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HSAs and Medicare: a Potential Social Security Pitfall

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:

*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.

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