Enrolling in Medicare: Why your employment status and HSA matter.
Most people become eligible to enroll in Medicare when they turn 65. But just because you can enroll in Medicare doesn't always mean you should, especially if you are going to continue working. And if you are contributing to an HSA, you have a special set of circumstances to consider when making Medicare enrollment decisions.
Navigating all of the contingencies and nuances of Medicare enrollment can be tricky, and making the wrong decisions can have significant financial consequences. If you are turning 65 over the next year, here are some important things to consider:
Will you be collecting social security when you turn age 65?
If you will be collecting social security at least three months before you turn 65, your enrollment in Original Medicare will be automatic. In this case, you should receive your Medicare card in the mail prior to the first day of the month of your 65th birthday. Original Medicare includes your Part A (hospital) coverage and your Part B (medical) coverage. If you or your spouse have contributed at least 40 quarters of social security taxes, you won't pay a premium for your Part A coverage. But Medicare Part B comes with a cost. Your Part B premium will be deducted from your monthly social security benefit.
If you aren't collecting social security when you turn 65 and you want to receive Medicare benefits, you'll need to actively enroll in Medicare, and the best way to do so is online at www.ssa.gov. Your initial enrollment period is a seven month window that includes your birth month, plus the three months prior and the three months after. It is advisable to start your enrollment process as soon as possible; preferably at the start of your initial enrollment window. By doing so, coverage will begin the first day of your birth month.
Will you continue to work after 65?
If you (or your spouse) will continue to receive health care benefits through an employer when you turn 65, you might choose not to enroll in Medicare. That is because you won't want to pay the Part B premium for coverage you don't need.
However, if you are receiving health care benefits through an employer plan, you will need to make sure that the coverage you have is considered "creditable" by the Centers for Medicaid and Medicare Services (CMS.) Creditable coverage means that your health care benefits are at least as good as those you would receive through Medicare. Most major employers offers plans that are creditable, but you should check with your HR team to be sure. That's because if you don't enroll in Medicare when you turn 65 and you don't have creditable coverage, you will subject yourself to paying a premium penalty on your Medicare Part B, and that penalty will stay with you for life.
If you decide to stay with employer coverage, you will need to enroll in Medicare after you retire (or when that coverage ends, whichever comes first.) Losing employer coverage opens up an eight month Medicare Special Enrollment Period (SEP.) Taking advantage of this employer-coverage related SEP will ensure that you avoid Part B penalties. If you are interested in enrolling in a Medicare Advantage plan after you retire, however, you have only a 60 day window after losing employer coverage to do so. In order to avoid any gaps in coverage, it is helpful to begin the Medicare enrollment process as soon as you know you will be retiring (up to 90 days in advance.)
As a side note, if you are collecting social security AND also have other, creditable coverage, you will need to actively disenroll from Medicare Part B if you don't want the benefit and the premium that comes with it. That is because, as stated previously, your enrollment in Medicare Parts A and B is automatic if you are collecting social security.
Should you enroll in Part A even if you delay Part B?
Part A is usually premium-free. In some cases, it makes sense to enroll in Medicare Part A upon turning 65 even if you plan to continue with your employer's health care benefit. Part A will give you another "free" layer of coverage, becoming a secondary insurer should your primary carrier be unable to pay. Enrolling in Part A will also get you established in the Medicare system to help you avoid coverage gaps in the future. There is, however, one important consideration: If you are contributing to a Health Savings Account (an HSA,) you will want to be careful with the timing of your Part A enrollment.
How does my HSA affect my Part A enrollment decision?
By law, you cannot contribute to an HSA tax-free while enrolled in Medicare. And while not common knowledge, your Part A enrollment automatically triggers six months of retroactive coverage. This means that if you've contributed to an HSA after turning age 65 and within six months of enrolling in Part A, the contributions you made during that time will now be subject to tax penalties, including payment of back taxes on their tax-free contributions and account interest and/or additional income taxes.
So the important rule of thumb is you should stop contributing to your HSA six months before enrolling in Medicare. (However, you only need to manage this retroactive timeline back to your 65th birthday, if that is less than six months prior to your enrollment.)
Can I use HSA funds to pay for medical expenses after I enroll in Medicare?
The good news is that you can and should use your HSA funds after you enroll in Medicare. You may use your funds, tax and penalty free, for qualified medical expenses as well as to pay for Medicare Part B premiums and Medicare Advantage Plan premiums. HSA funds can be used for prescription drug premiums, deductibles and co-payments. They can be used for qualified dental, vision and hearing expenses and many over-the-counter items.
Note that Medicare supplement (Medigap) policy premiums are not HSA-eligible expenses. However, after you turn 65, you can use your HSA funds for non-qualified medical expenses without incurring the 20% additional tax penalty. This means that you can use HSA funds for Medigap premiums but the funds will be taxed as ordinary income.
There are a few other things to keep in mind related to HSAs and Medicare:
If your spouse is HSA eligible, he or she can open an HSA and you can contribute to it even after you enroll in Medicare.
Your HSA funds can be used toward your spouse's Medicare premiums and medical costs. However;
You cannot reimburse your spouse's Medicare related premiums from your HSA until you, the HSA owner, turn 65.
As you approach your 65th birthday, the decisions you make about Medicare enrollment will affect your health care coverage and your pocketbook. Navigating these decisions can be daunting, especially when you are faced with the possibilities of lifetime premium penalties and significant tax consequences. For these reasons, It can be very helpful to sit down and talk with a professional who specializes in Medicare. Meeting with a licensed, independent agent three to six months before your 65th birthday can keep you on the most efficient path when it comes to decision-making, helping you avoid coverage gaps and penalties. The bottom line? Your health care coverage roadmap from age 65 to retirement and beyond is unique, determined by your (and your spouse's) special set of circumstances. You don't have to be an expert; you can reach out for help.
P.S. Check out our Medicare Navigators here!