Medicare and HSAs: Don’t Get Caught in the Dark

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Are you approaching age 65? If so, Medicare enrollment information will soon fill your mailbox. Does everyone need to enroll in Part A and Part B at age 65? No! In fact, if you're contributing to a Health Savings Account, Medicare enrollment can be a liability. Let’s shed some light on what you need to know before enrolling.

Who Needs to Enroll in Medicare?

Medicare enrollment at age 65 is only necessary if you do not have qualifying health insurance through an employer. This is what you need to know before accepting or declining Medicare:

No employer health insurance:  If you do not have health insurance through an employer, you are required to enroll in Medicare at age 65. You have a seven-month window for enrollment that begins three months before the month you turn 65 and ends three months after your birth month.

For example, if you turn 65 in June, your initial enrollment period begins in March and closes in September. But act fast.  Delaying enrollment in Part A and/or Part B until the last four months of your initial enrollment period will result in delayed coverage. Enrolling outside your initial enrollment period will generally subject you to lifetime penalties.

Employer health insurance: If you are age 65 and you have health insurance through your employer, you will need to do some research to determine if that enrollment timeframe applies to you. If your employer has fewer than 20 employees, the answer’s definitive - you’ll need to enroll in Part A and Part B during that designated timeframe to avoid paying penalties.

However, if your employer has more than 20 employees, you may qualify for penalty-free, delayed enrollment. Here’s what you need to do:

  • Ask your human resources representative if you have IRS-defined group health plan coverage. If so, Medicare allows you to delay enrolling in Part A and Part B.

  • Determine whether your employer requires employees age 65 or older to enroll in Medicare. If you don’t need to enroll in Medicare and can remain on your employer’s health plan, you are eligible for a Special Enrollment Period (SEP). The SEP is an eight-month window that begins the month your employer health insurance ends.

  • Check Medicare’s website for additional scenarios that may impact your ability to delay enrollment.

How Does Medicare Impact My HSA?

Your eligibility to contribute to a Health Savings Account (HSA) is based on the type of health insurance you have. To contribute to an HSA you must be covered exclusively by an HSA-qualified, high-deductible health plan. Medicare does not have any plans that meet this definition. Therefore, if you are a Medicare participant, you cannot contribute to an HSA.

If you are covered by an employer health plan, but also enroll in Medicare Part A because it’s free, then you will eliminate your ability to contribute to an HSA account.  Enrolling in Medicare Part A automatically disqualifies your HSA contributions.

Intentional or otherwise, HSA contributions made when you are not eligible to do so need to be corrected.  Failing to do so, results in HSA excess contributions.  Excess contributions are subject to a 6% excise tax for each year they remain in the HSA. They are also subject to income taxes. There are a few IRS approved options outlined in Publication 969 that allow you to avoid financial penalties depending on the circumstances.

Another thing to note:  Medicare enrollment impacts HSA contributions only, not distributions. Any funds in your HSA are available to be used for qualified medical expenses even though you are participating in Medicare.

What About My Spouse and the HSA?

The spouse with employer coverage remains eligible to contribute to an HSA even though the non-working spouse is participating in Medicare. The contribution limit is based on whether he/she is covered under an individual plan or a family plan. If over age 55, the HSA eligible spouse can contribute an additional $1,000. 

At times, the working spouse, age 65 or older, chooses to be covered under an employer plan and also be enrolled in Medicare. So, what does this mean for the non-employee spouse who is younger than age 65? If the non-employee spouse is otherwise HSA-eligible, meaning his/her only health insurance is a qualifying high-deductible plan, then he/she can contribute to an HSA. This may mean opening a new HSA account in the name of the HSA eligible spouse.

Now What?

Take some time to figure out how enrollment in Medicare will impact you and your family; then, assess your options. You don’t want to get stuck with financial penalties. With a little advance preparation, you can avoid penalties and still maximize your benefits!

Sarah Mahaffa, CFP is a Senior Wealth Advisor with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website or email Sarah.

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