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Navigating HSAs, Social Security, and Medicare

Navigating HSAs, Social Security, and Medicare

April 18, 2024

There are things to consider regarding your Health Savings Account (HSA) if you have a High-Deductible Health Plan (HDHP) and you're nearing Medicare eligibility (around age 65).

Here's the catch: Once you enroll in Medicare at 65, contributions to your HSA stop – that's an important IRS rule.

Now, you might be wondering... what if I just skip Medicare altogether? This could allow me to keep contributing to my HSA and build a bigger tax-free nest egg for future medical bills.

The reality: In most cases, delaying Medicare enrollment isn't an option. There can be penalties involved, and Medicare is crucial health coverage for many.

Social Security and Automatic Medicare Part A Enrollment

If you're receiving Social Security benefits and turn 65, there's an important detail to know: you'll automatically be enrolled in Medicare Part A (hospital insurance). This isn't optional, it's a program rule.

The reason?  Social Security considers Part A essential health coverage for beneficiaries.

So, what are your options?

In most cases, automatic enrollment in Part A isn't a bad thing. Part A helps cover hospital stays and other inpatient care.  However, if you have a strong reason to delay Part A enrollment, it's best to consult with a financial advisor to understand your specific situation and explore any potential alternatives. Here's an important thing to consider: Applying for Social Security retirement, spousal, or survivor benefits at 65 (or older) automatically enrolls you in Medicare Part A (hospital insurance). This enrollment can even be retroactive for six months if you're past 65 and a half. Unfortunately, you can't contribute to your Health Savings Account (HSA) while enrolled in Medicare Part A.  If you've already made contributions during this period, you'll need to withdraw them to avoid a 6% penalty for exceeding contribution limits.

Key takeaway: Coordinate your Social Security and HSA plans. If you plan to use an HSA for future medical expenses, consider delaying Social Security benefits (if possible) to maintain HSA eligibility.  Talking to a financial advisor can help you navigate these options.

Other Health Insurance

Because Medicare Part A exclusively handles hospitalizations, and given that you're no longer eligible for your employer's HSA/HDHP plan, you'll require alternative health insurance to address doctor visits, lab work, procedures, prescription drugs, and related needs. You could inquire with your employer about alternative plan options that don't require an HSA. Alternatively, you could transition fully to Medicare by enrolling in Parts B and D, and consider supplemental insurance to cover any remaining gaps. Since Medicare receives significant government subsidies, it might actually offer a more advantageous plan for your needs.

Determine whether your plan covers fewer than 20 employees

Another scenario necessitating Medicare enrollment at age 65 arises when you lack coverage under an employer group plan encompassing 20 or more employees. Therefore, if your employer's HSA/HDHP plan caters to fewer than 20 employees, enrollment in Medicare at 65 is mandatory. What if you choose not to enroll at 65? You risk being uninsured. For individuals aged 65 and above, plans covering fewer than 20 employees become secondary to Medicare. Consequently, when visiting the doctor, the bill is initially submitted to Medicare. Failure to enroll in Part B means Medicare won't contribute. Furthermore, if Medicare fails to cover its 80% portion of the bill, your health plan may refuse to pay its share, resulting in no payment at all. Additionally, late enrollment penalties apply for joining Part B after age 65, unless you're covered by an employer group plan with 20 or more employees.

Maintaining Your HSA Beyond Age 65

If you're 65 or older and your employer's HSA/HDHP plan covers 20 or more employees, and you're not receiving Social Security, you don't need to enroll in Medicare. You can stay on the HSA/HDHP and keep receiving contributions. However, if you do enroll in Medicare, HSA contributions must stop. Also, note that your high-deductible health plan may not offer Medicare-creditable drug coverage, potentially resulting in a late-enrollment penalty if you later join Medicare Part D.

Keep HSA For Spending

Although enrolling in Medicare prevents additional HSA contributions, you can still utilize your HSA funds to cover eligible medical expenses during retirement, such as your Part B premiums. We advise individuals approaching 65 to contact the Social Security Administration at 800-772-1213, discuss their existing health insurance coverage, and inquire about the necessity of Medicare enrollment. Furthermore, it's beneficial to explore all available healthcare options. Even if Medicare enrollment isn't mandatory, it might still be advantageous to consider.


Sources:

https://secure.ssa.gov/poms.nsf/lnx/0600801000

https://www.cms.gov/training-education/find-provider-type/employers-unions/top-five-medicare-enrollment

https://www.medicare.gov/basics/get-started-with-medicare/sign-up/when-can-i-sign-up-for-medicare


Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5280 CARROLL CANYON ROAD, SUITE 300, SAN DIEGO CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WestPac Wealth Partners LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License #0G14394 | Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice.  Consult your tax, legal, or accounting professional regarding your individual situation. | 2024-173124 Exp. 04/26. Neither Guardian nor its subsidiaries issue or advise with regard to Medicare. The Social Security Administration has not approved, endorsed, or authorized this material. Contact the Social Security Administration for complete details regarding eligibility for benefits.  The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.