How Medicare and Social Security Impact HSAs - Capstone Brokerage

By: Amy Pennza, Insurance Journal, July 2017

Medicare and Social Security are two subjects complicated enough to give anyone a mental workout. However, it’s important for employers and employees alike to understand how Medicare and Social Security affect contributions to a health savings account (HSA).

While the rules are actually quite straightforward, the penalties for making improper contributions are steep. Employees and employers should be informed to ensure they don’t inadvertently break the rules.

How Federal Retirement Benefits Affect HSA Contributions

If you use an HSA alongside your individual health insurance policy, or you’re an employer who offers an HSA, it’s important to understand how federal retirement benefits affect HSAs.

Per IRS rules, employees can’t contribute to an HSA if they’re enrolled in Medicare. Likewise, employers aren’t allowed to make contributions to an employee’s HSA once the employee enrolls in Medicare.

The same is true for Social Security, as an individual who enrolls in Social Security is automatically enrolled in Medicare Parts A and B. And while it’s possible to opt out of Part B, Social Security recipients are stuck with Medicare Part A — which means they can’t contribute to an HSA.

These rules apply whether an employee has an HSA, or an HSA combined with an HRA.

Delaying Social Security and Medicare Benefits

Understandably, some employees choose to delay their Social Security benefits. For workers who are healthy enough to continue working, delaying these benefits can be a sound financial strategy.

For example, a worker who delays Social Security benefits until age 67 will receive 108% of the monthly benefit. Workers who wait until age 70 get 132% of the monthly benefit.

The good news is that employees who delay their Social Security benefits while working for a company with 20 or more employees can continue contributing to their HSA without penalty. Keep in mind, however, that they must also delay enrolling in Medicare during this time.

Avoiding Improper HSA Contributions

Employees and employers should also be aware of a potential Social Security pitfall that can result in improper HSA payments — and the tax penalties that go with them.

Workers who apply for Social Security retirement benefits when they’re at least six months past retirement age automatically receive six months of backdated benefits. There’s no doubt that this is helpful for many people, but it also makes a worker’s enrollment in Medicare Part A retroactive by six months. This means that any HSA contributions made by the employee or the employer during this six-month period are improper.

To avoid penalties, workers and employers should stop making HSA contributions at least six months before the employee applies for Social Security retirement benefits.

Conclusion

HSAs are an affordable and flexible way for employers to help their workers cover the cost of individual health insurance. As employees approach retirement, however, it’s critical for both employers and employees to stop contributions far enough in advance to avoid incurring

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