Many older workers sign up for Medicare Part A as soon as they turn 65, even if they’re still working and have insurance through their job.
For most of them, Part A, which covers hospitalizations, doesn’t cost anything, and it may pay for expenses the employer plan doesn’t cover.
But there is one caveat if you’re 65 and your employer-provided plan offers a health savings account: To contribute to an HSA, you must be enrolled in a high-deductible health plan, and you can’t be enrolled in any other health insurance plan, including Medicare.
You can take withdrawals from an HSA while you’re enrolled in Medicare, but you can’t contribute to an account. If you do, you’ll owe income taxes on the contribution, plus a 6 percent excise tax.
The easiest way around this problem is to forgo contributions to an HSA once you turn 65. That way, you can go ahead and sign up for Part A without worrying about any overlap.
However, if your employer contributes to workers’ HSAs — and many do — you could end up leaving some serious money on the table. The average employer contribution to an HSA is $474 for individual coverage and $801 for family coverage, according to the United Benefit Advisors.
Contributions to an HSA are pretax if they’re made through payroll deductions. Plus, the money grows tax-deferred, and withdrawals used to pay qualified medical expenses are tax-free.
Unlike a flexible spending account for health care, HSAs are portable. You can take your savings with you when you leave your job and use the money to pay for medical expenses that aren’t covered by Medicare.
You can, of course, delay signing up for Medicare until you quit your job and continue to contribute to your employer’s health savings account.
But there’s a hitch: If you sign up for Part A after your 65th birthday, Medicare coverage is retroactive for up to six months. That means you still could face penalties for contributing to an HSA while enrolled in Medicare, even if you wait until you quit your job to sign up.
Here’s how to get around this dilemma:
- Discontinue contributions to your HSA at least six months before you leave your job. If you want to front-load your HSA contributions at the beginning of the year, prorate the amount you contribute to adjust for the number of months you’ll be eligible to contribute before Medicare kicks in, taking the retroactive period into account.
- Next, after you leave your job and sign up for Medicare, file a Return of Excess Contribution form with your plan administrator to withdraw contributions made while you were covered by Medicare. You’ll owe income taxes on the money, but as long as you withdraw the amount of your excess contribution before the tax deadline, along with any income you’ve earned on that money, you’ll avoid the 6 percent excise tax.