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A crucial decision arises for anyone who works past age 65 and wishes to continue contributing to an HSA.
Congrats! You are turning 65 and received a letter from Medicare WARNING you about lifetime penalties if you DON’T sign up for Medicare.
However, since we are living longer, some are working past 65 because they love what they do, maybe they want another 2 years to work, or they simply have to.
Before you make that decision, there is a HUGE fact that you NEED to be aware of.
Individuals who enroll in Medicare Part A are not allowed to continue funding their HSA, and anyone postponing Medicare enrollment must be diligent about how applying for Social Security or Medicare after age 65 impacts their HSA accounts.
According to Medicare.gov here are the rules and facts to follow.
-Taxpayers already receiving Social Security at their 65th birthday will automatically be signed up for Medicare. Taxpayers who aren’t yet collecting Social Security and are still covered by an employer’s group health plan because they are actively working (retiree medical plans do not count) may wish to defer signing up for Medicare at their 65th birthday in order to continue contributing to an HSA.
-Besides the special enrollment periods available to workers who defer Medicare due to other eligible coverage, there are only certain times of year that Medicare recipients can sign up for or change coverage, which is why getting the sign-up process right is so important.
-Signing up for Medicare Part B when first eligible avoids penalties. Generally speaking, taxpayers are able to defer Medicare past age 65 if they work for an employer with 20 or more employees while also enrolled in a group health plan based on that employment. However, they will need to take action to enroll upon leaving that plan in order to avoid lifetime penalties for late enrollment in Medicare Part B.
–If you work for a small employer with fewer than 20 employees, you usually have to enroll in Medicare at age 65 because Medicare typically becomes the primary insurer and employer coverage is secondary. If you don’t enroll in Medicare then, you could face big coverage gaps.
There are lots of quirks involved when determining whether a taxpayer is eligible to make contributions to an HSA (which are always tax-deductible as long as they are allowed), most of them having to do with health care plan design. But, as the Journal of Accounting states, a separate rule that often trips up taxpayers is that HSA contributions are disallowed when a taxpayer has other coverage in addition to an HSA-eligible plan (Sec. 223(c)(1)(A)(ii)).
-HSA contributions (including employer-provided ones) are disallowed when other coverage is in place, including Medicare Part A. Workers can still enroll in HSA-eligible plans and use funds already in HSAs for eligible expenses; they just can’t contribute further once they are enrolled in Medicare.
-Workers may opt to participate in an HSA-eligible plan after enrolling in Medicare, typically because it’s the only plan available to them at their workplace or because the lower premiums justify the choice, but they cannot contribute additional funds to their HSA nor can they accept contributions from their employer without penalty.
-There is a six-month look-back period (but not before the month of reaching age 65) when enrolling in Medicare after age 65, so a best practice is for workers to stop contributing to their HSA six months before the month they apply for Medicare to avoid penalties. Note that the month of application is what is used to calculate the six-month lookback, not the month the applicant wishes to begin benefits.
-Funds already in the HSA can still be used for qualified medical expenses upon enrollment in Medicare, including to reimburse taxpayers for Medicare premiums (but not premiums for Medicare supplemental insurance, aka “Medigap”) as well as to pay for long-term-care costs and insurance premiums up to certain limits.
-If a worker is already collecting Social Security upon turning age 65, he or she will be automatically enrolled in Medicare and henceforth no longer be able to contribute to his or her HSA. The only way to opt out of this would be to rescind the Social Security election (within 12 months) and pay back all benefits received to date.
-A worker enrolling in Social Security upon reaching full retirement age will automatically be enrolled in Medicare Part A and consequently cannot make HSA contributions.
More Facts to Understand
-To defer Medicare past age 65, the taxpayer must be enrolled in an employer-based group health plan. An HSA-eligible plan through the private marketplace, COBRA, or a health care exchange does not suffice, and in that case, he or she must cease contributions to the HSA upon reaching age 65 and enroll in Medicare to avoid lifetime late-enrollment penalties.
-Once a taxpayer is age 65 or older and no longer has coverage through an employer-based group health plan, he or she has eight months to enroll in Medicare Part B to avoid a penalty. If that deadline is missed, there is a risk of a lifetime penalty for late enrollment as well as being unable to enroll until the Jan. 1–March 31 window, which doesn’t start coverage until July 1. In other words, getting the Medicare Special Enrollment Period wrong risks a gap in coverage plus a lifetime of penalties.
-To avoid this scenario, it’s a best practice for taxpayers to go ahead and enroll in Medicare Part B as soon as they decide to retire. They should also keep in mind that the six-month look-back period for HSA contributions is based on the month of application and not the month Part B benefits begin.
Conclusion
When taxpayers opt to continue working past age 65 and wish to continue funding an HSA, they need to be very clear on the Medicare rules of application and enrollment to avoid either penalties for excess HSA contributions or late-enrollment penalties for Medicare Part B and Part D.
Related: Navigating the Financial Landscape: A Guide to 2023 Year-End Tax Planning