Medicare, the Group Plan, and an HSA That May No Longer Be Legal

No. She is not an eligible individual, and has not been since her Part A coverage began at 65.

HSA eligibility requires that the person be covered by a qualifying high-deductible health plan and not be entitled to Medicare. Entitlement - not enrollment in Part B - is the trigger, and her Part A entitlement started automatically at 65. She is also receiving employer and salary-reduction contributions, so the excess is larger than she thinks.

Correction path:

1. Stop payroll HSA contributions immediately (a written notice to payroll, dated).
2. Remove the excess contributions plus attributable earnings as a corrective distribution before the tax-filing deadline (including extensions). Ordinary income is recognized on the earnings; the 20% accuracy penalty is avoided.
3. If the excess is not removed timely, a 6% excise tax applies to the excess for each year it remains.

What is still fine: the existing HSA balance is not forfeited. She may spend it tax-free on qualified medical expenses at any time - including her group plan's $2,000 deductible and coinsurance. She simply cannot add to it.

The producer should also flag that the employer's $1,000 is an excess contribution too and cannot be left in place.

The group plan pays first. The employer has 30 employees - comfortably above the 20-employee threshold - and she is covered based on current employment. That makes the group health plan the primary payer and Medicare secondary. The group deductible and coinsurance apply; Medicare may pick up some of what the group plan leaves unpaid, but she should not assume Medicare will fill the whole gap.

Part B enrollment is optional right now, and there is a good case for waiting. Because she has group coverage through her own current employment at a 20+ employee employer, she qualifies for a Special Enrollment Period and is not subject to the late-enrollment penalty for as long as that coverage continues. She can enroll when she stops working, with an 8-month SEP after the group coverage ends (or employment ends, if earlier).

Why waiting can be the better call: Part B would cost her a monthly premium for a secondary payer position she may rarely use, while the group plan remains primary. Why she might enroll anyway: if she wants Medicare to pick up cost-sharing, or if she travels. Either way, she must confirm the group drug coverage is creditable for Part D purposes - if it is not, and she later goes without creditable coverage for 63 days or more, a Part D penalty accrues.

At retirement she must transition deliberately, because the group plan will stop being primary the day employment ends.

• Part B: enroll during the 8-month SEP that begins when employment or group coverage ends. Enrolling within that window avoids the lifetime late-enrollment penalty (10% per 12-month period of delay). If she misses it, she waits for the General Enrollment Period and pays the penalty permanently.
• Part D: she needs creditable drug coverage within 63 days of losing the group plan. If her group drug coverage was creditable, she carries no penalty; if not, the 1%-per-month penalty applies for as long as she lacked creditable coverage.
• Supplement or Advantage: she should compare a Medigap plan (which she can buy during her one-time Medigap open enrollment at 65 or later, with guaranteed issue under federal rules during that window) against a Medicare Advantage plan. Note that HSA dollars cannot pay Medigap premiums, though they can pay Part B and Part D premiums.

Put in writing now: the date her HSA contributions stopped, the excess-contribution correction, the fact that the group plan is primary and Medicare secondary, the 8-month SEP and 63-day rules, the creditable-coverage confirmation from the employer, and a retirement-transition checklist dated for age 71. Documenting now protects both her and the producer later.