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Medicare and Health Savings Accounts

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The decision to delay Medicare Part B isn’t normally affected by what kind of health coverage you have at work. But if your employer insurance combines a high-deductible health plan with a Health Savings Account (HSA), you need to sit up and pay attention. That’s because, under IRS rules, you can’t continue to contribute to a HSA if you’re enrolled in Medicare.

This rule sounds screwy, but under the law, you don’t pay tax on earnings you put into a HSA, and you can’t qualify for that benefit if you have other health insurance, including Medicare.

This IRS regulation affects anybody who wants to work beyond age 65 and whose employer offers only the kind of health insurance that includes a Health Savings Account. It’s a situation that affects more and more people because HSAs have become popular with employers in recent years. Yet Medicare and Social Security hardly ever mention this important rule in their enrollment info for consumers.

Here’s what it means:

  • If you’re an employee with a HSA at work: You can’t continue to contribute any money to it after enrolling in Medicare. You can draw on any funds left in the account to pay for approved medical purposes, but you can’t add any new funds to it.

  • If you’re covered by your spouse’s HSA at work and you’re enrolled in Medicare: You aren’t affected by the rule because you aren’t the contributing employee. You can continue to use funds in the account.

Being enrolled in Medicare means Part A as well as Part B under this rule. So if you want to contribute to a HSA at work after age 65, you’re better off not signing up for Part A during your initial enrollment period. It won’t cost you anything, because you’re legally entitled to delay Part A (as well as Part B) until you stop work, without risking any late penalties.

However, this strategy raises another big issue. If you’re already receiving Social Security retirement benefits when you become eligible for Medicare, you’ll be automatically enrolled in Medicare Parts A and B.

Similarly, if you start drawing retirement benefits after age 65 and aren’t already signed up for Medicare, Social Security automatically enrolls you. And although you’re given the option to opt out of Part B, you can’t opt out of Part A if you receive Social Security benefits.

This situation has been the focus of a lawsuit against the government and also of federal legislation — neither of which has been successful at the time I’m writing this. So unless the law changes, these are your options if you have a HSA and are eligible for Medicare, according to different circumstances:

  • You haven’t applied for Medicare or drawn Social Security retirement benefits: If you’re 65 or older and eligible for Medicare but haven’t yet filed an application to enroll in Medicare or draw Social Security benefits, you don’t need to do anything.

    You can continue to contribute to your HSA after age 65 and postpone applying for Social Security and Medicare Parts A and B until you stop working. You won’t be penalized for this delay.

  • You’re enrolled in Part A but haven’t applied for Social Security retirement benefits: If you’re entitled to Medicare because you’ve already signed up for Part A at age 65 or later (perhaps not realizing that it can affect the use of your HSA) but haven’t yet applied for Social Security retirement benefits, you can withdraw your application for Part A.

    To do so, contact Social Security at 800-772-1213 or at the TTY number 800-325-0778. You face no penalties or repercussions, and you’re free to reapply for Part A when you stop work.

  • You’ve already applied for or are receiving Social Security retirement benefits: If you’re 65 or older and you’ve applied for or are receiving Social Security retirement benefits — which automatically entitle you to Part A — you can’t continue to contribute to your HSA.

    And in these circumstances, the only way you can opt out of Part A is to pay back to the government any money you’re already received in Social Security payments, plus anything Medicare has spent on your medical claims. You must repay these amounts before your application to drop out of Part A can be processed.

    If you take this action, you’re no longer entitled to Social Security or Medicare, but you can reapply for both at any time in the future, such as when you end or lose your HSA coverage.

  • You’re receiving Social Security disability benefits but can return to work: If you’re under 65 and receiving Social Security disability benefits but are able to return to work, your Medicare entitlement may continue for another eight and a half years, even though your disability payments have stopped. So if your employer’s health insurance includes an HSA, you won’t be able to take it because you have Medicare.

    Again, the only way you can opt out of Medicare is to repay Social Security for all the disability payments you’ve received and repay Medicare for any medical services you’ve used. For most disabled people in this situation, that amount may add up to hundreds of thousands of dollars, and opting out of Medicare is therefore not a viable option.

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