A Dangerous Intersection

” [Y]ou may have to pay a permanent premium surcharge if you don’t’ enroll when you’re first eligible. But you may not. And it may make sense to incur future penalties in exchange for immediate financial benefits”

William G. (Bill) Stuart

Director of Strategy and Compliance

May 23, 2019

Readers of this column know that I recently published HSAs: The Tax-Perfect Retirement Account. This book wouldn’t make top-shelf for beach reading. Rather, it’s designed as a reference book to help financial professionals, retirement planners, benefits advisors, employers, and ordinary Americans understand the rules around Health Savings Accounts. Additionally, and just as important is why HSAs are superior to other options as retirement accounts due to lower tax friction.

An entire section of the book has been devoted to the intersection of HSAs and Medicare since this is an area of great confusion, as well as potential compliance landmines and lost opportunities. Below is a summary of the key issues where HSAs and Medicare intersect.

You don’t have to enroll in Medicare at age 65. You’re eligible to enroll in all Parts of Medicare at age 65, but no law requires you to do so (but see below to learn how some other factors may limit your options). This flexibility is important if you want to continue to make and receive contributions to your HSA. Every Part of Medicare is disqualifying coverage, so if you’re enrolled in Part A (inpatient services), Part B (outpatient services), Part D (prescription drug coverage), or Part C (a private alternative to traditional Medicare), you can’t make or receive further contributions to an HSA.

Many Americans turn age 65 and delay enrollment in Medicare because they’re happy with their employer-sponsored coverage.  They don’t see the value in enrolling in Medicare (monthly premiums for both Part B and Part D) when they’re covered on their employer’s plan. See “Enrolling in Medicare” in Chapter 13 for more information.

You’re no longer HSA-eligible if you collect Social Security benefits and are age 65 or older. Under current administrative rules, anyone collecting Social Security benefits must enroll in Medicare at age 65 (if collecting benefits prior to your 65th birthday) or beginning with the month that you begin to receive Social Security benefits. This situation holds even when you remain covered on your employer’s plan and don’t want Medicare coverage. You can waive Part B (and avoid the monthly premium), but not Part A (for which most recipients pay no monthly premium, having paid payroll taxes during their working years to purchase this coverage premium-free). See “Enrolling in Medicare” in Chapter 13 for more information.

Your insurer may require you to enroll in Part A and Part B. Medicare is primary coverage for employees who work at companies with 19 or fewer employees. The group plan is secondary coverage. What does that mean? Providers send claims to Medicare first, if the patient is enrolled in Medicare. Medicare determines its financial responsibility for the claim. Once it sends this information to the provider and patient, the provider bills the employer plan. The employer plan pays what it would normally pay less what Medicare paid.

A simple example: You have a $30,000 inpatient stay. Medicare covers all but $1,368 (the Part A deductible). Your employer plan has a $500 inpatient copay, so it pays $868 (the difference between $1,368 and $500). You receive benefits from both plans, but the total received is no more than what the richer plan would have paid.

Medicare rules don’t require you to enroll in Part A and Part B if you work for a small company, but your employer’s insurer might. And you can see why in this example where the employer’s plan would have paid $29,500 rather than $868. Many – but by no means all – insurers require employees age 65 or older at small companies to enroll in Part A and Part B as a condition for remaining covered on the group plan, and now you know why. See “Medicare Secondary Payment Rules” in Chapter 13 for more information.

You can be enrolled in employer-sponsored coverage and Medicare simultaneously. It’s not uncommon for people to be enrolled in more than one medical plan. Many veterans retain the TRICARE coverage to which they’re entitled and enroll in their employer’s plan as well. Some children may be enrolled in two parents’ plans. And many working seniors are enrolled in the group plan and Medicare.

When you’re covered by more than one plan, one is always primary coverage,  and the other is secondary. The rules vary on which is primary, and or secondary.  But the effect is the same: The insurers will coordinate coverage so that you receive benefits up to what the richer (or richest) plan would pay, but no more. You won’t be reimbursed for the same expense by two different insurers. See “Medicare Secondary Payer Rules” in Chapter 13 for more information.

You may pay penalties if you delay enrollment in Medicare. You never pay penalties when you enroll in Medicare when you’re first eligible – a seven-month period that begins three months before your 65th birthday. If you delay enrollment, you may pay penalties in the form of monthly premium surcharges if you remain enrolled in Medicare.

The topic of Medicare is far too complex to break down in this article. The key point is that you may have to pay a permanent premium surcharge if you don’t’ enroll when you’re first eligible. But you may not. And it may make sense to incur future penalties in exchange for immediate financial benefits (like avoiding Medicare premiums and continuing to enjoy the tax benefits associated with an HSA). See “Strategies to Avoid Penalties” in Chapter 14 for a robust discussion of this issue.

COBRA isn’t group coverage. That’s right – even though you’re continuing group coverage when you exercise your COBRA rights, COBRA coverage isn’t group coverage. Why does that matter? It matters because if you continue coverage through COBRA when you turn age 65 and delay enrollment in Medicare to remain on your COBRA plan, you may face some issues when you want to enroll in Medicare. Specifically, you may be assessed penalties,  and you may experience a gap in coverage between when your COBRA plan ends and when your Medicare coverage becomes effective. See “Medicare Enrollment Periods” and “Penalties for Delayed Enrollment” in Chapter 13 and “Beware of COBRA” and “The Effect of Penalties” in Chapter 14 for more information.

Medicare premiums are qualified expenses. You can reimburse tax-free distributions from an HSA to pay your monthly Medicare premiums.  Part B premiums are based on income, and most recipients pay $135.50 monthly; the average Part D premium is about $30 per month. That’s about $2,000 per year. You’d have to withdraw about $2,500 from a traditional 401(k) plan or IRA to pay the $2,000 premium and taxes on the withdrawal. But you’d have to withdraw only $2,000 from an HSA since you can make tax-free distributions for qualified expenses. See Chapter 19 for more information.

Medicare deductibles, coinsurance, and copays are qualified expenses. All Parts of Medicare impose cost-sharing in the form of deductibles. And some Parts require you to pay copays and coinsurance as well when you access care. You can pay these qualified expenses tax-free from your HSA, whereas distributions from a traditional 401(k) plan or IRA for the same expenses are taxed as ordinary income. See Chapter 19 for more information.

Dental, vision and certain uncovered expenses are qualified. Many people don’t appreciate the full cost of a dental implant and crown, a routine eye exam, or a course of acupuncture until they don’t have an insurer that negotiates discounts and pays a portion of the cost. Medicare doesn’t cover dental or vision expenses. And Medicare covers fewer alternative medical therapies than a growing number of commercial insurers do. A dental implant and crown, for example, can easily cost $3,000 or more without insurance. Paying that bill with a $3,000 withdrawal from an HSA is far preferable than withdrawing $3,600 from a traditional 401(k) plan or IRA to reimburse the provider,  and pay the taxes due on the distribution. See Chapter 19 for more information.

Medicare Supplement plan premiums are not qualified expenses. Medicare is an ill-constructed plan. Its separate inpatient (Part A) and outpatient (Part B) coverage is a remnant of the coverage market in 1965 (when Medicare was created) – an era long before Blue Cross (inpatient) and Blue Shield (outpatient) merged, and a design hardly recognizable in today’s commercial market with integrated coverage.

Part A imposes lifetime limits on inpatient days covered. Part B imposes a small deductible ($185), then covers only 80% of all additional expenses. That 20% of patient responsibility is steep when you’re undergoing treatment for cancer. Imagine 20% of $200,000 or $450,000, and then your cost becomes quite significant.

Most enrollees in traditional Medicare purchase a Medicare Supplement plan. As the name implies, these plans supplement Medicare coverage – increasing the number of inpatient days, capping total out-of-pocket costs (which the Affordable Care Act requires on all commercial coverage), and providing some additional benefits. Premiums for this coverage aren’t qualified expenses, so any distributions from an HSA to pay for Medicare Supplement premiums are included in taxable income. See Chapter 19 for more information.

You can’t reimburse Medicare premiums until you turn age 65. This little-understood provision is important and requires family planning if the primary HSA owner is the younger spouse. The family may lose the opportunity to reimburse some Medicare premiums tax-free before the spouse with the larger HSA balance turns age 65. There is a way to manage this situation, but you must plan long before the older spouse turns age 65. See “Distributions to reimburse a spouse’s Medicare premiums” in Chapter 19 for more information and a tip on how to address this issue.

There you have it. A quick outline of issues at the intersection of HSAs and Medicare. But a quick outline is no substitute for a detailed understanding of how to identify these issues and address them so that you remain in compliance and maximize the value of your retirement savings.

What We’re Reading

Benefit Strategies has created a series of HSA GPS Fact Sheets to help clients and customers to understand tricky compliance issues. The sheet entitled HSAs and Medicare provides details to supplement the discussion above.

Research conducted by my alma mater, The Fuqua School of Business at Duke University, shows that a growing number of patients are engaging in discussions with their doctors about the cost of care, and it’s working. Patients are switching sites of service, choosing a lower-cost therapy or test, and using copay assistance or drug coupons. Some of these strategies lower patient cost rather than overall system costs, but they’re a step in the right direction.

HSAs are a great retirement opportunity. And Yahoo Finance lays out a compelling case here.

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