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Robert Bloink and William H. Byrnes

Life Health > Health Insurance > Medicare Planning

Working Past 65? Remember, Medicare and HSAs Don’t Mix

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What You Need to Know

  • The rules governing the interaction between Medicare and HSAs after age 65 can be complicated.
  • Issues will arise if a client continues funding their HSA after becoming eligible for Medicare.
  • Failure to apply for Medicare within the required time period will result in penalties that last a lifetime.

In today’s economy, it’s common for clients to work well past age 65. Although those clients become eligible for Medicare once they hit 65, there are potential complications that must be addressed to prevent unpleasant surprises.

One of those complications arises when a client continues funding their health savings account to reap tax benefits after becoming eligible for Medicare. The rules governing the post-65 interaction between Medicare and HSAs can be complicated.

It’s important for clients to understand these rules before signing up for Medicare or claiming Social Security, so that they know the potential implications with respect to their tax-preferred HSAs in retirement.

Medicare and HSAs: The Basics

As most clients are aware of, an individual must be enrolled in a high-deductible health plan to contribute to their HSA. HSA contributions are not allowed if the individual is enrolled in any other type of health plan.

Importantly, individuals who continue to work past 65 cannot contribute to their HSA if they are enrolled in Medicare. They also cannot accept employer contributions to HSAs.

Medicare backdates coverage when an individual enrolls in Medicare Part A. A six-month lookback period applies, meaning that clients should stop contributing to their HSAs six months before they enroll in Medicare or begin receiving Social Security benefits to avoid penalties.

If the client makes contributions within that six-month window, however, they can withdraw the contributions before the end of the year of contribution without penalty.

It’s also important to remember that once someone claims Social Security after reaching full retirement age, they are automatically enrolled in Medicare Part A. Individuals who claim benefits before reaching 65 are also automatically enrolled upon reaching that age.

That means they can no longer make HSA contributions even though they did not actively apply for Medicare coverage.

Individuals who enroll in Medicare later in the year may be entitled to make HSA contributions for months when they are not enrolled in Medicare coverage. In other words, a prorated contribution for the year may be allowed (but clients should remember the six-month retroactive window when calculating their HSA contribution limit for the partial year).

Deferring Medicare

Individuals who continue to work past 65 can opt to defer enrollment in Medicare without incurring penalties if they are enrolled in a group health plan that is sponsored by an employer with at least 20 employees. Private health plans that are available through the Affordable Care Act health insurance marketplace and COBRA plans do not qualify.

Once the individual is no longer covered by the employer-sponsored plan, they have an eight-month window to enroll in Medicare Part B. Failure to enroll during that window will result in late enrollment penalties, which last for the individual’s lifetime.

If the individual misses the eight-month deadline, they have a limited general enrollment period in which to apply (that period is Jan. 1 to March 31). Coverage begins the month after they sign up. Even if the individual enrolls during the GEP, late enrollment penalties will increase their cost of coverage for life.

Assuming the individual does not defer Medicare, after 65, an individual can continue to participate in an HSA-eligible health insurance plan to provide coverage in addition to Medicare. However, even if a Medicare-enrolled individual continues to participate in the HSA-eligible plan, they cannot continue to contribute to the HSA because they also have Medicare coverage.

They can, however, continue to use funds that they have already accumulated in HSAs. Those funds continue to be available tax-free so long as they are used to pay for qualifying medical expenses (including traditional Medicare premiums for Parts A, B, C and D, but excluding premiums for supplemental Medicare programs).

Taxpayers can use HSA funds to reimburse themselves for Medicare premiums that are withdrawn directly from their Social Security benefits (but it’s important to keep records to substantiate the HSA withdrawals).

Key Reminders

HSAs provide a powerful tax-preferred savings vehicle to cover the ever-increasing costs of medical expenses during retirement. That said, it’s important for clients to understand the complex rules that apply once the taxpayer becomes eligible for Medicare coverage to avoid penalties and surprise taxes.

While there is proposed legislation that would change the rule, under current law, individuals are no longer eligible to contribute to an HSA once they enroll in Medicare.

(Pictured: Robert Bloink and William H. Byrnes)

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