“Ignore the label “penalty.” When you reposition the penalty in your mind as a “surcharge,” you open yourself to analysis that might show a benefit to delaying Part D enrollment because the financial benefits outweigh the financial risks.”
William G. (Bill) Stuart
Director of Strategy and Compliance
November 21, 2017
Many people find HSAs confusing. Many others find Medicare confusing. When trying to navigate the intersection of HSAs and Medicare, few people have found a GPS capable of helping them arrive at the right destination.
We could write a book about Medicare and HSAs (and, in fact, I’m finishing a draft of a new volume on HSAs, Medicare and retirement planning, which will be published in 2018). Fortunately, we can summarize the rules without, we hope, inducing the same somnambulant effect that the tryptophan in your turkey will create during the Chargers-Cowboys game Thanksgiving afternoon.
Here are the key pieces of general information that you, your clients or your employees need to know to understand when to enroll in Medicare and how to plan a smooth transition from HSA eligibility to Medicare coverage.
What are the rules around Medicare and HSAs? If you enroll in any Part of Medicare, you’re no longer eligible to contribute to an HSA. You can continue to spend your HSA balances tax-free for eligible expenses (including Medicare premiums) for the rest of your life, but you can’t make contributions for any month during which you’re enrolled in Medicare.
What happens with respect to Medicare when I turn age 65? You’re eligible to enroll in Medicare during a seven-month period that begins three months before your 65th birthday, continues during the month of your birthday and continues three months after the month of your 65th birthday. During this time, called the Initial Enrollment Period, you can enroll in Medicare without any potential future penalties or gaps in coverage.
Am I automatically enrolled in Medicare at age 65? If you’re collecting Social Security or Railroad Retirement benefits, you’re automatically enrolled in Medicare Part A (inpatient services) and Part B (outpatient services) at age 65 (or when you start to receive these benefits after age 65).
Otherwise, you’re not enrolled in Medicare. If you’re not collecting these retirement benefits, you must actively enroll in Medicare to begin to receive benefits. This concept is important if you want to remain HSA-eligible and aren’t collecting Social Security or Railroad Retirement benefits, you won’t be enrolled in HSA-disqualifying Medicare coverage.
Can I waive Medicare coverage? If you’re collecting Social Security or Railroad Retirement benefits, you can’t waive Part A coverage. As the Medicare law is written, you must accept Part A coverage. You can disenroll from Part B (for which you pay a premium) to save money, an option that many individuals who remain covered on an employer’s plan choose. If you’re not collecting Social Security or Railroad Retirement benefits, you can delay enrollment in Medicare indefinitely.
How does the size of my employer’s employee population impact my Medicare coverage? If you’re covered on your employer’s insurance and also by Medicare, the two insurers coordinate benefit so that you receive reimbursement up to the limits of the richer plan. If your company has 20 or more employees, the employer’s plan is the primary payer. Your providers submit claims to this insurer first, then seek additional payment from Medicare. If your company has 19 or fewer employees, your provider bills Medicare first, while your employer’s insurance pays any additional amounts up to the richer of the two plans’ coverage levels.
Can my employer force me to enroll in Medicare? No. If your company has 19 or fewer employees, however, its insurer can require that you enroll in Part A or Parts A and B so that the insurer becomes the secondary payer (thus reducing its financial responsibility, since Medicare pays first). If you don’t enroll in Medicare, your employer’s insurer has the right to pay as though it were the secondary payer, leaving your employer with a financial burden for a hospitalization, course of cancer treatment or surgery.
If I’m enrolled in Medicare and want to disenroll to make contributions to an HSA, can I? Yes, you can disenroll from Medicare. You must complete paperwork and repay any reimbursements that Medicare has made to you and your providers. If you’re healthy or Medicare is the secondary payer, you may not have to repay much money. If Medicare is the primary payer or you’ve had substantial claims, the cost likely is prohibitive.
If you’re receiving Social Security or Railroad Retirement benefits, you must also repay all Social Security benefits that you’ve received to disenroll from Medicare. Individuals who are collecting benefits typically find that it doesn’t make sense financially to disenroll. One benefit in doing so is that disenrollment allows you to re-enroll for benefits later, when your delay increases your monthly benefit.
Am I subject to penalties or gaps in coverage if I delay enrollment in Medicare? Potentially.
If you remain covered by an employer’s plan after age 65 and delay Medicare coverage, you can qualify for a Special Enrollment Period. If you disenroll from your employer’s plan and immediately enroll in Parts A and B, you won’t face a penalty or gap in coverage.
If you’re not covered by your employer’s plan (for example, you have no coverage, you continued the group plan by exercising your COBRA rights or you bought a nongroup plan through an ACA marketplace or directly from an insurer), you’re not entitled to a Special Enrollment Period. You can’t enroll in Parts A or B until the next effective date of coverage (July 1) during the annual General Enrollment Period.
If you don’t pay a premium for Part A (individuals who’ve worked 40 quarters, 10 years, prepay their Part A premium through payroll taxes during their working years), you pay no penalty for delaying enrollment without qualifying employer coverage. If you delay Part B, you pay a penalty in the form of a 10% premium surcharge for every 12-month period that you delayed enrollment without qualifying employer coverage. In other words, if your premium in 2017 is $142 and you had delayed enrollment for one year without qualifying coverage, you’d pay $142 plus $14.20, or $156.20 per month for Part B coverage. As the Part B premium increases in the future, so does the penalty, which is always a percentage of the premium.
Are there penalties for delaying enrollment in Part D? Potentially.
Part D, the prescription drug benefit, has different roles from original Medicare (Parts A and B). You can’t enroll in Part D unless you’re enrolled in Parts A and B. If you delay enrollment in Part D, you must have what’s called Medicare Creditable Coverage (MCC) every month since you turn age 65 to avoid future penalties. MCC simply means that your prescription drug coverage is at least as rich as Part D. Your insurer tests its pharmacy benefits annually and tells you (and Medicare officials) whether your coverage is MCC.
If you remain enrolled in an MCC prescription drug plan every month after age 65, you avoid all future penalties and can enroll in Part D immediately, so long as you’re enrolled in Parts A and B. If your coverage isn’t MCC, you can’t enroll in Part D until the next General Enrollment Period and pay a penalty equal to 1% of the national base plan premium ($35.02 in 2018), or 35 cents. So, if you delayed enrollment for 10 months without MCC, you’d pay a monthly surcharge of $3.50 on top of your monthly Part D premium in 2018. As with the Part B penalty, the surcharge increases as future premiums increase. Learn more about penalties here.
How can I avoid Part D penalties? You avoid all penalties when you remain enrolled in your employer’s coverage (so that you’re entitled to a Special Enrolment Period that allow you to enroll immediately in Parts A and B) and in a prescription drug plan that’s MCC (so that you avoid Part D penalties).
If I can’t avoid penalties, does it make sense to enroll in Medicare and end my participation in an HSA program? Maybe not. You’ll have to run the numbers (probably with the help of a financial advisor well versed in Medicare and HSAs). Let’s say you have a plan to wind down your employment and that plan projects that you’ll pay a 30% Part D penalty when you enroll. If the national base plan premium that year is $40, you’ll pay an additional $12 premium per month, or about $150 per year. If you live an additional 25 years and the Part D premium rises by 6% annually, your total penalty is about $8,000. In 2018 alone, you’ll put aside an additional $7,900 into your HSA to pay that penalty.
The key point is this: Ignore the label “penalty.” We associate “penalty” with terms like “bad” “criminal” and “to be avoided.” When you reposition the penalty in your mind as a “surcharge,” you open yourself to analysis that might show a benefit to delaying Part D enrollment because the financial benefits outweigh the financial risks.
At what age does it no longer make sense to delay enrollment in Medicare? For most individuals, it’s age 70. When you delay enrolling in Social Security at your full retirement age, you earn an additional 8% increase in your future monthly benefit for every full year that you delay receiving benefits, up to age 70. At age 70, even if you value the tax advantages of continuing to contribute to an HSA, those tax advantages (reducing taxable income by up to $7,900 in 2018, resulting in tax savings of about $2,400 to $3,000 annually) are dwarfed by an annual Social Security benefit of $18,000 or more.
At that point, it makes sense to enroll in Social Security, which triggers your automatic enrollment in Parts A and B. The automatic enrollment in Medicare precludes you from making further contributions to your HSA. If you remain enrolled in employer coverage and have the option to enroll in different coverage with lower cost-sharing, you might want to switch medical plans during the next open enrollment.
Whether your medical plan is the primary payer (your company has 20 or more employees) or secondary (19 or fewer), your employer plan and Medicare coordinate benefits so that you receive coverage up to the richer plan’s benefit.
Where can I learn more? The Centers for Medicare and Medicaid Services (CMS), part of the US Dept. of Health and Human Services, publishes Medicare and You annually. This guide, though it doesn’t discuss the intersection of HSAs and Medicare, provides excellent information about the Medicare program.
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