By: HUB’s EB Compliance Team
Can employees who stay on the job past age 65 be enrolled in a high deductible health plan (“HDHP”) / Health Savings Account (“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.
HSAs can only be offered in tandem with group HDHPs. 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 any other purpose are generally 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 do not necessarily want to stop receiving employer contributions or stop 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. In those cases, HSAs can be good auxiliary retirement savings accounts for them. For example, HSA funds can be used to pay premiums for Medicare supplement plans after the account holder turns 65. Additionally, distributions after age 65 are only subject to regular income tax, not the additional excise taxes, if not used for qualified healthcare expenses.
But how do the HSA rules interact with the Medicare rules for employees who are Medicare eligible?
Medicare Eligibility and Secondary Payer Rules
Simply gaining eligibility for Medicare does not disqualify employees from staying on an HDHP or contributing into an HSA. However, if your employee enrolls in Medicare and, generally speaking, your organization has 20 or more employees, your plan is the primary payer (we cover these rules in more detail in this piece). It pays first and Medicare pays second. When your plan is primary, there is minimal coordination of coverage between your plan and Medicare. For this reason, employees may consider remaining covered under your plan over Medicare.
However, if your organization generally 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 likely 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 if your company fits in this category. However, if they choose to enroll in Medicare, they are no longer eligible to contribute to an HSA or receive contributions. Enrollment in Medicare disqualifies employees from contributing to HSAs.
Medicare and HSA Contributions
Actual enrollment in Medicare (Parts A, B, C, or D) disqualifies an employee from making or receiving contributions to an HSA; merely being eligible for Medicare, without enrolling, does not. However, enrollment in Medicare does not impact an individual's eligibility to enroll in the HDHP. Therefore, someone enrolled in Medicare can get extra coverage by also being enrolled in the HDHP.
In addition, individuals enrolled in Medicare can still receive reimbursements from the HSA. In other words, while they cannot contribute, they can still get their medical expenses paid for or reimbursed by the 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 (but no earlier than the month before the individual turned 65). Therefore, individuals choosing to enroll in Medicare may want to consider stopping their contributions six months before enrolling. If the individual contributed anyway, it may also be possible to request a distribution of contributions made during those six months to avoid excise taxes.
Receiving Social Security Benefits
Workers receiving Social Security benefits are automatically enrolled in Medicare Part A if they have paid Medicare taxes for 40 calendar quarters. When they choose to receive Social Security benefits six months after the full retirement age, 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 potentially 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. If the individual contributed anyway, it may also be possible to request a distribution of contributions made during those six months to avoid excise taxes.
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 if 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 benefits from Social Security 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 is 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.
Conclusion
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.
If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.