Many people take advantage of Health Savings Accounts to put money aside for future medical costs. But there are special rules you need to know about these accounts when first joining Medicare.

What is a Health Savings Account (HSA)? 

An HSA itself is not a health insurance plan but an option with a High Deductible Health Plan (HDHP). Employer Group HDHPs are increasingly popular due to their relatively lower costs to employers. 
 
An HSA is a valuable tool to save money to pay the higher upfront out-of-pocket costs and offers tax benefits. Employees can reduce their taxable income by contributing pre-tax dollars from their paycheck or individuals can deduct contributions for tax purposes if the HSA is set up through a trustee. 

Who can get an HSA? 

The Internal Revenue Service defines HSA eligibility as follows: 

• Covered under a HDHP  
• No other health coverage, other than what is allowed under other health coverage  
• Not enrolled in Medicare, and 
• Cannot be claimed as a dependent for tax purposes on someone else’s tax return. 

How does an HSA work with Medicare? 

Many people enroll into Medicare Part A when first eligible because there is no monthly premium. Enrolling when first eligible also avoids the possibility of incurring a Medicare Part A late enrollment penalty. However, for those working beyond 65 (or have a spouse that is still working) and are enrolled in an employer group health plan, it may be wise to wait to enroll in Part A and Part B. This is especially important if your employer has an HDHP with a health savings account. 

If you have health coverage through an employer group health plan and are considering delaying Medicare Part A enrollment keep in mind that:  

1. Contributions to an HSA are not allowed after Part A and/or Part B enrollment.     

Employees should contact their Human Resources office and request HSA contributions stop before Medicare enrollment. 
 
Note: After Medicare Part A and/or B enrollment, saved HSA funds can be spent on qualified medical expenses, including Medicare deductibles and coinsurance, Medigap premiums, and Medicare qualified medical expenses. 

2. Claiming Social Security benefits beyond age 65 years triggers automatic Part A enrollment and a retroactive Part A coverage period that cannot be declined. 

The retroactive Part A period is limited to 6 months and cannot go back further than the entitlement date. An IRS penalty applies to HSA contributions made, even if unknowingly, during the Part A retroactive period. To avoid an IRS penalty, stop contributions to the HSA between 1-7 months prior to enrolling in Medicare Part A or claiming Social Security (SS) benefits after age 65 years. 

The Centers for Medicare & Medicaid Services (CMS) has determined that when an individual 65 and over qualifies for more than one Part A and Part B enrollment period, the order of enrollment periods is as follows:  

1. Initial Enrollment Period (IEP) 
2. Special Enrollment Period (SEP) 
3. General Enrollment Period (GEP) 

The Initial Enrollment Period (IEP) supersedes the SEP or GEP; the Social Security Act states that both the Special Enrollment Period and the General Enrollment Period are only available following the end of an individual’s IEP. The guidance also stipulates that an individual is eligible for the SEP for the Working Aged if he or she is covered under a group health plan based on their (or their spouse’s) current employment AND they did not enroll during their IEP.

3.    Those working at age 65 and beyond (or whose spouse is working) with an EGHP based on current employment can delay Medicare Part A (and Part B) until a Special Enrollment Period and avoid late enrollment penalties. 
 
While an employee with an EGHP can use an SEP to delay enrollment and avoid Medicare late enrollment penalties, Medicare Coordination of Benefit rules will impact beneficiary coverage and need to be considered when making enrollment decisions. 

For example, if an employer has fewer than 20 employees and offers an EGHP to individuals 65 or older, Medicare is the primary payer and the EGHP is the secondary payer on any claims filed by individuals eligible for Medicare. The employee must enroll into Medicare for Medicare acts as the primary insurer. As secondary, the EGHP will. typically, not pay until Medicare has made payment. 

In a situation where the employer has more than 20 employees and offers an EGHP to those age 65 or older. Medicare is the secondary payer. As the secondary payer, Medicare pays only if the primary insurance pays less than Medicare would have as the primary payer. As a result, Medicare may pay little, if any, on medical claims as a secondary payer. 

Employees that are considering delaying Part B enrollment because they have insurance should talk with their benefits manager or human resources department to gain a thorough understanding as to how their current plan coordinates benefits with Medicare.   

Get Help

Find more examples of how to coordinate HSA contributions with Medicare enrollment in the detailed fact sheet below.

The State Health Insurance Assistance Program (SHIP) network provides unbiased assistance to people with Medicare and their families. Find your SHIP at www.shiphelp.org or by calling 1-877-839-2675.