Employees Nearing 65? Health Savings Accounts and Medicare Enrollment Rules

HSA accounts follow a new set of rules for employees that enroll in Medicare. If any of your employees are covered by a High Deductible Health Plan (HDHP), contribute to a HSA, and are looking to enroll in Medicare these rules apply to you. 

What is a HSA?

A Health Savings Account (HSA) is an account that anyone on a high deductible health plan (HDHP) can contribute to on a tax-free basis (when used to pay for qualified medical expenses). Employers can oversee an HSA or employees are able to have an individual HSA that a bank, credit union, or insurance company oversees. 

Who can contribute to a HSA?

The IRS defines an individual as eligible to contribute to a HSA as follows (Internal Revenue Service Bulletin 2004-2, Q/A-2):

1. is covered under a high deductible health plan (HDHP) on the first day of such month; 
2. is not also covered by any other health plan that is not a HDHP (with certain exceptions for plans providing certain limited types of coverage); 
3. is not enrolled in Medicare (generally, has not yet reached age 65*); and 
4. may not be claimed as a dependent on another person’s tax return.”

*Individuals become ineligible to contribute to a HSA on the first day of the month of their 65^th birthday. 

Can Medicare and a HSA Coexist?

Employees can make contributes to a HSA as long as they are not enrolled in Medicare. Once an individual enrolls in either Medicare Part A or Part B they can no longer contribute to a HSA. Also once an employee enrolls in Social Security, they are automatically enrolled in Medicare Part A, which then disqualifies further HSA contributions. 

The month an employee enrolls in Medicare, which is typically the month of their 65th birthday, the account manager must switch the contributing balance to zero dollars per month. But - an employee may withdraw money from their HSA to help pay for medical expenses after enrolling in Medicare, but no contributions can be made. 

Should Your Employees Delay Enrolling in Medicare?

Small employer plans (less than 20 employees):

Individuals working for a small employer should take Medicare when they first qualify. Group Health care coverage from small employers pays secondary to Medicare, so failure to enroll in Medicare when first eligible may result in little or no health coverage.  When an employee enrolls in Medicare they lose the tax advantages of the HSA.

Large employer plans (20 or more employees):

Group Health care coverage for large employers pays primary (before Medicare). This allows eligible employees the opportunity to stay on their employers plan as the primary payer. These employees do not need to enroll in Medicare in order have coverage. They can also decline Medicare Part B and then elect that coverage when they are no longer eligible for their employer group health coverage without any penalty (subject to enrollment rules). 

Employees who initially decide not to enroll in Social Security (and Medicare Part A) and contribute to their HSA should consult their tax advisor prior to Social Security enrollment in order minimize their potential tax liability. Social Security will back pay up to six months of retirement benefits (or back to that individuals full retirement age whichever is less) potentially creating a tax liability for any HSA contributions made during this back pay period.

Those with a HSA account can continue to take distributions from the HSA for qualified medical expenses after they enroll in Social Security and Medicare. Funds in the HSA can be used for such qualified medical expenses for the HSA account owner, their spouse and dependents on a tax-free basis.