I see more and more employers offering high deductible health plans (HDHPs) every year. This type of plan can be tricky, but it’s increasingly popular in the quest to keep premium spend down as healthcare costs rise. We come across our fair share of questions and issues with HDHPs and health savings accounts (HSAs) at the Benefits Help Desk regularly.
In case you don’t already know, HSAs serve as a companion to HDHPs and allow taxpayers to contribute funds to a portable account where – assuming all eligibility criteria is met – they are not subject to federal income tax. Employees can lower their taxable income by making pre-tax contributions from their paycheck and employers can help fund employees’ accounts if they choose. Sounds like a good deal to me.
There’s a big catch though – Medicare recipients cannot contribute to an HSA. Being enrolled in any part of Medicare, including the usually free Part A, leaves taxpayers ineligible for deposits into an HSA. More people are working later into life and I’ve noticed they’re wising up. Many choose to defer their enrollment into Medicare so they can keep taking advantage of HSA tax benefits. And this can be done without penalty as long as the member is covered under a qualified HDHP plan as a result of their own (or their spouse’s) active employment through an employer of 20 or more employees.
All that seems simple enough right? But here’s where the real danger lies… Most people don’t know that when you sign up to collect Social Security retirement income, you’re automatically enrolled in Medicare Part A. If you have deferred Medicare, this automatic coverage could go back retroactively up to six months from your income sign-up date (but NOT prior to the first of the month of the initial retirement income eligibility date). Make sense? And there is no option to waive Part A while you collect.
I urge employers to get ahead of these issues. Figure out if this scenario could apply to your population. If employees have delayed their Medicare enrollment in order to contribute to an HSA, clearly communicate to your workforce that they may need to stop contributing to their HSA as early as six months prior to signing up to collect their Social Security retirement income. The exact strategy will vary from case to case – for instance, someone who chooses to collect retirement income immediately upon birthdate eligibility wouldn’t need to stop contributions ahead of time.
If you do have an employee who deposited funds into an HSA after losing eligibility, take the necessary steps as quickly as possible to retract the funds. We’re here if you have any questions.