Many people are now working past age 65 due to an increased Social Security Full Retirement Age (FRA) and the lure of maximizing benefits through age 70. In addition, many employers now offer high deductible health insurance plans and provide an HSA (Health Savings Accounts) to help ease the burden of high health care costs.
NEWSFLASH: If you are enrolled in any part of Medicare, you are not eligible to contribute to an HSA. This means all parts of Medicare, including Part A Hospital Insurance, which is free for most, Part B Medical Insurance, and Part C Medicare Advantage Plans as well as Part D which covers prescription drugs.
When should I enroll in Medicare?
According to www.medicare.gov, “Most people should enroll in Medicare Part A when they turn 65, even if they have health insurance from an employer. This is because most people paid Medicare taxes while they worked and therefore do not pay a monthly premium for Part A. However, some people may want to consider delaying Medicare Part A until a later date, such as people who contribute to a Health Savings Account (HSA) or those who have to pay a premium for Part A.”
The fine print says that when you enroll in Medicare you are automatically enrolled in Part A retroactively for up to 6 months in the past (or until you turned 65, whichever is shorter).
For example, if you are already 65 but are retiring December 31st, 2017, and you plan to enroll in Medicare for health care coverage at that time, you need to STOP contributing to your HSA by June 30, 2017. The exception is if you turn 65 sometime between July 1st and December 31st. If that is the case, you could still contribute to the HSA up to and including the month prior to your eligibility.
How to contribute to your HSA once you turn 65
The ban applies to both the date and the contribution amount. In our example, you couldn’t plan on maximizing your annual HSA contribution amount prior to July 1st. If you are ineligible in any month, your annual maximum contribution amount is reduced by a ratio that matches your months of ineligibility/12. In other words, you would only qualify, in the earlier example, for 6/12 of your annual HSA eligibility. While you could opt out of Medicare Part A that also means you opt out of Social Security. Be warned that if you are already collecting Social Security, you need to be prepared to payback all Social Security benefits you have received if you choose this option.
Remedies and penalties for HSA contributions
If you miss the deadline for ceasing contributing to your HSA, excess contributions must be removed from the HSA by the tax due date, including extensions, for the year in which the excess contribution was made. The excess contributions and related earnings will be taxed as ordinary income. If the contributions aren’t removed, you can be subject to a 6% penalty from the IRS each year the excess remains in the HSA.
How to figure out whether you should be on Medicare or contributing to your HSA
Health insurance and taxes have now become a complex tangle of paperwork and new provisions. Asking questions to your team of advisers is now more important than ever. If you are turning 65 and have questions regarding signing up for Medicare, you may want to review the fact sheet at the attached link: https://www.cms.gov/Outreach-and-Education/Find-Your-Provider-Type/Employers-and-Unions/FS3-Enroll-in-Part-A-and-B.pdf