Delayed Medicare Enrollment, HSA Contributions, and Coverage After Retirement
Ken is 67 and has worked full time for 20 years for a Washington employer with 15 employees. He stayed on the group medical plan and a group high-deductible plan with an HSA instead of enrolling in Medicare at 65. This year he has contributed $4,300 to the HSA and his employer contributed $1,000. He plans to retire on August 1. His wife, 61, is covered on the group plan and has no Medicare entitlement. Ken has no other prescription drug coverage and takes three maintenance medications. He has never received a notice describing the group drug coverage as creditable.
1. Was Ken's decision to delay Medicare while working correct? Which plan pays first now, and what will enrolling cost him?
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His premise was wrong. The 'working aged' rule that makes an employer group plan primary applies to employers with 20 or more employees. With 15 employees, the group plan is secondary to Medicare regardless of his employment status. Medicare should have been primary for Ken from age 65, and the group plan pays only what Medicare does not - often very little, because the group plan's allowed amount is calculated as if Medicare paid first. He has been paying group premiums for coverage that was second in line.
Enrollment is now the priority, and it is not automatic. Because the employer has fewer than 20 employees, Ken does not qualify for the working-aged special enrollment period. He must use the General Enrollment Period (January 1–March 31) for a July 1 effective date. If he retires August 1 without having enrolled, he faces a coverage gap of nearly a year unless he bridges it with the group plan (COBRA or state continuation) or a marketplace plan.
The cost of delay is permanent. Part B carries a late enrollment penalty of 10% of the standard premium for each full 12-month period he went without coverage, added to his premium for life. Part D carries a 1% per month penalty on the national base beneficiary premium, also permanent, unless he had creditable drug coverage. He has no other drug coverage and never received a creditable coverage notice, so he should assume the group drug benefit is not creditable and brace for a Part D penalty.
Practical step: verify now whether the group plan's drug coverage is creditable, get the notice in writing, and enroll in Part B and a Part D plan effective the earliest possible date, using the group plan for the gap in the meantime.
2. What is wrong with Ken's HSA contributions, and what must be done about them?
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Medicare entitlement ends HSA eligibility. An individual may not contribute to an HSA for any month after entitlement to Medicare (Part A, whether or not he enrolls in Part B). Ken is now 67 and has never enrolled, but this is where the retroactivity rule bites: when he applies for Part A, entitlement can be backdated up to six months. That backdating makes his recent HSA contributions - his own and his employer's - excess contributions for those months.
Consequences of excess contributions:
- The employer contribution counts too. Together, $4,300 + $1,000 = $5,300 is at stake for the year in question.
- Excess contributions are included in income and subject to a 6% excise tax for each year they remain in the account.
- If he used the last-month rule to justify a full-year contribution, failing the 13-month testing period because of Medicare entitlement accelerates income and adds an additional tax.
- Earnings on the excess amounts must be removed as well.
What to do: stop all HSA contributions - his and the employer's - no later than the month before Medicare entitlement begins; request a timely correction of the excess (withdrawal of the excess plus attributable earnings) through the HSA custodian; report the correction properly. Going forward he may keep the account and spend it on qualified medical expenses tax-free, including Medicare premiums for Part B and Part D, but he may not contribute. He should also confirm with the employer that payroll stops the deduction, because payroll systems rarely know about Medicare.
3. Ken retires August 1. What coverage options does his 61-year-old wife have, and what are the deadlines?
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She has three sequential options and a hard deadline.
1. Employer continuation. Because the employer has fewer than 20 employees, federal COBRA does not apply; Washington's continuation statute does. The group plan must offer continued coverage (generally up to six months) for the spouse when coverage ends because of the employee's retirement, at the group rate plus an administrative charge, with a conversion right to an individual policy when continuation runs out. She must elect within the plan's election window or she loses the right.
2. Marketplace coverage with a special enrollment period. Loss of minimum essential coverage is a qualifying event. She has 60 days from the loss of coverage to enroll in a marketplace plan and claim an advance premium tax credit; the 60 days runs from the date coverage ends, not from the date she starts looking. Washington's exchange is the route here, and because she is 61 and not Medicare-eligible, subsidies may make this cheaper than continuation.
3. Bridge to Medicare. She will be eligible at 65. She should avoid a gap in creditable prescription drug coverage that is longer than 63 days, or she will owe a Part D penalty when she enrolls.
Do not do this: let her go without coverage and assume she can enroll later. Guaranteed issue at the marketplace is tied to the qualifying event, and a lapse that is not a qualifying event means waiting for open enrollment. Ken's own Part A/B enrollment should also be timed so the couple's coverage does not gap in the same month - enroll during the General Enrollment Period well before the August 1 retirement date, and use the group plan or continuation to bridge the interval.