If you have stopped working by age 65, or you are working for a firm that has fewer than 20 employees, you need to sign up for Medicare coverage right around your 65th birthday.

There are two mandatory pieces you will sign up for. Part A covers hospitalization, and Part B covers just about everything else, with one big honking exception: prescription drugs.

Medicare Part D: prescription drugs

Medicare offers everyone the chance to have insurance to cover most (but not all) costs for many prescription drugs. But it’s not mandatory coverage, and you typically have to pay a monthly premium.

How Part D works:

If you have decided to enroll in Original Medicare for your Part A and Part B coverage, the premium cost to add a Part D prescription drug plan averages about $38 a month in 2021, according to the Kaiser Family Foundation.

If you didn’t go with Original Medicare and opted for Medicare Advantage (MA), you likely have a drug plan embedded in your MA plan. Many MA plans don’t charge any extra premium for the coverage, and for those that do, the cost averages around $12 a month. (A side note: That doesn’t necessarily make an MA plan a better deal for drug coverage. It depends on what your deductible, copays and coinsurance will be when you actually use the insurance.)

The risk of not adding Part D coverage

When you turn 65, whether you are working (and still covered by health insurance) or not, you should sign up for Medicare Part A. There’s no premium cost if you worked at least 10 years where you paid FICA payroll taxes.

If you’re not working at 65, or work for an employer with fewer than 20 employees, you will also want to sign up for Medicare Part B when you first become eligible. Medicare Part B comes with a monthly premium based on your income. The 2021 minimum per-person monthly premium: $148.50.

Once you enroll in Part B, you’re eligible for Part D. There are two risks to passing up your initial chance to enroll in Part D.

Risk 1: You miss your initial enrollment sign-up window.

Everyone gets one free window of a few months to sign up for Part B and Part D with no late penalties. The general rule is that if you aren’t working at 65, you have a seven-month window to sign up. That spans the three months before you turn 65, the month you turn 65, and the three months after you turn 65.

If you miss that window, you will pay a penalty for both Part B and Part D, when you eventually do sign up.

The Part D penalty in 2022 is expected to be about $33 a month.

The penalty is permanent — you’ll pay it every year, based on a formula we’ll skip here.

The sign-up rules are different if you are working at 65, and your workplace insurance continues to cover you as the “primary” insurer. (Be careful here: if you’re still working, but your employer has fewer than 20 employees, the workplace plan is no longer considered “primary.” You must sign up for Medicare.)

You may qualify for a “special enrollment period” where you can sign up for Part D well past your initial enrollment period and be exempt from any penalty.

Is your workplace drug coverage creditable?

If you are working past age 65 and have coverage through work, you need to ask HR if the drug coverage in your workplace plan is considered “creditable” by Medicare.

For a plan to be creditable it must offer benefits that are at least as good as what is covered by a basic Part D Medicare plan. If the answer is yes (get it in writing) and staying on the workplace plan is cheaper than starting Medicare, you can stick with it. (Creditable coverage also applies for anyone covered by VA or military (TRICARE) retiree health insurance benefits. If at some point you want to switch to Medicare coverage, your prior coverage will entitle you to get a Plan D drug plan without any penalty.)

The minute you stop working post-65, or the minute the plan bumps you from coverage post-65, you need to be aware of a maddening quirk in Medicare rules.

You have up to eight months to sign up for Medicare Part B without any premium penalty. But you only have two months (63 days to be exact) to sign up for Medicare Part D, without the penalty formula kicking in.

Risk 2: Something happens, and you need prescription medicine.

Outside of your initial enrollment period or your special enrollment period you can still sign up for Part D. But only during the annual enrollment period that runs from Oct. 15 to Dec. 7 each year, for coverage that begins on Jan. 1 of the next year.

If you don’t sign up in this window, you can’t add it until the following year’s annual enrollment period.

Consider one plausible scenario. You decide to not sign up for Part D coverage for 2022. In February, you are diagnosed with an illness that requires expensive medication. You can’t add a Part D plan right then. You will need to wait until the 2022 open enrollment period (Oct. 15 to Dec. 7, 2022) to purchase coverage that begins in January 2023. Effectively, you are on the hook for your medications for 11 months.

That makes a $30 or $40 monthly premium for a standalone Part D plan look like a great deal.

And in many regions, you might find a Part D plan that offers solid (but not the most generous) benefits for just $10 or $15 a month. That’s awfully cheap insurance.