Age 65 is often referred to as a benchmark retirement date, yet there are a number of individuals who are reaching Medicare-eligible age 65 and still planning to work beyond this age. Many of these individuals have health insurance coverage through their employer.
Medicare Part A for the Employer-Insured
If these individuals work for an employer with more than 20 employees, they have the option of maintaining their employer insurance coverage and waiting until they retire or separate from service before signing up for Medicare. Because Medicare Part A is free to those who are eligible (those who have worked and paid Medicare taxes for 10 years), they may sign up for Part A and then give no second thought to Medicare until they retire. This could possibly be a mistake.
Medicare and Your HSA
Before signing up for Medicare Part A, the individual needs to know how Medicare Part A interacts with their employer sponsored health insurance plan. If their health insurance plan is a high deductible plan (HDHP) with a health savings account (HSA) they cannot sign up for Medicare Part A while continuing to contribute to a health savings account. This is meaningful because an individual 55 and older is allowed to put in up to $4,500/year into a HSA. As a refresher, an HSA is an account that allows the owner to contribute on a pre-tax basis a certain amount each year into the HSA. The money in the account can be invested and grow tax deferred until the money is drawn out — and of course be used for current medical expenses. If the money is drawn out for qualified medical expenses, there is no tax owed on the earnings generated by the investments in the account. Therefore, the HSA has a triple tax advantage. Were the money to be used for non-qualified expenses, it functions similar to an IRA and is taxed as ordinary income on the way out. Since there are no required distributions for the HSA, the funds within the HSA typically have time to grow. The benefits of the HSA make it such that individuals do not want to jeopardize their ability to contribute to the HSA, especially by signing up for Medicare Part A when unnecessary.
Six Months Look-Back Rule
A little-known rule about how Medicare Part A and HSA accounts interact with one another is what is known as the six months look back rule. This rule is relevant to those who are working now, are over age 65 and plan to sign up for Medicare Part A within the next six months. How the look back rule works is that when an individual over age 65 signs up for Medicare Part A, the Social Security administration provides them with six months of retroactive coverage from the date they signed up. This means that the individual is ineligible to contribute to a HSA during those six months. Any contributions made during that period of time are considered excess contributions and need to be removed from the individual’s HSA and counted as taxable income on the individual’s tax return. If the individual does not withdraw their excess contributions before filing their tax return, the excess contributions will be penalized at 6% for each year they remain in the health savings account.
To make sure that excess contributions are not made into the HSA, the individual needs to coordinate with their employer to make sure that both employee and employer contributions are stopped six months prior to their retirement.
In summary, an individual is no longer eligible to contribute to a health savings account when they sign up for Medicare Part A. If they are over age 65, it is important that all contributions to health savings accounts are stopped six months ahead of time to prevent unexpected tax and penalty consequences.
Due to the potential value of a health savings account, it is important to reach out to your RegentAtlantic Wealth Advisor to see how an HSA fits into your customized financial plan and the obstacles to avoid along the way.
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