Turning 65, Still Working, and an HSA
Walter, 64 years and 10 months, works for a 30-employee engineering firm and is covered by its group health plan with a $2,000 deductible. He contributes $4,150 to a health savings account (HSA) each year and plans to work until 68. His wife, 62, is covered on his plan. He is not receiving Social Security. He will turn 65 next month. The employer plan is primary for active employees. Walter wants to keep contributing to his HSA and avoid Medicare premiums. He asks whether he should enroll in Medicare Part A and Part B at 65, and what happens if he loses his job at 66. He also has $12,000 in his HSA and wants to use it for dental work next year.
1. Should Walter enroll in Medicare Part A and Part B at 65? Explain the employer-size rule, HSA eligibility, and premium penalties.
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Walter can delay both Part A and Part B if he is not receiving Social Security and has group health coverage based on current employment. The employer has 30 employees, which is more than 20, so the group plan is primary and he is not required to enroll in Medicare at 65. Delaying Part B is penalty-free as long as he is covered by the employer plan through current employment; he will have an eight-month special enrollment period after that coverage ends. Part A is premium-free if he has 40 quarters of Medicare-covered work, and there is generally no late penalty for premium-free Part A, but enrolling in Part A would make him ineligible to contribute to his HSA. Because he wants to keep HSA contributions, he should delay Part A as well as Part B, confirm he is not receiving Social Security, and verify that the employer plan is a qualifying high-deductible health plan. If he enrolls in Medicare, he must stop HSA contributions.
2. What are the HSA consequences if Walter enrolls in Part A while still working?
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HSA eligibility requires that he not be enrolled in Medicare. Enrolling in Part A, even though it is premium-free, ends HSA eligibility. He cannot contribute to the HSA for any month in which he is enrolled in Medicare, and if Part A is retroactive, contributions for those retroactive months are excess. He would need to stop payroll contributions before the Medicare effective date, calculate any excess contributions, and withdraw them with earnings to avoid a 6% excise tax. The existing $12,000 balance can still be used for qualified medical expenses, including dental work, even after he is enrolled in Medicare. The judgment call is to coordinate with payroll and the HSA custodian so the contributions stop at the correct month. If he wants to maximize HSA contributions, he should delay Medicare and keep the employer HDHP and HSA-eligible coverage in place.
3. If Walter loses his job at 66, what Medicare enrollment period applies, and what should he do about Part B and Part D?
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Losing employer coverage through current employment gives Walter an eight-month special enrollment period for Part B. He should enroll in Part B before that period ends to avoid a late enrollment penalty. Part A can be enrolled at the same time; if he has premium-free Part A, there is generally no late penalty, but he should still apply. For Part D, he needs creditable prescription drug coverage from the employer plan or he will face a late enrollment penalty after a 63-day gap. He should obtain a creditable coverage notice from the employer. COBRA is not coverage based on current employment, so it does not extend the Part B special enrollment period or allow him to delay Medicare without penalty. He should also stop HSA contributions before Medicare begins and use the remaining HSA funds for qualified expenses.