By Liliana Salazar
Can employees who stay on the job past age 65 be enrolled in a HDHP/HSA?
This is one of the tricky questions that older workers may pose as they delay retirement, but still need to understand what staying on the job means for their Social Security and Medicare benefits. The answer can be complicated.
Health Savings Accounts (HSAs), are offered in tandem with group HDHPs. They were designed to act as a healthcare savings vehicle and also as a way to make enrollment in HDHPs plans more attractive. Employer and employee contributions to HSAs and earnings from HSAs are exempt from federal and state taxes (with a few exceptions).
Disbursements from HSAs for qualified healthcare expenses are also tax-exempt. However, disbursements for unqualified health care expenses (cash disbursements) are subject to income and excise taxes. Unused HSA balances roll over from one year to the next and never forfeit. The HSA holder may assign a beneficiary.
Workers who are approaching age 65 and Medicare eligibility don’t necessarily want to stop receiving employer contributions or making their own contributions into an HSA. This is especially true if they anticipate working for a few more years and are in good health, having comparatively low out-of-pocket medical costs. HSAs can be good retirement savings accounts for them. HSAs allow older workers to save for the time when their healthcare expenses are significantly greater and their income decreases.
Employees need the right guidance on how Medicare, HDHPs and HSAs interact. Here’s what you and your employees need to know.
- Medicare Eligibility and Secondary Payer Rules: Simply gaining eligibility for Medicare doesn’t disqualify employees from staying on your high deductible plan or from contributing into an HSA. However, if your employee enrolls in Medicare and your organization has 20 or more employees, your plan is the primary payer. It pays first and Medicare pays second. When your plan is primary payer, there is minimal coordination of coverage between your plan and Medicare. For this reason, employees should consider remaining covered under your plan over Medicare. However, if your organization has fewer than 20 employees, Medicare will be primary payer. If your employee chooses to waive enrollment in Medicare, and remains enrolled in your group health plan, your insurance carrier will process claims taking Medicare into account, exposing your employees to very high out-of-pocket expenses. This means most employees aged 65 or older should consider enrolling in Medicare over your plan. However, if they choose to enroll in both Medicare and your HDHP, they are no longer eligible to contribute to an HSA or receive contributions, as enrollment in Medicare disqualifies employees from contributing to HSAs.
- Medicare and HSA contributions. Enrollment in Medicare (Parts A, B, C, or D), versus becoming eligible for Medicare, disqualifies an employee from making or receiving contributions to an HSA. However, enrollment in Medicare does not impact an individual's eligibility to enroll in the HDHP as HSAs are independent offerings from a HDHP, or to request reimbursement from an HSA. Note that when individuals choose to enroll in Medicare Part A after age 65 (during a special enrollment period) coverage becomes retroactively effective up to six months from the date of the enrollment request for enrollment.
- What receiving Social Security benefits means to HSA holders. Workers receiving Social Security benefits are automatically enrolled in Medicare Part A if they have contributed 40 quarters into Medicare. When they choose to receive Social Security benefits six months past the full retirement age of 66, Social Security gives six months of benefits in “back pay.” As enrollment in Medicare Part A is associated with Social Security benefit payments, the employee will be enrolled in Medicare Part A retroactively, six months before the request to receive Social Security benefits. The retroactive enrollment in Medicare Part A disqualifies employees from contributing to or receiving contributions to an HSA, and subjects them to six months of tax penalties. To avoid penalties, older workers should be advised to stop contributing to their HSA account six months before applying for their Social Security benefits.
- Opting out of Medicare. If older workers at organizations employing 20 or more employees enroll in Medicare Part A without understanding what it means for their HSAs, they can withdraw their Medicare enrollment as long as they have not yet applied to receive Social Security benefits. Doing so will not subject them to penalties, and they can reenroll in Medicare Part A in the future.
- The disability factor. People on disability are automatically enrolled in Medicare after their 25th disability check from Social Security. When they return to work, their disability payments stop, but the Medicare entitlement extends for 93 months. If their employer offers an HSA that’s tied to a high deductible plan, they are thus ineligible to enroll in or receive or make contributions to an HSA. The only way to opt out of Medicare Part A is by paying Social Security back for all the disability payments and paying Medicare back for services used.
Understanding the ins and outs of Medicare and how it intersects with your group benefits is complicated and increasingly important to understand as older employees stay on the job longer. Your HUB Medicare specialists can guide you through what you need to know.