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Age 65 in Sight? Avoid Some Pitfalls

“The decision around when to sign up for Social Security benefits is complicated . . . Just be aware that one of the negative consequences of collecting Social Security benefits is that if you’re age 65 or older, you can’t make or receive additional Health Savings Account contributions.”

William G. (Bill) Stuart

Director of Strategy and Compliance

September 5, 2019

Are you familiar with our Health Savings Account Fact Sheets? They’re information-packed guides to compliance issues that affect Health Savings Accounts and specific topics like partial-year eligibility, domestic partners, interactions with Health FSAs, and COBRA. Here’s an example that’s relevant to this column. Find them all by clicking here and selecting Health Savings Account.

September 16 is the most common birthday in the United States, and more than 10,000 Americans will turn 65 on that day. So now’s a good time to rekindle a discussion about the interaction of Health Savings Accounts and Medicare.

As anyone who has read my blogs (especially this one, this one, and this one); my book; or my HSA Wednesday Wisdom columns on LinkedIn knows, danger awaits at the intersection of Health Savings Accounts, turning 65, and Medicare eligibility. Here’s what you need to know to help you avoid losing something of value – the ability to make and receive contributions to a Health Savings Account to reduce your taxable income, build medical equity, and watch your balances buy more medical services in retirement than comparable distributions from a traditional 401(k) plan or Individual Retirement Arrangement.

Medicare Is Disqualifying Coverage

Medicare has four parts:

  • Part A – coverage for inpatient services, home health, and hospice.
  • Part B – coverage for outpatient services like physician visits, imaging, testing, and outpatient therapy.
  • Part D – prescription-drug coverage.
  • Part C – a private alternative that replaces Parts A, B, and D and is increasingly popular with Medicare enrollees.

If you’re enrolled in any Part of Medicare, you’re disqualified from making or receiving Health Savings Account contributions. That’s true even if you’re a working senior and are participating in your employers Health Savings Account program.

You’re eligible to enroll in Medicare during a seven-month period that starts three months before the month of your 65th birthday. Coverage begins as early as the first day of the month of your 65th birthday (unless your birthday is the first day of the month, in which case it begins as soon as the first day of the prior month).

It’s important to weigh the benefits of enrolling in Medicare when you’re first eligible versus delaying enrollment to continue to make and receive Health Savings Account contributions. But the decision isn’t always as easy as delaying Medicare enrollment . . .

Social Security Benefits Can Disqualify You

If you receive Social Security benefits, you’re automatically enrolled in Medicare Part A if you’re 65 or older. You’re enrolled in Part B as well, but you can waive that coverage. You’re required to remain enrolled in Part A, however, thus disqualifying you from opening a Health Savings Account if you haven’t already done so and making or receiving additional contributions to your account.

Today, more than half of all Americans begin to collect Social Security benefits between age 62 – when they’re first eligible – and 65. That’s true even though they reduce their monthly benefit for the rest of their lives.

If you start collecting Social Security benefits at 62, you receive 75% of your benefit at full retirement age (66 if you’re born in 1954, older if you were born later). If you begin to receive benefits at 65, you receive 93.3% of your full benefit. Collecting lower benefits earlier may benefit you (if you die young) or harm you (if you live for decades at a lower monthly benefit).

The decision around when to sign up for Social Security benefits is complicated, and it involves a lot more than your eligibility to continue to make or receive Health Savings Account contributions. Factors like your projected longevity, spouse’s benefit, current need for income, and other sources of retirement income are all variables that you and a retirement specialist need to consider. Just be aware that one of the negative consequences of collecting Social Security benefits is that if you’re 65 or older, you can’t make or receive additional Health Savings Account contributions.

Lower-Income Working Seniors Are Penalized

Imagine you and your best friend at work, Annie, are both 65. The company has 20 or more employees. You’re both enrolled in your employer’s HSA-qualified coverage with a $4,000 deductible and a $2,000 employer contribution to your Health Savings Account. Your best friend makes $80,000 as the department manager. You used to be a manager at another company, but your job was eliminated during the recession a decade ago and you’ve been working since in a clerical position that pays $32,000 annually.

Annie plans to work to 70 and delay enrolling in Social Security until 70, when she’ll receive a check about 40% larger than if she enrolled in the program at 65. You, on the other hand, have expenses that exceed your $32,000 income, and you’ve received Social Security benefits since you were first eligible at 62.

These decisions shouldn’t spill over into your work life, but they do. Annie receives the $2,000 employer contribution and reduces her taxable income by $6,000 (saving about $2,000 in taxes) by contributing to her Health Savings Account.

You, on the other hand, are automatically enrolled in Medicare Part A at 65. That means that you can’t contribute to your Health Savings Account any longer. It also means that you can’t receive the $2,000 contribution that your employer gives everyone else (and you, until now) to help pay for services subject to the deductible, nor enjoy additional tax savings with personal contributions. Sure, you now have additional coverage (Part A), but it kicks in only if you have an inpatient stay and provides benefits (if any) only after you employer’s plan pays.

Small-Company Working Seniors are Penalized

Your other best friend, Sarah, is also 65, works at a company with 19 or fewer employees, and has a manager job that pays $80,000 annually. And she’s enrolled in a $4,000 deductible plan with a $2,000 employer contribution. In other words, she’s a lot like Annie. Surely they’ll have similar opportunities to participate in a Health Savings Account program, right?

The truth is, she might not. At companies with fewer than 20 employees (not full-time equivalents, but bodies), Medicare is primary coverage for working seniors who enroll. If Sarah’s company’s insurer is like many others, it requires employees who are eligible for Medicare benefits to enroll as a condition of remaining covered on the group plan.

Why? Imagine Sarah had a hospital stay that her employer’s insurer would cover for $40,000 and Medicare for $23,000. If Sarah isn’t enrolled in Medicare, her employer’s insurer would pay the hospital $36,000 (Sarah would pay the $4,000 deductible). If Sarah is enrolled in Medicare, Medicare pays $21,636, Sarah pays the $1,364 deductible, and the employer’s insurer pays nothing.

That’s why many insurers at small companies require employees who are 65 or older to enroll in Medicare as a condition of remaining on the employer coverage. Some don’t, but you can see why many do require enrollment in Medicare.

So Sarah is just like you – she can’t receive her employer’s $2,000 Health Savings Account contribution, and she can’t save another $2,000 in taxes by contributing $6,00 of personal funds to her account.

A Checklist at Age 60

By 60, you may well be working with a retirement specialist to help you sort through myriad issues related to retirement and finances, including (but hardly limited to):

  • When to retire from your current job/profession.
  • Whether to work part-time.
  • When to begin to collect Social Security, enroll in Medicare
  • When to begin to tap assets to finance your retirement (or reduced income).
  • Which accounts to tap first.
  • What medical coverage you need and when you need it.

Here are the issues related to Health Savings Accounts that should be incorporated into these discussions:

  • If you’re enrolled in an HSA-qualified plan and plan to work after 65, let your retirement specialist know this information. Share why it’s important (or find a new retirement specialist) if they say this information isn’t relevant.
  • Think carefully before you enroll in Social Security benefits. Delaying enrollment will increase your future monthly benefit and preserve your eligibility to make and receive additional Health Savings Account contributions.
  • If you work for a company with fewer than 20 employees, find out whether you’re required to enroll in Medicare Part A and Part B when you turn 65.
  • If you’re considering switching jobs, check on this same information at any prospective employer with fewer than 20 employees.
  • If you lose your eligibility to make and receive Health Savings Account contributions because you’re enrolled in Medicare in either scenario above, determine whether you’re better off dropping group coverage (Medicare is your only coverage) or keeping both the employer plan and Part A or Part A and Part B. Factors include premiums, out-of-pocket responsibility, benefits covered, network of providers, and ongoing treatment transition.

Help on the Way?

In July 2018, the House of Representatives passed a bill that allowed Medicare Part A enrollees who were otherwise eligible to continue to make and receive Health Savings Account contributions. That bill would have helped working seniors who collect Social Security benefits. That bill died when the Senate didn’t vote on it.

More recently, the bipartisan Health Savings for Seniors Act was introduced in the House (read more here). It would allow anyone who’s enrolled in Medicare and otherwise meets Health Savings Account eligibility requirements to open and make or receive contributions to a Health Savings Account. It would solve both problems cited above. But its prospects are far from certain at this point. So the discussion and checklist above are still relevant, and may remain so for years to come. Don’t worry – we’ll keep you apprised of any changes.

What We’re Reading

The leader in tracking and reporting Health Savings Account statistics and trends is Devenir, a provider of services to account administrators. In its 2019 mid-year report, we learn that assets now exceed $60 billion, and more than 1 million account owners have invested a cumulative total of $13 billion in mutual funds and other instruments.

If you’re a regular reader, you know how passionate I am about Health Savings Accounts as a means of building medical equity to pay for qualified expenses tax-free in retirement. Kiplinger offers some sound advice to account owners age 65 or older, whether they’re still working or retired. For more information for Health Savings Account owners 65 and older, click on the link at the top of this column to read Benefit Strategies’ Health Savings Account Fact Sheet entitled HSAs and Medicare.

7 thoughts on “Age 65 in Sight? Avoid Some Pitfalls”

  1. Mark Scarberry says:

    A person who applies for Social Security benefits is enrolled retroactively in Medicare as of a date that is six months earlier. It appears to me that any deposits into an HSA made during that six month period will have to be withdrawn. Also, the prorating of the HSA maximum based on the number of months of eligibility will be affected; the prorated maximum will be reduced because those six months will not be eligible months. If this is correct, and I believe it is, then the interaction between HSAs and Social Security is more complex than your analysis indicates. I would love to be proved wrong, but this is my conclusion after substantial research. And it does not appear that the retroactive Medicare coverage can be declined.

    1. Bill Stuart says:

      Mark Scarberry, you are correct. See page 13 of this document for more information on retroactive enrollment in Medicare:

      When you enroll in Part A after age 65, enrollment is retroactive six months (or back to your 65th birthday month, if you enroll in Medicare within five months of our birthday). You can’t waive retroactive coverage. You do have to pro-rate your contribution, which may involve withdrawing funds and including them in taxable income to avoid penalties. It’s a very unfortunate feature of the system. You don’t want retroactive Medicare coverage, you don’t need retroactive Medicare coverage, and that unneeded and unwanted coverage actually harms you financially. But those are the current rules.

  2. Mark Scarberry says:

    My comment was addressed to the situation where a person applies for social security benefits at least six months after turning 65. Medicare coverage will be retroactive for six months. And the consequence appears to be what I stated.

    From IRS Publication 969,

    “Enrolled in Medicare. 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 back dated, any contributions to your HSA made during the period of retroactive coverage are considered excess.”

  3. Bill says:

    So you’re saying that enrolling early for Medicare, even if it does not take effect until the month when you turn 65, immediately makes you ineligible to make HSA contributions? My wife and I both turn 65 next year (her first). If what you said is true, it makes sense to wait until the month before we turn 65 to apply for Medicare rather than doing so as soon as we can, since I will still be on an HSA health plan next year.

    1. Bill Stuart says:

      Bill – Not exactly. You can ENROLL up to three months before the month that you turn age 65 without affecting your eligibility to make and receive contributions to your Health Savings Account. But once your Medicare coverage becomes EFFECTIVE, you have disqualifying coverage and can’t make contributions for future months.

  4. Candace Hirsch says:

    My husband applied for Social Security after his FRA, at age 66.5 years (FRA is 66 years and his DOB is 07/19/1953) and Social Security is making his retirement benefits effective 02 2020. He didn’t apply until middle of December 2019

    His last day of work is 01/31/2020. He has an HSA (and he makes payroll contributions) and a HDHP with his employer but all that ends on 01/31/2020. I am adding him to my employer sponsored HDHP, effective 02/01/2020 (cost to add him is $183 per month). So he will have my coverage and Medicare Part A starting in 02/01/2020.

    What I read from your blog is Medicare’s effective date will become effective retoactively?

    Also, I make payroll contributions to my HSA through my employer, how will this affect him and Medicare? I am not changing my current HSA contributions even thou I am adding him to my HDHP.

    But, my employer also provides employer sponsored contributions to the HSA. Annually (prorated per payroll) $300 for single only enrollment or $600 for EE+SP coverage. How will this affect my husband and Medicare Part A?

    I look forward to getting your reply,. Thank you so much.


  5. Thanks for explaining why we need to weigh the benefits of enrolling right away versus delaying enrollment. I want to help my mom do research about Medicare since she’ll be turning 65 near the middle of next year. I appreciate you sharing this info and teaching me what factors to consider as I continue to research different Medicare options for her.

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