits into their coverage — Original Medicare was simply never designed to include them, and that gap doesn’t go away on its own.

What Part B Costs in 2026

Part B has three separate cost components, and understanding all three matters:

Cost Component

2026 Amount

Standard monthly premium

$202.90

Annual deductible

$283

Coinsurance on most covered services

20%

The premium is deducted automatically from your Social Security check if you’re already collecting benefits. If you’re not yet collecting Social Security, you’ll receive a bill, typically every three months.

The deductible works differently than Part A’s — it’s a straightforward annual figure. You pay the first $283 of Medicare-approved outpatient costs each calendar year, and then Medicare’s cost-sharing kicks in.

The coinsurance is where the real risk lives. After your deductible is met, Medicare pays 80% of the Medicare-approved amount for most covered services, and you’re responsible for the remaining 20%. There is no yearly cap on this 20% under Original Medicare alone. If you have a $100,000 course of cancer treatment, your 20% share is $20,000 — unless you have a Medigap policy or Medicare Advantage plan absorbing that cost.

Paul’s Honest Take: I put this in bold because it’s genuinely the single most important number in this entire guide. That uncapped 20% is the whole reason Medigap and Medicare Advantage exist as products in the first place. Original Medicare by itself was never designed to protect you from a truly expensive year — it was designed to cover 80% of it and leave the rest to you.

IRMAA: What Higher Earners Actually Pay

If your income is above certain thresholds, you’ll pay more for Part B through the Income-Related Monthly Adjustment Amount (IRMAA) — based on your tax return from two years prior. For 2026, that means your 2024 income determines your premium tier.

2024 Income (Individual)

2024 Income (Married, Joint)

Total Part B / Month

$109,000 or less

$218,000 or less

$202.90

$109,001 – $137,000

$218,001 – $274,000

$284.10

$137,001 – $171,000

$274,001 – $342,000

$405.80

$171,001 – $205,000

$342,001 – $410,000

$527.50

$205,001 – $499,999

$410,001 – $749,999

$649.20

$500,000 and above

$750,000 and above

$689.90

At the top tier, you’re paying more than three times the standard premium. If your income has recently dropped — retirement, the loss of a spouse, or certain other life-changing events — you can appeal your IRMAA determination using Form SSA-44.

Do You Have to Enroll? And What Happens If You Don’t?

Technically, Part B is optional — Medicare won’t force you into it. But opting out without a valid alternative is genuinely risky, because of how the penalty structure works.

If you don’t sign up during your Initial Enrollment Period (the 7-month window around your 65th birthday) and you don’t have qualifying employer coverage, you’ll face a permanent 10% penalty added to your premium for every full 12-month period you went without Part B. That penalty doesn’t expire — you pay it for as long as you have Part B, which for most people means for the rest of your life.

Example: If you delayed enrollment by 24 full months without a valid exception, you’d pay an extra 20% on top of the standard $202.90 premium in 2026 — roughly $40.58 more, every month, permanently.

How Part B Works with Group Insurance

Just like Part A, whether you can safely delay Part B without penalty comes down to one specific number: how many employees your company has.

Companies with 20 or more employees: If you or your spouse are actively working and covered by a genuine group health plan, your workplace insurance is primary, and you can legally delay Part B without any penalty. When that employment or coverage eventually ends, you get an 8-month Special Enrollment Period to enroll in Part B penalty-free.

Companies with fewer than 20 employees: Medicare automatically becomes your primary insurer at 65, regardless of your employment status. You need to enroll in Part B right on schedule. If you don’t, your small employer’s plan can legally refuse to pay claims that Medicare should have covered first — potentially leaving you responsible for the full cost.

Paul’s Honest Take: I say this in nearly every guide I write, because it’s genuinely one of the costliest misunderstandings I encounter: “I have good coverage at work” and “I’m protected from Medicare’s enrollment deadlines” are two completely different statements, and whether the second one is true depends entirely on your employer’s size — not how generous the coverage feels. Confirm the actual employee count before you decide to delay anything.

Retiree Coverage Is Not the Same as Active Employer Coverage

This is a distinction that catches a genuinely large number of people off guard: the “20 or more employees” exception only applies to active employment. If you retire and your former employer offers you retiree health benefits — sometimes a genuinely good, comprehensive plan — that coverage does not create a Special Enrollment Period the way active group coverage does, and it does not exempt you from enrolling in Part B on time.

Paul’s Honest Take: I’ve seen this mistake more than once, and it’s an especially painful one because it happens to people who did everything right during their working years. Someone retires with a strong retiree health plan from a large employer, assumes it works the same way their active coverage did, and delays Part B — only to find out later that retiree coverage was never a valid reason to delay in the first place. The moment you stop actively working, that clock starts, regardless of how good your retiree plan looks on paper. If you’re retiring and keeping employer retiree benefits, treat enrolling in Part B as something to handle right on schedule, not something retiree coverage lets you postpone.

Why You Need Both Part A and Part B for Medigap or Medicare Advantage

Here’s a foundational requirement worth understanding clearly, since it shapes every other coverage decision in Medicare: you must be enrolled in both Part A and Part B before you can buy a Medigap policy or enroll in a Medicare Advantage plan. Neither product exists as a standalone substitute for Original Medicare — both are built specifically to work alongside it.

  • Medigap fills the cost-sharing gaps left by Original Medicare (Parts A and B) — it has nothing to fill in if you’re not enrolled in both parts to begin with.
  • Medicare Advantage legally must provide at least the same coverage as Parts A and B combined, which is only possible because you’re required to be enrolled in both before a Medicare Advantage carrier can enroll you.

Paul’s Honest Take: This surprises people who assume they can somehow “skip” Part B and go straight into a Medicare Advantage plan to avoid the extra premium. It doesn’t work that way — Part B enrollment, and its premium, is a prerequisite either way, whether you end up on Original Medicare with Medigap or on a Medicare Advantage plan. There’s no path through Medicare that avoids the Part B premium once you’re actually using the system.

Does Medicare Work If You’re a Veteran?

Yes — and if you have VA health benefits, understanding how the two systems relate is genuinely important, because they work differently than most people assume.

Medicare and VA benefits do not coordinate. These are two entirely separate systems that each pay only for care received within their own network. Medicare doesn’t pay for care you receive at a VA facility, and VA benefits don’t pay for care you receive from a non-VA doctor or hospital. You, the veteran, choose which system to use each time you seek care.

Here’s the critical point: having VA benefits does not exempt you from Medicare’s enrollment deadlines. VA coverage is not considered a qualifying reason to delay Part B without penalty. If you don’t enroll in Part B during your Initial Enrollment Period and you’re relying solely on VA benefits, you can still trigger the permanent late enrollment penalty.

Why the VA itself recommends enrolling in Medicare anyway:

  • It gives you access to civilian doctors and hospitals outside the VA system
  • VA healthcare funding depends on annual Congressional appropriations, which isn’t guaranteed to remain stable
  • If VA authorizes only part of your needed care at a non-VA facility, Medicare can help cover the rest
  • Having both gives you meaningfully more flexibility and security than relying on either system alone

Paul’s Honest Take: This is one of the most common misconceptions I run into with veterans specifically, and it’s an expensive one to get wrong. Good VA coverage feels like it should be enough, and it might genuinely handle most of your care — but it doesn’t protect you from the Part B enrollment clock the way employer coverage from a large company can. The VA itself actively encourages enrolling in Medicare Parts A and B for exactly this reason. If you have VA benefits and are approaching 65, this is worth a direct conversation before you assume you’re covered.

Veterans who enroll in Part B can also purchase a Medigap policy, which can be particularly valuable if you use non-VA providers regularly — though if you primarily rely on VA facilities for most of your care, the value of an added Medigap policy may be more limited, and worth weighing carefully.

How Long Does It Actually Take to Get Part B Approved?

This is one of the most practical, and most overlooked, pieces of planning — especially if you’re leaving a job after 65 and coordinating your Part B start date around the end of your employer coverage. Applying isn’t instant, and the timeline depends heavily on which enrollment window you’re using.

Enrollment Situation

Typical Processing Time

When Coverage Actually Starts

Initial Enrollment Period (around 65)

2–4 weeks, sometimes up to 6

1st of your birthday month (if applied in the 3 months before) or 1st of the month after you apply (if applied during or after your birthday month)

Special Enrollment Period (leaving employer coverage)

4–8 weeks, sometimes longer

1st of the month after your application is submitted

General Enrollment Period (Jan 1–Mar 31, missed window)

4–6 weeks

1st of the month after you apply

Why the Special Enrollment Period takes longer: applying after leaving employer coverage requires two forms, not one — Form CMS-40B (the actual Part B application) and Form CMS-L564 (Request for Employment Information), which your employer needs to complete to verify you had qualifying coverage. Social Security has to manually review both, which is exactly why this route consistently takes longer than a standard Initial Enrollment Period application.

Paul’s Honest Take: This timeline question comes up constantly with clients who are retiring or leaving a job after 65, and it deserves real attention — not just because of the penalty risk we’ve already covered, but because a slow approval can leave you with an actual gap in coverage if you time it too tightly. My standard advice: start this process at least 2 to 3 months before you need Part B to actually begin, not the week your employer coverage ends. If your former employer is slow to complete their portion of Form CMS-L564, that alone can hold up the entire application — so it’s worth following up with your HR or benefits department directly rather than assuming it’s been submitted.

Practical tips to avoid delays

  • Apply online through SSA.gov whenever possible. It’s consistently the fastest method — mailed or faxed forms are more prone to getting lost or delayed.
  • If you’re on a Special Enrollment Period, submit Form CMS-L564 alongside Form CMS-40B, not separately. They need to arrive together, and one incomplete form can stall the whole application.
  • Expect a short intake lag even with online applications. It can take several business days for an online submission to actually appear on a local Social Security agent’s screen — don’t panic if you call shortly after applying and they say they don’t see it yet.
  • Once approved, you don’t have to wait for your physical card. Your Medicare Beneficiary Identifier typically appears in your online Social Security or Medicare.gov account within a day or two of approval, and you can print a temporary card from there — the physical card generally arrives by mail within about 30 days.

Excess Charges: The Cost Almost Nobody Knows to Ask About

Here’s a detail that surprises even people who’ve been on Medicare for years: not every doctor who accepts Medicare agrees to accept Medicare’s approved amount as full payment.

Providers fall into three categories:

  • Participating providers accept Medicare assignment, meaning they agree to accept the Medicare-approved amount as payment in full. This covers the vast majority of providers — roughly 98% of doctors nationally.
  • Non-participating providers still accept Medicare patients but haven’t agreed to accept the standard rate. They can charge an excess charge of up to 15% above the Medicare-approved amount.
  • Opted-out providers have left the Medicare system entirely and can charge whatever they want under a private contract — Medicare pays nothing at all for care from these providers, except in emergencies.

How excess charges actually work: if the Medicare-approved amount for a service is $300 and you see a non-participating provider, they can legally charge up to an additional $45 (15%) on top, for a total bill of $345 — and that excess amount doesn’t count toward your Part B deductible.

Eight states currently prohibit or limit excess charges entirely: Connecticut, Massachusetts, Minnesota, New York, Ohio, Pennsylvania, Rhode Island, and Vermont. If you live in one of these states, you’re generally shielded from excess charges from providers within your state — though you could still face them if you receive care from a non-participating provider elsewhere.

Paul’s Honest Take: This is exactly why Medigap Plan G matters so much for people who want maximum flexibility. Plan G covers excess charges in full — Plan N does not. If you’re the kind of person who wants the freedom to see any doctor without worrying about billing surprises, that distinction is worth understanding clearly before you pick between the two. And regardless of which plan you choose, it’s always worth asking a new provider directly whether they accept Medicare assignment before your first appointment.

The HSA Rule: Part B Closes the Door Too

If you’re hoping to keep contributing to a Health Savings Account, know this clearly: enrolling in Part B — or any part of Medicare — ends your ability to make new HSA contributions. This isn’t unique to Part B; it applies the moment you enroll in Medicare in any form, including premium-free Part A.

If keeping your HSA active matters to you, the only way to legally delay both Part A and Part B is through qualifying employer coverage — which, as covered above, generally requires an employer with 20 or more employees. And because Part A enrollment can be backdated up to 6 months once you do enroll, it’s smart to stop HSA contributions 6 months before you plan to sign up for Medicare or file for Social Security, whichever comes first.

Frequently Asked Questions

Is there a cap on what I’ll pay for Part B services in a year? Not under Original Medicare alone — the 20% coinsurance has no yearly limit. A Medigap policy or Medicare Advantage plan is what actually caps your exposure.

What happens if I don’t sign up for Part B on time? You’ll generally face a permanent 10% penalty on your premium for every 12-month period you went without coverage, unless you qualify for a Special Enrollment Period through active employer coverage.

Do I need Part B if I have good coverage through a small employer? Almost certainly yes. If your employer has fewer than 20 employees, Medicare becomes your primary insurer at 65 regardless of your job coverage, and not enrolling can leave you exposed to unpaid claims and a lifelong penalty.

Do veterans need Medicare Part B if they have VA benefits? Generally, yes. Medicare and VA benefits don’t coordinate — each only pays for care within its own system — and VA coverage doesn’t exempt you from Medicare’s enrollment deadlines or penalties.

What is a Part B excess charge? An additional charge, up to 15% above the Medicare-approved amount, that a non-participating provider can legally bill you. It doesn’t count toward your deductible, and only Medigap Plan G (among current plans) covers it in full.

Can I keep contributing to my HSA if I enroll in Part B? No. Enrolling in any part of Medicare, including Part B, ends your HSA contribution eligibility going forward.

How long does it take to get approved for Part B? It depends on the enrollment window. Initial Enrollment Period applications typically process in 2–4 weeks. Special Enrollment Period applications, used when leaving employer coverage, generally take 4–8 weeks since Social Security must manually verify your prior coverage using Form CMS-L564. Start the process at least 2–3 months before you need coverage to begin, especially when coordinating around a job ending.

The Bottom Line

Part B is the half of Medicare that covers your everyday medical care — and it’s also where the real financial exposure of Original Medicare lives, thanks to that uncapped 20% coinsurance. Whether you should enroll at 65, whether you can safely delay, and how much of that exposure you’re carrying all depend on details specific to your situation: your employer’s size, your income, your VA status, and which doctors you actually see.

If you want help sorting out exactly how Part B applies to your specific circumstances — or want to understand how Medigap or Medicare Advantage could close that uncapped coinsurance gap — that’s exactly the conversation I have with clients every day, at no cost to you.

Call 631-358-5793 or visit paulbinsurance.com to set up a time to talk it through.

Paul Barrett, CMIP, is the founder of The Modern Medicare Agency, based in Melville, NY, and has spent 18+ years exclusively helping people navigate Medicare — never life insurance, never annuities, just Medicare. He’s licensed in 37 states, represents more than 40 carriers, and has personally helped over 5,000 clients choose coverage that actually fits their lives.

Figures current as of 2026 and sourced from CMS, Medicare.gov, and the Social Security Administration. Individual circumstances vary, especially around employer coverage, VA benefits, and income-based premiums — always verify your specific situation before making enrollment decisions.

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