Archives for April 2015

A reader writes in, saying:

“I thought that I completely understood [Social Security strategies] but I sure didn’t understand the Medicare Part A/HSA complication.  Please make sure that your readers are aware of this significant complication, which doesn’t exist if you don’t have an HSA.”

The complication the reader is referring to is that, beginning with the first month you are enrolled in Medicare, you cannot contribute to a health savings account (HSA). The potential trouble arises as a result of the fact that it’s possible to become enrolled in Medicare without having intended to enroll. In fact, in some cases, you may even be unintentionally retroactively enrolled in Medicare, thereby making you ineligible for HSA contributions in a month in which you already made such contributions.

Automatic Enrollment in Medicare

The following comes from the Code of Federal Regulations:

Individuals who need not file an application for hospital insurance. An individual who meets any of the following conditions need not file an application for hospital insurance:

1. Is under age 65 and has been entitled, for more than 24 months, to monthly social security or railroad retirement benefits based on disability.
2. At the time of attainment of age 65, is entitled to monthly social security or railroad retirement benefits.
3. Establishes entitlement to monthly social security or railroad retirement benefits at any time after attaining age 65.

In other words, you will automatically be enrolled in Medicare Part A* when you reach age 65 if at that time you are already receiving Social Security retirement benefits (or spousal or widow/widower benefits) or have been receiving Social Security disability benefits for more than 24 months. Alternatively, if you claim Social Security benefits (including as a part of a “file and suspend” strategy) at any point after age 65, you’ll automatically be enrolled in Medicare Part A at that time.

In addition, the same CFR section states that, “an application under § 406.10 that is validly filed within 6 months after the first month of eligibility is retroactive to that first month. If filed more than 6 months after that first month, it is retroactive to the 6th month before the month of filing.” In other words, if you become enrolled in Medicare Part A after reaching age 65, they’re going to backdate your enrollment by 6 months (but no earlier than age 65).

How About an Example?

Example: Jane files for her Social Security retirement benefit at age 66. As a result of that application, she is automatically enrolled in Medicare Part A. In fact, she will automatically be retroactively enrolled in Medicare Part A going back to age 65½ (i.e., 6 months prior to her application). If Jane had made contributions to an HSA in any of those 6 months for which she is now retroactively enrolled in Medicare, she has a problem.

What To Do About This?

The way to avoid this situation is as follows:

• If you file for Social Security benefits at any point prior to age 65, you will want to stop making HSA contributions at age 65.
• If you aren’t claiming any Social Security benefits until after age 65, you will want to stop making HSA contributions 6 months prior to the date at which you file for Social Security benefits.

If you have already made HSA contributions in a month in which you were ineligible due to automatic Medicare enrollment, your options are to:

• Correct your excess HSA contribution by the due date of your tax return for the year, or
• Withdraw your Social Security application (withdrawing your automatic Medicare enrollment as well). Then, stop making HSA contributions, and re-file for Social Security at a later date.

*When you are enrolled in Medicare Part A, you are automatically enrolled in Part B as well, but you are given the opportunity to opt out of it, should you want to do so.

There’s been quite a bit of talk over the last few years about the fact that most people should wait to claim Social Security, if they can afford to do so. And that’s true, for two reasons:

1. Waiting to claim Social Security reduces risk, because it is a decision that works out best in the most financially scary scenarios (in which you live a very long time and therefore have to fund a very long retirement).
2. Waiting to claim Social Security maximizes spendable dollars, in most cases. (That is, with inflation-adjusted interest rates as low as they are right now, for more than half of people, delaying Social Security will result in having a greater number of inflation-adjusted dollars to spend over the course of their lifetimes.)

But it’s important to understand that, while it makes sense in the majority (i.e., greater than 50%) of cases to delay, there are still many situations in which a person would be well served by claiming Social Security earlier rather than later.

The first and most obvious reason to claim Social Security early is simply that you need the income immediately.

But, beyond that, there are still several cases in which, if you do not need the risk reduction that comes from delaying Social Security, your spendable dollars are likely to be maximized by claiming benefits earlier rather than later.

What follows are eight examples of such cases. (To be clear, this is not meant to be an exhaustive list. These are simply some of the more common such situations.)

1. You are single (and have never been married) and you have a significantly shorter than average life expectancy due to a medical condition.

2. You are the spouse with the lower primary insurance amount in a married couple and you or your spouse have a shorter than average life expectancy.

3. You are the low-PIA spouse in a married couple, and you’re many years younger than your spouse (meaning that, when you are age 62, your first-to-die life expectancy is significantly shorter than the first-to-die life expectancy of a couple in which both spouses are age 62).

4. You are the low-PIA spouse in a married couple, you are younger than your spouse, and you are filing early in order to allow your spouse (i.e., the higher-PIA spouse) to claim spousal benefits while he/she allows his/her own retirement benefit to continue growing until 70.

5. You are a widow/widower, and you’re claiming retirement benefits as early as possible while allowing your widow/widower benefit to continue growing until your full retirement age. Or, you’re claiming widow/widower benefits as early as possible while allowing your retirement benefit to continue growing until age 70.

6. You have one or more children who would qualify for child’s benefits once you file for your retirement benefit (thereby making the cost of waiting significantly greater than it is for most people).

7. Inflation-adjusted interest rates are high (unlike they are right now), making the option of taking the money and investing it a better deal. (Interest rates would have to be super high, however, for this to be a good deal for the high-PIA spouse in a married couple.)

8. You will qualify for a sizable government pension from work that was not covered by Social Security, and you’re claiming Social Security spousal benefits early while delaying your pension (so that the pension grows and so that you can put off applicability of the government pension offset).