A 66-Year-Old Active Employee, a 24-Year-Old Dependent, and an HSA Request
Rosa, 66, works full time for a Michigan manufacturer with 45 employees that offers a fully insured PPO. She enrolled in Medicare Parts A and B when she turned 65 and kept both along with the employer plan. Her husband, 70 and retired, is covered under her employer plan and also has Medicare. Their son, 24, is on the plan, graduated last May, works part-time, and has no coverage offered through his job; the plan is not grandfathered. The employer is adding a high-deductible option with an HSA, and Rosa wants to switch to it and contribute $5,000 for the year. She is about to have a $40,000 knee replacement; the PPO pays 80% after a $1,500 deductible and has no coordination-of-benefits carve-out.
1. For the $40,000 knee replacement, which plan pays first, and what is Rosa's exposure?
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The employer PPO pays first; Medicare pays second. The Medicare Secondary Payer working-aged rule makes the group health plan primary for an employee age 65 or older (and that employee's spouse age 65 or older) who is covered through current employment with an employer of 20 or more employees. The manufacturer has 45, so the group plan is primary regardless of what either plan's COB clause says, and the plan may not terminate her coverage or steer her to Medicare while she is actively working.
The math on the PPO: billed $40,000; after the $1,500 deductible the plan pays 80% of $38,500 = $30,800. Her responsibility is $9,200 ($1,500 deductible + $7,700 coinsurance). The provider must bill both plans; Medicare as secondary will consider the claim and may pay part of that $9,200, generally not exceeding what Medicare would have paid had it been primary.
Judgment on Part B: she is paying for Part B while the group plan stands first, which is often wasted premium - she could disenroll and use a special enrollment period at retirement. The counterweight is that Part B is her only secondary payer for that $9,200 and for anything the group plan excludes, and a lapse in coverage between retirement and Medicare enrollment is expensive to fix.
2. Can the plan drop the 24-year-old son now that he has graduated and is no longer a full-time student?
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No. Under the ACA, a non-grandfathered group health plan that offers dependent coverage must make it available until the child turns 26, regardless of student status, residency, marital status, financial dependence, or eligibility for coverage through his own employer. Losing student status is legally irrelevant, and the fact that he works part-time with no benefits changes nothing.
Two refinements worth stating:
- The exception allowing a plan to exclude a child who is eligible for other employer coverage applies only to grandfathered plans; this plan is not grandfathered.
- He remains covered until his 26th birthday. The plan must give advance notice of the termination date, and when coverage ends for loss of dependent status that is a COBRA qualifying event - he should be offered up to 36 months of continuation at his own expense.
Any enrollment form or SPD that conditions dependent eligibility on full-time student status is unenforceable as applied to him.
3. Rosa wants to enroll in the HDHP and put $5,000 in an HSA. What is her eligibility, and what are the consequences if she contributes anyway?
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She is not an eligible individual, and the HSA contribution would be improper.
To contribute, an individual must be covered by a qualifying high-deductible health plan, have no disqualifying coverage, and not be claimable as a dependent. Medicare enrollment is disqualifying coverage. Because she has had Part A (and B) since age 65, she is ineligible for every month of this year, so her annual HSA limit is effectively zero. Part A cannot realistically be dropped while she receives Social Security retirement benefits, so this is not a temporary problem.
If she contributes anyway: the $5,000 is an excess contribution, subject to a 6% excise tax for each year it remains in the account, plus ordinary income tax on the excess unless it is withdrawn with earnings by her tax filing deadline. Employer contributions count toward the same limit and create the same problem.
What she can still do: keep and spend an existing HSA. Qualified medical expenses include Medicare Part B premiums (but not Medigap premiums), and she may use HSA funds for her spouse's qualified expenses. Enrolling in the HDHP itself is permitted - she simply cannot fund an HSA for those months, and Medicare will still be secondary to the HDHP while she is actively employed.