Robert's Medicare, the Small Employer, and the HSA He Shouldn't Have

Medicare pays first. The employer has 12 employees - under 20 - so the working-aged Medicare Secondary Payer exception does not apply. Medicare is primary and the group HDHP is secondary. That has several consequences the friend's advice ignores:

• Robert is paying $780 a month for a plan that mostly picks up what Medicare leaves behind, which is an expensive way to buy secondary coverage.
• For his wife, 58, the group plan remains primary and is likely her best option - she cannot get Medicare yet, and individual coverage would be medically underwritten or priced without an employer contribution.
• Dropping the group plan would strip his wife's coverage, so any decision has to be made as a couple, not as an individual.

The sensible structure is: keep the group plan for the wife, and compare keeping it for Robert (secondary) against a Medigap plus Part D arrangement. A Medigap policy pairs with original Medicare and would cover the cost-sharing Medicare leaves; the comparison is $780 for two versus the wife's portion plus a Medigap premium plus a Part D premium, plus drug costs. Note that Medigap does not cover drugs.

He is not eligible, and has not been since he enrolled in Medicare.

HSA eligibility requires that the individual be covered by a qualifying high-deductible plan, have no disqualifying coverage, and not be entitled to Medicare. Entitlement begins with enrollment in Part A - even if he is not drawing benefits. He enrolled at 65, so contributions should have stopped then.

The Part A lookback makes it worse. When someone enrolls in Part A after 65, enrollment can be retroactive up to six months. If that applies, his last month of eligibility may be earlier than his 65th birthday, extending the ineligible period.

Correction:

1. Stop the $350 monthly contributions immediately and instruct payroll.
2. The employer's $1,200 annual contribution is also an excess contribution.
3. Remove the excess contributions and their earnings - an ordinary-income correction - by the tax filing deadline, or leave them in and pay the 6% excise tax on the excess for each year it remains. The 6% recurs annually, so delay is expensive.
4. He may still spend existing HSA funds tax-free on qualified medical expenses, including Medicare premiums (Part B, Part D, Medicare Advantage) - just not contribute.

His friend's "keep funding it, it's tax-free" advice is exactly backwards: the contributions are the problem, the spending is fine.

Robert - Medicare/Medigap. Losing the employer plan gives him a guaranteed-issue right to buy a Medigap policy; he must apply inside the window that follows the loss of coverage, and he cannot be underwritten during it. He should enroll in a Part D drug plan at the same time, and should not rely on the group plan's retiree drug coverage unless it is creditable. Dropping Part B or D without creditable coverage triggers lifetime late-enrollment penalties.

The trap: COBRA is not active employer coverage. Continuing the group plan through COBRA does not delay his Medigap guaranteed-issue window and does not extend it. If he waits until COBRA ends, the guaranteed-issue right may be gone and he may be underwritten. His earlier quote of $190 a month is not locked in unless he applies during the window.

Wife, 58. She is not Medicare-eligible and the group plan is ending for her too. Her options: California's Cal-COBRA continuation (the state program covers employers with 2–19 employees for up to 36 months, since federal COBRA's 20-employee threshold is not met), then an individual plan through Covered California, or coverage through her own employer if available. She should price Cal-COBRA against an ACA plan with a subsidy before electing - Cal-COBRA is often the more expensive path once the employer contribution stops.