Monday, December 1, 2014

Can I Have a Health Savings Account if I'm Eligible for Medicare?

During our open enrollment period a lot of questions came up about Medicare. I reached out to our attorneys to confirm my understanding of some key issues. I'll share that information here, but first let's make sure we're on the same page in discussing the parts of Medicare. In the simplest terms: 
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  • Medicare Part A covers hospitalization. It's free to those who enroll.
  • Medicare Part B covers physician care. Participants pay for it. 
  • Medicare Part D covers prescription drugs. Participants pay for it. 
Obviously, there are a lot more nuances to Medicare, but the above should suffice for this discussion. (You can read more about the different parts of Medicare on the site.) 

It's a common misunderstanding that you have to apply for Medicare Part A when you turn 65. If you are an active employee and enrolled in health coverage, it's not necessary for you to enroll in Medicare Part A or Part B. It's enrollment in Medicare that precludes you from contributing to an Health Savings Account (HSA), not your age. So, you can contribute to an HSA if you have a high deductible health plan and you're Medicare eligible as long as you do not enroll in Medicare. If you start receiving social security benefits, you will be automatically enrolled in Medicare Part A. If you work for an employer with 20 or fewer employees, you may be required to enroll in Medicare when you become eligible. Check with your plan administrator.

Once you are no longer working, you must enroll in Medicare Part A and Medicare becomes primary. Most retiree health plans also require you to enroll in Part B by reducing the benefits as if Part B was elected. If you didn't enroll in Part B, you'd be left responsible for the part of the bills it would have paid. This is how ASHA's plan works. If you retire from ASHA and keep our retiree coverage, you should enroll in Part A and Part B. You should also not wait to enroll in Part B, once you are no longer working. If you wait to enroll in Part B, you may have to pay a penalty for late enrollment, which will last for as long as you are enrolled in Part B. 

Medicare Part D is different. It's completely voluntary and if you already have broad based prescription drug coverage (like what ASHA provides) you should not enroll in Part D. Many retiree plans state that if a person does enroll in Part D that the retiree coverage will terminate because the coordination of benefits provisions between Part D and a retiree plan are too cumbersome. ASHA provides a creditable coverage notice to our retirees each year. Because our coverage is creditable, our retirees can use ASHA's coverage and not pay a higher premium (a penalty) if they later decide to join a Medicare drug plan. 

Pretty straight forward so far, but now it gets tricky. I stumbled upon this warning at the end of this AARP Article
Warning for when you retire: You cannot contribute to an HSA in any month that you are enrolled in Medicare.  And there’s a pitfall inherent in that rule that you need to be aware of.  When you finally sign up for Social Security retirement benefits—probably when you’re on the point of retirement—and if you’re already at least six months beyond your full retirement age (currently 66)—Social Security will give you six months of “back pay” in retirement benefits.  It’s a generous gesture, but it means that your enrollment in Part A will also be backdated by six months.  Under IRS rules, that leaves you liable to pay six months’ of tax penalties on your HSA.  To avoid the penalties, you need to stop contributing to your account six months before you apply for Social Security retirement benefits.

When applying for social security, a person may be entitled to monthly benefits retroactively for up to six months for full retirement age claims. When social security benefits are paid retroactively, typically the Medicare Part A enrollment is also made retroactively to the same effective date. There is little information available about this. It may be possible to inform the social security administration that you had other coverage and you do not want to start Part A retroactively. If you were able to do this, there would be no problems contributing to an HSA while you're employed. Here's what we recommend: 
  1. Stop your HSA contributions six months prior to applying for social security benefits. When you do apply, ask the social security administration not to backdate your Part A enrollment. If they honor your request, you can make an additional contribution equal to what you would have contributed in the six months prior to applying for social security benefits. You'd make this contribution directly to the HSA trustee before December 31 or before you file your tax return for the relevant year. Then, you'd deduct the "missed" contribution from your income taxes. 
  2. If you do not stop your HSA contributions six months before applying for social security benefits and you are enrolled in Part A retroactively, contact the HSA trustee and request that your contributions during that time period be removed from your account and refunded to you. You should do this before December 31 of the year you became ineligible. (You may be able to do it up to the point when you file your tax return for that year, but that's more complicated.) If you do not have the ineligible contributions refunded, a special penalty tax applies to that contribution for the year and for each future year that the contribution is not withdrawn. 
So, the answer to the question posed in the title of this post is "Yes", but it can get complicated. We're hoping to have a Medicare expert come in and talk with ASHA staff next year. 

Update October 15, 2020:

Question: One of our colleague’s husband is turning 65 this month. She is under 65 and covers both of them on our plan. They’ve elected the HDHP with HSA. The question is will she still be able to make a full family contribution if her husband enrolls in Medicare? 

Answer: If she maintains family HDHP coverage, she can continue to contribute up to the family HSA limit, even if her spouse enrolls in Medicare.  The person who enrolls in Medicare is not eligible to contribute to an HSA (which is why the rule is different for employees who enroll in Medicare).  If she were to switch to single HDHP coverage, then her maximum contribution would be reduced for the remainder of the year.

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