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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 a avoid 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.


Tony,

Man, you really threw me a 12-6 curveball.  A real knee-buckler.  This is a really good and complex question!  It’s also one I didn’t cover in my book because “most people” don’t run into this.  “Most people” working past age 65 simply accept Medicare Part A and Medicare Part B and peel off of their employer-based health insurance.  That’s because 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.

But deferring Medicare Part A to max out your HSA while you’re still working?  Before I even begin to explain how you can do that (you can), I’m simply going to recommend you not do it.  Don’t do it, Tony.  I wouldn’t.  Just miss out on funding your HSA next year if you’re really 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.

I mean, the max you could contribute to your HSA in as someone over the age of 55 isn’t that significant in the whole scheme of things.  Even if you’re in the top tax bracket, in real dollars the tax benefit isn’t that impactful if I do the quick math.

Obviously, I don’t know your situation beyond what you wrote, but that’s my advice.  Don’t do it.

Type of Coverage2021 Contribution Limit2022 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

See, there’s problem with wanting to contribute to an HSA and turning 65 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 either Medicare Part A or Medicare Part B.  That goes for Medicare Part C (Medicare Advantage) and Medicare Part D Prescription Drug Plans as well.  You can’t have any part of Medicare A-D.  Nothing, nada zilch.  You have to defer them all.

As a reminder, 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, as I note several times in my book, if you’ve got good, valid reasons for doing so (like still working) you may not pay a 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.

Now, I’m not an accountant, fiduciary or financial planner nor do I play any of those on TV.  However, if you want my professional summary from a Medicare perspective, keep reading.

HSAs – A (Very) Brief Overview

An HSA is an acronym for Health Savings Account.  HSAs allows people to move money into different kinds of accounts on a pre-tax basis to pay for qualified medical expenses.  Some employers also contribute money to HSAs as part of an employee benefit 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 either, which is nice.   Lots of 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 generally not allowed to be used to pay health insurance premiums while you’re working.  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. Not only are your contributions tax-free but so is the interest you earn on them on your federal and state taxes 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

However, one of the cool things about HSAs and Medicare is 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 left over after Original Medicare Part A and Part B pay their part.  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 a variety of other ways once you’re on Medicare, including reimbursing yourself for Medicare Part B premiums, prescription drug copays, and more.

HSAs, High Deductible Health Plans and Medicare

In order to contribute to an HSA, the feds say you must be enrolled in what’s called a High-Deductible Health Plan or, HDHP.  That’s exactly what it sounds like – these health insurance plans only start covering most benefits after you pay a hefty (high) deductible.  The health insurance plan has to qualify as an HDHP by following all sorts of different parameters, but you get the point.  It’s a high-deductible health insurance policy.  If you want to read more about what those look like, click here.

Contributing to an HSA After 65

If you’ve got an HSA you want to keep contributing to it after age 65, the answer is yes – you can.  Maybe.  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 a lot of ways you won’t be able to and you may have already made choices which now exclude you from being able to contribute to an HSA next year.

I found what looks like a good summary of the issue on the web –I’ve linked the entire page under “Sources” at the end of the blog post.  Underlines are mine.

Enrollment in Medicare Part A is oftentimes 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 age 65 if Social Security benefits payments commence.  There are five potential scenarios to consider:

  1. Social Security Prior to Age 65: When Social Security benefit payments began prior to age 65, enrollment in Medicare Part A is automatic at age 65.  In this case, individuals lose the ability to make HSA contributions.
  2. Social Security at Age 65: When Social Security benefits begin concurrently with turning age 65, enrollment in Medicare Part A is automatic concurrently at age 65.  In this case, individuals lose the ability to make HSA contributions.
  3. 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.
  4. 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, the individual may complete a form to actively disenroll themselves from Medicare Part A.  In the absence of 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.
  5. 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 do not have the ability to 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?

My attempt at summarizing that answer based on those five items above goes like this:

  1. If you get employer health insurance through an employer with twenty or fewer employees, the answer is a resounding NO.
  2. If you are already drawing Social Security, the answer is NO.
  3. 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.

How Do You Decline Medicare Part A?

Medicare Part A coverage can be declined by submitting a request form to the Social Security Administration.  Here’s a link to the form and I highly suggest you call or make an appointment and talk about it before you fill it out and mail it in.  The phone number for Social Security is 1-800-772-1213 (TTY 1-800-325-0778) make an appointment online for an in-person meeting by clicking here.

If I Defer Medicare Part a or Medicare Part B, When and How Do I Sign Up When I’m Ready?

Again, this is super-tricky and yes, it gets even crazier from here.  I’m going to quote directly from the Medicare FACT SHEET: Deciding Whether to Enroll in Medicare Part A and Part B page 13. Underlines are mine.

If you decide not to enroll in Part A and Part B during your Initial Enrollment Period, your next chance to enroll depends on your situation:

  • I (or my spouse) am still working and I have employer coverage from THIS employer If you’re eligible for premium-free Part A, you can enroll in Part A at any time after you’re first eligible for Medicare. Your Part A coverage will go back (retroactively) 6 months from when you sign up (but no earlier than the first month you are eligible for Medicare). You should start your Part B coverage as soon as you stop working or lose your current employer coverage (even if you sign up for COBRA or retiree health coverage from your employer).  You have 8 months to enroll in Medicare once you stop working OR your employer coverage ends (whichever happens first). But you’ll want to plan ahead and contact Social Security before your employer coverage ends, so you don’t have a gap in coverage.
  • WARNING: If you do not enroll in Part B within 8 months of losing your coverage based on current employment, you may have to pay a lifetime late enrollment penalty. In addition, you will only be able to enroll in Part B during the Medicare General Enrollment Period (from January 1 to March 31 each year) and your coverage won’t start until July. This may cause a gap in your coverage.
  • WARNING: If you have a Health Savings Account (HSA), you should stop making contributions to your HSA 6 months before you sign up for Part A and Part B in order to avoid a tax penalty.

Medicare and HSA Excise Tax Penalties

So, let’s say you go ahead and do this anyway.  If somehow you end up timing your Medicare perfectly, your Medicare enrolment date will get backdated.  Here’s what Medicare says, and underlines are again mine.

If you qualify for premium-free Part A, your coverage will go back (retroactively) up to 6 months from when you sign up.  So, you should stop making contributions to your HSA 6 months before you enroll in Medicare Part A and Part B (or apply for Social Security benefits, if you want to collect retirement benefits before you stop working).

Beginning with the first month you are enrolled in Medicare, your contribution limit is zero.  This rule applies to periods of retroactive Medicare coverage.  So, if you delayed applying for Medicare and later your enrollment is backdated (per the above), any contributions to your HSA made during the period of retroactive coverage are considered excess.

See what I mean?  You certainly can do it.  I wouldn’t.  You know when Medicare puts an all-CAPS warning out there, there’s a real chance timelines and dates, birthdays, employer benefit time periods, taxes – everything has to line up perfectly and be very well planned out for no gaps in your Original Medicare coverage.  Plus, when you do eventually go back and enroll, they’ll backdate your enrollment date and you’ll likely face excise tax penalties.

But you can do it!

Good luck with your decision, Tony!

Whew!  That was a long one but 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

Sources:

https://www.cms.gov/Outreach-and-Education/Find-Your-Provider-Type/Employers-and-Unions/FS3-Enroll-in-Part-A-and-B.pdf

https://help.vitacompanies.com/knowledgebase/article/KA-01283/en-us

https://www.irs.gov/publications/p969

 

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. He’s also the host of The Matt Feret Show.

He’s held leadership roles at numerous Fortune 500 Medicare health insurers in sales, marketing, operations, product development and strategy for over 20 years.  Matt holds a BA from Virginia Tech and an MHA from Washington University in St. Louis. 

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