Dear Matt,
I’m eligible for Medicare next month and plan on working through next year. I also plan to keep my employer-based health insurance the entire year. I have been participating in an employer HSA and have recently signed up for the max HSA deduction for next year during my employer’s benefits open enrollment. Can I defer Medicare Part A coverage (I’m aware of the Medicare Part B deferral option) while I’m still working so I can continue to participate in the HSA excise tax-penalty free? If I must sign up for Part A to avoid a late enrollment penalty, under what circumstance can I still participate in the HSA and avoid the excise tax penalty?
Thanks for your help,
Tony B.
How Your HSA and Medicare Part A Work Together
Most people working past 65 simply accept Medicare Part A and Medicare Part B and peel off of their employer-based health insurance. A lot of the time, doing so is much cheaper than paying the employer-provided health insurance premium. Or they accept Medicare Part A (because there’s usually no premium associated with it), defer Part B, and stay on the employer health insurance until they stop working and retire.
Before explaining how you can defer Medicare Part A to max out your HSA while you’re still working, I recommend you not do it. Don’t do it, Tony. Just miss out on funding your HSA next year if you’re going to retire one year later at 66. There are too many pitfalls, dates, and times to contend with. Even if you defer Medicare Part A and sign up later, Medicare will likely backdate your effective date, which might mess up your taxes. There are just too many things you can mess up, and you don’t want to mess up your Medicare coverage.
The max you could contribute to your HSA as someone over 55 isn’t that significant in the whole scheme of things. Even if you’re in the top tax bracket, the tax benefit isn’t that impactful in real dollars if I do the quick math.
| Type of Coverage | 2021 Contribution Limit | 2022 Contribution Limit |
| Self-only coverage | $4,600 | $4,650 |
| Family coverage | $8,200 | $8,300 |
That said, you can do it. You can indeed defer Medicare and max out your HSA. It’s a very complicated process with lots of “it depends” to explain, but here goes! I hope my rather long answer not only helps you but helps others, too.
HSA Contributions and Medicare
There are some problems with wanting to contribute to an HSA and getting Medicare. If you have any kind of Medicare coverage, you can no longer contribute to an HSA. If you want to contribute to your HSA, you can’t have Medicare Part A or Medicare Part B. That goes for Medicare Part C (Medicare Advantage) and Medicare Part D Prescription Drug Plans. You can’t have any part of Medicare A-D. You have to defer them all.
If you don’t get Medicare Part A and Part B when you turn 65, you may pay lifetime enrollment penalties when you eventually enroll. However, suppose you’ve got valid reasons for doing so (like still working). You may not pay the penalty if you delay Medicare Part A and Medicare Part B because you have coverage through your (or your spouse/partner’s) current employer, like Tony does.
I’m not an accountant, fiduciary, or financial planner, nor do I play any of those on TV. However, keep reading if you want my amateur summary from a Medicare perspective.
A Brief Overview of Medicare HSA Accounts
HSA is an acronym for Health Savings Account. HSAs allow people to move money into different accounts pre-tax to pay for qualified medical expenses. Some employers also contribute money to HSAs as part of an employee benefits package. When you put money into an HSA account, that money is deductible on your federal tax returns. Employer contributions aren’t included in your income from a federal tax standpoint, which is nice. Many people use HRAs as an IRA-like tax retirement tool, just without the income restrictions that come with IRAs because there are no income restrictions on contributing to an HSA.
HSA funds are not allowed to be used to pay health insurance premiums. They can be used to pay for deductibles, copays, coinsurance, and other health-related items. Distributions from an HSA that are used to pay qualified medical expenses aren’t taxed. Your contributions are tax-free, except if you live in California or New Jersey. If you want to read more about HSAs and taxes, click here.
HSA Funds and Medicare
One of the cool things about HSAs and Medicare is that HSA funds can be used to pay for Medicare Advantage or Medicare Part D Prescription Drug Plan premiums. HSA funds cannot be used to pay for Medicare Supplement premiums. Medicare Supplement premiums aren’t considered a qualified medical expense because they’re simply insurance policies that pay what’s leftover after Original Medicare Part A and Part B pay their part.
And while they’re not technically “part” of Medicare, like Medicare Part A, B, C, and D. That’s why it’s typically a pretty good idea to buy a Medicare Advantage plan if you retire with a large HSA balance. Not only can you pay your Medicare Advantage premium with HSA dollars, but you can also reimburse yourself for copays, deductibles, and anything you owe in coinsurance with HSA money. HSA funds can also be used in various ways once you’re on Medicare, including reimbursing yourself for Medicare Part B premiums, prescription drug copays, and other covered items.
HSAs, High Deductible Health Plans and Medicare
To contribute to an HSA, the feds say you must enroll in a High-Deductible Health Plan or HDHP. These health insurance plans only start covering most benefits after paying a hefty deductible. The health insurance plan must qualify as an HDHP by following different parameters, but you get the point. If you want to read more about them, click here.
Contributing to an HSA After 65
If you’ve got an HSA you want to keep contributing to it after 65, you might be able to do so. You can defer Medicare Part A and Medicare Part B if you haven’t already messed things up or work for a small business. I say that with a smile, but it’s true. There are many ways you won’t be able to, and you may have already made choices that now exclude you from being able to contribute to an HSA next year. I found a good summary of the issue on the web –I’ve linked the entire page under “Sources” at the end of the blog post.
Enrollment in Medicare Part A is often automatic and thus can create an unintended consequence of disqualifying future HSA contributions. The Social Security Administration automatically enrolls individuals in Medicare Part A at 65 if Social Security benefits payments commence.
Five Potential Medicare Part A Options
Social Security Before 65: When Social Security benefit payments begin before 65, enrollment in Medicare Part A is automatic at 65. In this case, individuals lose the ability to make HSA contributions.
Social Security at 65: When Social Security benefits begin concurrently with turning 65, enrollment in Medicare Part A is automatic concurrently at 65. In this case, individuals lose the ability to make HSA contributions.
Social Security Deferred: When Social Security benefit payments are deferred, enrollment in Medicare Part A is also deferred until the beneficiary activates Medicare Part A (and other parts of Medicare). In this case, individuals retain the ability to make HSA contributions.
Elective Opt-Out from Social Security and Medicare: When Social Security benefits are activated, but an individual does NOT want current coverage under Medicare Part A, they may complete a form to disenroll themselves from Medicare Part A actively. Without completing the SS form, HSA contributions would be disqualified, even if an individual did not want to have or intend to use Medicare Part A benefits. Notably, it is not possible to retain Social Security benefits and electively opt-out of Medicare Part A. If an individual wants to opt out of Medicare Part A, they must opt-out of both. When an elective opt-out form is completed, individuals preserve the ability to make HSA contributions.
Employed at Small Employer: Individuals that work for smaller employers (fewer than 20 employees) have Medicare as their primary insurance at age 65; therefore, it would not work to opt out of Medicare in favor of retaining HSA eligibility. In this case, individuals cannot make HSA contributions.
So, we finally begin to answer the original question: can you defer Medicare Part A and contribute to an HSA if you’re working past 65?
If you get employer health insurance through an employer with twenty or fewer employees, the answer is a resounding NO. If you are already drawing Social Security, the answer is NO. If you’re turning 65, still working, have employer-based health insurance, don’t draw Social Security, and/or have deferred it, the answer is YES, you can defer Medicare Part A if you don’t work for a small employer.
Good luck with your decision, Tony!
I love answering Medicare questions. Email me yours at questions@prepareformedicare.com and I’ll pick a few for a future blog post!
To your wealth, wisdom, and wellness!
-Matt Feret
Related Articles
https://help.vitacompanies.com/knowledgebase/article/KA-01283/en-us
https://www.irs.gov/publications/p969
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Author Bio Matt Feret is the author of the Prepare for Medicare book series and launched prepareformedicare.com to help people get objective answers to questions about Medicare. Matt is also the host of The Matt Feret Show. He has held leadership roles at numerous Fortune 500 Medicare health insurers in sales, marketing, operations, product development, and strategy for over two decades.
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