Many of us look forward with anticipation to – or backward with fond memories of – life’s rites of passage: getting a driver’s license at 16, voting at 18, full legal benefits at 21. But, Medicare eligibility at 65? Perhaps not.
However, as Americans remain in the workforce longer, many of your clients probably have an increasing number of employees who are approaching Medicare eligibility or who want to start planning for their retirement years. Because Medicare comes with myriad rules and regulations that often confound employees, brokers can play an important role in bringing clarity. Listed below are several general guidelines to help you help your clients as they consider Medicare and how it will affect their employees’ health savings accounts (HSAs).
That magical age of 65
Once employees turn 65 and meet federal residential requirements — or earlier if they retire due to disability — they qualify for Medicare and can use their HSAs to pay for health care related expenses, just like before their 65th birthdays. However, when HSA account holders enroll in Medicare, they can no longer contribute to their HSA without a tax penalty. The same HSA contribution rules apply if enrolling in Medicare early due to disability.
Furthermore, whenever workers decide to collect full Social Security benefits (that’s age 66 for those born after 1942 according to AARP), they need to know that Medicare Part A automatically kicks in at the same time. In other words, Social Security and Medicare are a package deal, and the same rule about ceasing contributions to an HSA applies.
Finally, contributions to an HSA are based on the age of the account holder, not the age of the account holder’s spouse — even if the spouse is 65 or over and enrolled in Medicare.
The importance of six months
Anyone can delay enrolling in Medicare (that is, a person doesn’t have to enroll at age 65; it can be done years later). However, when someone defers Medicare benefits to a later age, they’re entitled to six months of retroactive Medicare benefits, which means they would need to stop contributing to their HSA six months before they enroll in Medicare or risk incurring a tax penalty.
Planning for this scenario is vital. One option is to open a flexible spending account (FSA) six months before signing up for Medicare, while ceasing contributions to an HSA. Doing this allows an individual to continue to set aside dollars for health care expenses on a tax-free basis.
Dollars and sense
The IRS limits 2019 HSA contributions to $3,500 for single coverage and $7,000 for family coverage. However, employees over 55 can contribute an additional $1,000 each year, known as the “catch up contribution.” This enables HSA owners to grow savings more quickly, especially if the plan is to delay collecting Medicare or Social Security.
One exception is when an employee enrolls in Medicare. IRS rules state contribution limits must be prorated to the time someone is eligible to contribute to an HSA, and eligibility ends when they enroll in Medicare.
Here are two examples of contribution limits for a Further member who enrolls in Medicare on September 1:
- $3,500 (single coverage) + 1,000 (catch up) = $4,500 divided by 12 months, times the number of months before Medicare (in this example, 8 months) = $3,000 maximum contribution.
- $7,000 (family coverage) + 1,000 (catch up) = $8,000 divided by 12 months times the number of months before Medicare (in this example, 8 months) = $5,333.33 maximum contribution.
HSAs while on Medicare
Some people aren’t sure what expenses are HSA-eligible after their Medicare kicks in. The good news is everything that was eligible before, still is. In addition, HSA dollars can be used to pay for Medicare premiums, such as Part B, Medicare Advantage plan Part C and prescription drug plan Part D. And, if an HSA account holder opts to purchase long term care insurance, your HSA can be used to fund that purchase, as well.
Want more info?
We realize that becoming eligible for Medicare benefits can be something to look forward to as one of life’s rites of passage. It can also be confusing, even intimidating, when taking into consideration all there is to know and comply with. We at Further are here to help. If you’d like more information to share with your clients, contact Client Services at 888-460-4015.