Working Past 65 With an HSA and a Spouse on the Way to Medicare
Walter turned 65 two years ago and still works full time for a machine shop with 45 employees. He is enrolled in the company's group health plan, earns $78,000 a year, receives Social Security retirement benefits, and has contributed $4,300 a year to the company HSA since turning 65. In three months he will retire and elect COBRA for himself and his wife, who is 63 and has no health coverage of her own. He has never enrolled in Medicare Part B. He has an appointment with a financial planner to 'sort out Medicare and the HSA' before he gives notice.
1. Can Walter keep contributing to the HSA, and what should be done about the contributions already made?
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- No. HSA eligibility requires qualifying high-deductible coverage with no disqualifying coverage, and enrollment in Medicare disqualifies a person. Because he is receiving Social Security retirement benefits and is past 65, he was automatically enrolled in premium-free Part A effective the first day of his birthday month. Every month since then has been a month of Medicare enrollment and therefore a month of HSA ineligibility.
- Those contributions are excess contributions. The remedy is to remove the excess plus attributable earnings before the tax-filing deadline, including extensions, for each year. The earnings come into income, and a 10% additional tax applies to earnings if he is under 59 and a half. If the excess stays in, a 6% excise tax applies for each year it remains.
- He cannot simply drop Part A to restore eligibility. Automatic enrollment at Social Security entitlement is not unwound retroactively to permit HSA funding, and prospective withdrawal is limited. Do not plan around it.
- A second trap is coming. When he applies for Part B after retirement, SSA can make the enrollment retroactive, and each retroactive month is another month of HSA ineligibility. See the next question.
- What the funds can still do. HSA money may pay qualified medical expenses for him, his spouse, and dependents, and may pay Medicare Part B, Part D, and Medicare Advantage premiums. Medigap premiums are not qualified expenses.
- Action: stop payroll contributions immediately, compute the excess year by year from the Part A effective date, and coordinate removal with the custodian before filing.
2. What is his Part B enrollment window at retirement, and why does the six-month lookback matter here?
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- His current status is protected. While he is actively working for an employer with 45 employees and covered by that group plan, he is in a valid delay period and owes no late enrollment penalty.
- The special enrollment period. When his employment ends, or the group coverage based on that employment ends, whichever comes first, an eight-month Part B special enrollment period begins. Enrolling within it avoids the penalty and avoids a coverage gap.
- The lookback. When someone enrolls in Part B after the initial enrollment period, SSA can set the effective date up to six months before the month of application, but never earlier than the initial enrollment period month. Those retroactive months count as Medicare months, so any HSA contribution made in them becomes an excess contribution. That is exactly why the instruction should be to stop HSA contributions now, rather than funding the account through December and applying in the spring.
- If he misses the eight-month window, he may have to wait for the general enrollment period, January 1 through March 31, with coverage starting the following month, and he faces a late enrollment penalty of 10% of the standard Part B premium for each full 12-month period of delay, generally for as long as he has Part B.
- Primary payer note. With 45 employees the group plan is primary while he works. That flips the moment he stops working, so the Part B application should be filed in connection with retirement, not after it.
- Confirm the effective date and any retroactivity with SSA in writing before withdrawing HSA money or filing taxes.
3. Who pays first among the group plan, COBRA, and Medicare, and how should his 63-year-old wife be covered?
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- While he is working, the group plan is primary. The employer has more than 20 employees, so Medicare Secondary Payer rules make the group health plan pay first and Medicare second. His Part A enrollment does not put Medicare in front of his employer's claims.
- At retirement the order flips. Active-employee coverage ends, Medicare becomes primary, and COBRA or retiree coverage is secondary. COBRA is not coverage based on current employment, so it can never be primary to Medicare for a person entitled to Medicare.
- COBRA does not protect his Part B deadline. COBRA is not employer coverage that extends the Part B special enrollment period or stops the Part D late enrollment clock. His eight-month window runs from the end of employment or active coverage, and he must use it.
- For his wife, age 63, COBRA is the workable bridge. She has no Medicare entitlement and needs real coverage. COBRA runs up to 18 months, enough to reach 65 and her initial enrollment period, when she can enroll in the three months before her birthday month. The alternatives are an ACA marketplace plan or an individual policy. Note that electing COBRA generally makes her ineligible for premium tax credits unless the employer plan is deemed unaffordable, so the marketplace route may close once she elects.
- The sequencing. Walter enrolls in Part B through the special enrollment period so it is effective when active coverage ends. He keeps Part A. He should treat COBRA for himself as cost-sharing help only, since it pays after Medicare, and he should make a Medigap or Medicare Advantage decision during his Medigap open enrollment window, which for a delayed enrollee begins when Part B takes effect. His wife elects COBRA timed to run through her 65th birthday, then enrolls in Medicare.