By Jim Terwilliger
In the July-August issue of 55 PLUS, we reviewed the many valuable characteristics of health savings accounts (HSAs), particularly their income tax benefits.
These benefits are three-fold: income tax deduction for contributions, tax-free growth via a menu of available investment options, and tax-free distributions, provided these distributions are used for qualified out-of-pocket health care costs including most health insurance premiums.
Given the advantages provided by such accounts, it generally makes sense to maximize annual contributions during one’s working years.
Not widely known, folks who receive Social Security are automatically enrolled in Medicare Parts A and B if age 65 or older even if they are covered by an employer health insurance plan. If you are in this situation, no HSA contributions are allowed.
In this case, folks can choose to opt out of Part B if insured by an employer plan that covers 20 or more employees but cannot opt out of Part A. When applying for Social Security, Medicare coverage will be made retroactive for six months or back to age 65 if shorter. There can be no HSA contributions for any month in which you are enrolled in any part of Medicare.
On the surface, determining eligibility to make contributions seems simple enough. It is simple for folks who are single. The complication arises for married couples when one or both are still working.
We’ll examine some common scenarios couples face and detail what is allowed and not allowed. If you and your spouse fall into any of these situations, play close attention!
• Scenario 1. John, age 67, and Susan, a homemaker age 65, are both covered by John’s employer plan, which is a high-deductible health insurance plan (HDHP) with family coverage. Neither spouse has started Social Security. John contributes to his HSA annually. The maximum family contribution to the HSA for 2021 is $7,200 plus another $1,000 catchup contribution for each spouse (available to folks age 55 or older) for a total of $9,200.
Let’s say John stays employed but enrolls in Medicare and leaves the employer plan. Because he is the employee, when his coverage ends so does Susan’s. She will also need to enroll in Medicare to maintain health care coverage for herself. The HSA contributions must stop, but both spouses can keep their HSAs to use for future medical expenses for themselves or each other.
• Scenario 2. Same situation. In this case, John stays with the employer high-deductible health insurance plan, but Susan elects to start receiving her Social Security benefits and opts out of Medicare Part B. While Susan continues to be covered by John’s employer insurance plan, she is now automatically enrolled in Medicare Part A, even though she does not want or need this coverage.
Since they are both enrolled in the employer’s high-deductible family plan, John can make the full family contribution of $7,200 plus John’s catchup contribution of $1,000. There can be no catchup contributions made for Susan after she begins Medicare coverage.
• Scenario 3. Same situation. Again, John stays with the employer’s high-deductible health insurance plan, but Susan decides to leave that plan starting in 2021 and elects to enroll entirely in Medicare. Now Jack’s HSA/HDHP becomes an individual plan. He can make the full individual contribution of $3,600 plus his $1,000 catchup.
Medicare and/or HSA/HDHP? Folks age 65 or older who still work for a “20+” employer have some choices. They can:
• Defer Medicare until the employer coverage stops (usually at retirement). No HSA contributions are allowed if receiving Social Security.
• Enroll in Medicare and keep the employer coverage, essentially having extra insurance. The employer plan pays first, Medicare pays second. No HSA contributions are allowed.
• Drop the employer plan entirely and enroll in Medicare with supplemental coverage. If a spouse is also covered by the employer plan, alternative insurance for the spouse needs to be arranged before dropping the employer plan.
If this were a pure math problem, all you would have to do is compare the benefits and costs of each option and choose the one with the best benefit to cost ratio. The math itself can become rather involved, however, especially if your income is high enough to trigger higher Medicare premiums.
The hard part is factoring in anticipated health care needs. HSA/HDHPs are ideal for people who are healthy and can stay that way. HSA contributions from the employee and employer (if offered) can continue to add to the pot. But once one starts taking expensive drugs or needs hospitalizations or costly procedures, Medicare might be the better choice.
Given the many rules and options associated with HSAs and Medicare, be sure to seek guidance from your financial planner and licensed health insurance professional.