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The Social Security and Medicare gotcha that makes contributing to your HSA illegal

Editor’s Note: Journalist Philip Moeller, who writes widely on health and retirement, is here to provide the Medicare answers you need in “Ask Phil, the Medicare Maven.” Send your questions to Phil.

Medicare rules and private insurance plans can affect people differently depending on where they live. To make sure the answers here are as accurate as possible, Phil is working with the State Health Insurance Assistance Program (SHIP). It is funded by the government but is otherwise independent and trains volunteers to provide consumer Medicare counseling in state and local offices around the country.

Moeller is a research fellow at the Center on Aging & Work at Boston College and co-author of “How to Live to 100.” Follow him on Twitter @PhilMoeller or e-mail him at medicarephil@gmail.com.


Jim – Conn.: Does it make sense for this 70-year-old to postpone filing for Social Security to avoid Medicare Part A so that he can contribute to a Health Savings Account (HSA)?

Phil Moeller: This is a deceptively complex question. And Jim, like many readers, is a lot smarter than I am. He was way ahead of me with this question. I had never considered that filing for Social Security could force someone to take Medicare even if they were still employed and had employer-provided health insurance. And I certainly never thought it would make it illegal for them to continue making pre-tax contributions to their HSA.

Silly me.

I was wrong and Jim is correct. So, be warned. If you are 65 or older and file for Social Security, the government will consider you to have also filed for Medicare. If you have an HSA, you will no longer be able to make pre-tax contributions to it. In fact, the rules say you need to stop contributions six months before claiming Social Security!

This makes no sense to me, but please read on and judge for yourself. And if I am the only one who didn’t already know this, let me know and I will enroll you in the Maven chapter of the Rootie Kazootie fan club.

HSAs are available to most people whose employers offer them high deductible health plans. The plans have lower premiums than standard coverage but higher deductibles.

Uncle Sam made these deductibles more palatable to consumers by pairing them with tax-exempt HSAs. Contributions can be up to $6,650 ($7,650 including a $1,000 catch-up contribution for people 55 and older) in pre-tax earnings, and they are placed in 401(k)-type investment accounts. Many employers sweeten the deal a bit more by making their own contributions to an employee’s HSA. The annual contributions limit applies to the total of all funds placed into the HSA.

Neither the contributions nor investment gains on the accounts will ever be subject to federal income taxes so long as account distributions are spent on qualifying medical expenses. Better still, any unused balances in the accounts will not be lost but will roll over to the next year and beyond. They can even be passed on to heirs when the original account holder dies.

HSAs thus can be a terrific retirement savings vehicle for people who don’t rack up large out-of-pocket medical expenses. Alternatively, people with the financial means to pay such expenses without tapping their HSAs can allow their HSA account values to rise over time, and then tap them in their later years, when they almost certainly will have less income but more medical expenses to pay.

High-deductible health plans have become an increasingly attractive way for employers to combat rising costs for health benefits. According to a federal survey (check out Table 10), as of the first quarter of this year, 36 percent of people younger than 65 with private health insurance had high-deductible plans; two-thirds of these people were not enrolled in an HSA and one-third was. As recently as 2009, only 22 percent of employees were in high-deductible plans.

Jim is one of them. He likes his HSA. He also is one of fewer than 2 percent of all Social Security participants who has elected to defer taking retirement benefits until he turns 70. By electing to defer benefits, Jim’s monthly check will be 32 percent higher (plus inflation adjustments) than if he began taking them at 66, and 76 percent higher than if he took early retirement at 62.

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But Social Security benefits reach their maximum values at age 70, so there is no longer any reason for Jim to delay taking them. He still plans to work, mind you, and his employer presumably is still willing to provide him with health insurance.

However, as confirmed by spokespersons for both Social Security and Medicare, Jim’s filing for Social Security will force him to also sign up for Part A of Medicare. And signing up for Part A, whether he wants to or not, qualifies as being on Medicare. And once Jim, or anyone else, is on Medicare, they can no longer contribute to an HSA. Here’s what Medicare said:

When he applies for Social Security and Medicare coverage, his Social Security entitlement and Part A coverage will be retroactive for 6 months, as outlined in law. He can’t apply just for Social Security benefits and not also get Medicare Part A as he is over age 65. IRS rules for the HSA state that someone can’t contribute to an HSA when they have Medicare, so the individual will need to stop contributing 6 months in advance of applying for Social Security benefits and Medicare. If he contributes to the HSA after Medicare coverage begins (not when he applies for Social Security/Medicare), he may be subject to IRS penalties.

Jim thus must lose his HSA or pass up his Social Security until he leaves his job. I think losing the HSA is far and away the less painful path for him. Average Social Security retirement benefits are about $1,300 a month, and I’m betting Jim’s benefit would be much higher. If you recall, the most pre-tax income that can be put into an HSA is $7,650 a year.

The last time I looked, every new user of Medicare cost Uncle Sam (that’s us, folks) money. So, I am thinking that the government should be happy to keep people on employer-provided insurance as long as possible. Forcing them out of HSAs hardly seems a wise move in that respect.

Part A, mind you, is the hospital portion of Medicare. It imposes no premiums on Jim (and most other workers) because they have in effect been paid for by the payroll taxes that Jim has been making to Social Security all these years. So, forcing him to get Park A does not put a penny more into government hands. Further, getting Part A doesn’t require Jim to sign up for the rest of Medicare. As long as he is covered by group health insurance, he does not have to get Medicare Part B or a Medicare drug plan or other forms of Medicare coverage.

What it does do is force Jim into a bad and costly decision. This policy should be changed, if not for Jim than for the millions of older workers who are staying in their jobs and will face the same set of two bad choices that Jim faces.

Labor force participation rates are falling for most workers but have soared for older workers. A 2013 Bureau of Labor Statistics study projected that nearly one in five persons aged 70 to 74 are in the labor force today and one in nine aged 75 to 79 are also working or seeking work.

Should all of them with employer health insurance be denied participation in HSAs because they want to claim Social Security?

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