You’ve worked 40+ years to prepare for retirement, and are now 66 years old. You’re still not ready to hang it up, though. You may even work to age 70, if you can physically. But you decide to begin receiving your Social Security retirement benefits, as you are now at Full Retirement Age (FRA), and your income won’t reduce your Social Security benefits. No problem, right? Well, it depends.
If you are like many employees enrolled in a high deductible health plan (HDHP) that includes a health savings account (HSA), you could run into some trouble. [Note: This is not an issue if you are covered in a traditional PPO plan, or a HDHP that includes a flexible spending account (FSA).] But let’s first quickly summarize what a HSA is — HSAs allow you to contribute money on a pre-tax basis toward future healthcare expenses. In 2016…
- Individuals can contribute $3,350
- Families can contribute $6,750
- In both scenarios, if you are age 55+, you can contribute an extra $1,000 on top of the limits mentioned above
What’s the problem, you ask? Well, if you begin Social Security retirement benefits and are age 65, you will be automatically enrolled in Medicare Part A. If you are enrolled in Medicare Part A, currently the owner of a HSA account and actively contributing (either your contributions or from your employer), no new money can be contributed to the HSA by you and your employer.
If you are enrolled in Medicare Part A, currently the owner of a HSA account and actively contributing (either your contributions or from your employer), no new money can be contributed to the HSA by you and your employer.
This comes as a shock to many when we help Medicare beneficiaries plan out their Medicare enrollment. With high deductible health plans being more and more common in the workplace, the chances of running into this issue continues to increase. And to make matters worse, the Social Security Administration will backdate your Part A start date 6 months when you enroll in Medicare after your 7-month Initial Enrollment Period (IEP). Why is this a problem? Here’s an example…
You turn 66 in August 2016 and plan to retire as of 8/1/16. Prior to this, you delayed all parts of Medicare to take advantage of HSA contributions while still working — a strategy we see often. You will enroll in Medicare Part B with a 8/1/16 start (under Special Enrollment Period rules), but the Part A will be backdated to 2/1/16. This means there will be only 1 month in 2016 in which you didn’t have Medicare coverage — so you can only contribute 1/12 of the HSA contribution limit in 2016 (that includes your contributions and your employer’s contributions).
In summary, you need to be careful whenever you believe you are ready to enroll in Medicare or Social Security while working past the age of 65.
Here is a link to an article that speaks overall to the situations mentioned above –> Social Security Sign-Up Can Bring an Unpleasant Surprise