What Every Medicare Rep Should Tell HSA Owners

Navigating the intersection of Health Savings Accounts and Medicare can be confusing - and constraining. These key points address the confusion.

As I periodically do, I recently attended a Medicare information meeting at my local library, led by a representative from one of the leading regional insurers. As an added benefit, the rep was a former long-time colleague who will filling in for a co-worker who was out of work unexpectedly.

Lisa did a great job explaining the Medicare-Health Savings Account interaction. But many people - carrier reps, your company's human resource professionals, and your brother-in-law, auto mechanic, and neighbor - don't know the nuances or aren't confident in their grasp of the information. Even among benefits professionals, most Medicare people don't understand Health Savings Accounts. Most Health Savings Account people don't comprehend Medicare.

You'll be well served if the person guiding you through the Medicare process gives you the following information:

Health Savings Accounts and Medicare: A Quick Overview

Health Savings Accounts and Medicare are incompatible. If you're enrolled on any Part of Medicare, you're not eligible to continue funding your account. That's true even if you remain active at work (what we call a working senior), enrolled on your company's HSA-qualified medical plan, and meet all other eligibility requirements. If you're Medicare eligible because you're age 65 or older and do not enroll in any Part of Medicare, you can continue to fund a Health Savings Accounts just as you did before you turned age 65.

The act driving your continued eligibility to contribute is your actual enrollment in Medicare, not merely blowing out 65 or more candles on your most recent birthday.

When Are You Enrolled in Medicare?

Some people are automatically enrolled in Medicare, and others must submit an application to enroll.

Automatic enrollment. If you begin to collect Social Security benefits before age 65 (as more than half of all recipients do), you're automatically enrolled in Medicare Part A (inpatient, skilled-nursing, home-health, and hospice care) and Part B (outpatient services) beginning the month that you turn age 65 [or the prior month, if your 65th birthday falls on the first day of the month]. If you remain covered on your own or a spouse's medical plan, you may choose to decline Part B coverage (and save at least $174.70 monthly in premiums). But you can't disenroll from Part A if you're collecting Social Security benefits. Period. In this case, you can't contribute to your HSA for any months after you're enrolled in Part A.

Optional enrollment. If you're not collecting Social Security benefits during the month that you turn age 65, you're not automatically enrolled in Medicare. If you want coverage, you must apply during a seven-month window beginning three months before the month of your 65th birthday. If you don't want to enroll during that window, do nothing and you won't have Medicare coverage. If you don't sign up for Medicare, you can remain eligible to fund your Health Savings Account. And if you're covered by a group plan after your 65th birthday, you can transition to Medicare with no Part A or Part B penalty.

"Forced" enrollment. If you work (or your spouse on whose plan you're covered works) for a company with fewer than 20 employees that sponsors a group medical plan, your company's insurer may (most do) require you to enroll in Part A and Part B to remain on the group plan. You'll pay at least $174.70 (the 2024 figure, which rises annually) in your monthly Part B premium. At this point, you must consider whether it's better to be covered by both plans or retain your new Medicare coverage only. This decision is situation-specific (largely depending on whether you're covering another family member and that person's access to another plan, and whether you're covered on an HSA-qualified plan).

The Six-Month Retro Rule

If you continue to fund a Health Savings Account and then enroll in Medicare after your 65th birthday, your Part A coverage will be retroactive up to six months from the month that you submit your application (not the later month of coverage). Here's the schedule:

Enroll in Medicare on the first day of the month of your 65th birthday: You have no Part A retroactive coverage. You can continue to fund your Health Savings Account until the month prior to the month of your 65th birthday.

Submit your application no more than five months after your 65th birthday: Your retroactive coverage goes back only as far as the first day of the month that you turn age 65 {or the first day of the prior month if your birthday is on the first day of the month].

Example: If your Medicare coverage is effective at 65 years and three months, your retroactive coverage goes back two months. You can't contribute for those two months. If you've already deposited money, you must withdraw it and include that amount in your taxable income.

Submit your application six or more months after your 65th birthday: Your retroactive Part A coverage goes back six months. You can't contribute for those six months (or must withdraw those deposits if you've already contributed).

Example: If you apply for Medicare at age 67 years and eight months, your Part A coverage is backdated to age 67 and two months. You can't contribute for any months after age 67 and two months. You must withdraw any amount beyond your prorated contribution limit.

Medicare Creditable Coverage

If you defer Medicare, you may be assessed a penalty if you subsequently enroll in Medicare Part D (prescription-drug coverage). The penalty applies if your drug plan beginning with the month of your 65th birthday was not as rich as Medicare's - a concept called Medicare Creditable Coverage. Your insurer will inform you annually by letter whether your prescription-drug plan meets MCC standards. Many HSA-qualified plans with high deductibles do not meet this standard. But some do.

If yours doesn't, the surcharge works like this: For every month (beginning with the month that you turn age 65) that your coverage isn't MCC, you pay a permanent surcharge on your Part D premium. The surcharge is equal to 1% of the Medicare Base Beneficiary Premium. That figure is about $35 in 2024, so the surcharge is equal to 35￠ for every month that you didn't have creditable coverage after turning age 65. Because the base premium changes annually, the same percentage applied to it will yield a different monthly surcharge every year.

Example: You delay enrolling in Medicare for 20 months after your 65th birthday. you don't have creditable coverage. Your monthly surcharge is $7 (35￠ times 20 months). If your Part D plan's monthly premium is $50, you'll be charged $57.

Don't be turned off by the term penalty, which implies that you're doing something wrong. Think of it instead as a surcharge, which is assessed if you choose from among viable options (like paying a fee to check a suitcase on most airlines, rather than trying to stuff five days' worth of gear into a three-day carry-on bag), not when you do something outside the law. This perspective is important because you may be better off financially by delaying your Part D enrollment when you're covered on a non-MCC plan and continuing to fund your Health Savings Account.

Spending Your Health Savings Account Balances

When you're no longer HSA-eligible, neither you nor your employer can make additional contributions to your Health Savings Account. Your balances continue to grow tax-free, however. And you can continue to reimburse your own, your spouse's, and your tax dependents' qualified expenses tax-free.

The list of qualified expenses expands once you turn age 65 to include Medicare premiums. You can reimburse your own or your spouse's Medicare premiums once you hit that age, but not before (even if your spouse is older and already enrolled on Medicare before you turn age 65). Qualified premiums include your monthly charges for Part B ($174.70, or higher if your income exceeds certain thresholds) and Part D (premiums vary by plan and private insurer - the average is about $55 monthly). If instead of traditional Medicare you choose a Medicare Advantage (Part C) plan, your Part B premium (you must pay this to enroll in Part C) and Part C premium (many plans charge no additional premium, and other charge a small monthly amount) are qualified for tax-free reimbursement. Most people pre-pay their Part A premiums through payroll taxes during their working years. If you've worked less than 40 qualifying quarters (10 years), you pay a premium, which is qualified as well.

If you defer enrollment in Medicare at age 65 and remain covered on an employer-sponsored plan (but not COBRA), you can avoid Part A and Part B delayed-enrollment penalties by signing up within eight months of dropping the group plan (but you'll sign up immediately to avoid gaps in coverage). If you face late-enrollment penalties, those fees are also qualified for tax-free distribution.

The Bottom Line

Understanding Medicare is not easy. And funding a Health Savings Account when you're eligible for Medicare creates additional wrinkles and angst. If you follow the guidance above, you can avoid potential land mines in this transition.

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HSA Monday Mythbuster is published every other week, alternating with HSA Question of the Week on Mondays. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.