Questions about Medicare and HSAs Keep Surfacing - Part A Collisions

Too few Americans approaching age 65 know the ins and outs of Medicare enrollment. If they remain active at work, they must understand how Medicare enrollment works - particularly if they want to continue to fund a Health Savings Account.

This is the first installment in a three-part series on the interaction of Medicare and Health Savings Accounts. In subsequent articles, we'll discuss the collisions between Health Savings Accounts and both Medicare Part B and Medicare Part D.

Medicare and Health Savings Accounts have always been on a collision course. As the number of working seniors (those who remain employed after their 65th birthday) increases and Health Savings Accounts become more widespread, the conflicts between the two programs' rules affect more and more Americans. Let's dive into this issue head-on:

Medicare Structure

Medicare is divided into Parts to reflect the state of medical insurance in 1965, the year that Medicare launched. Then, the primary insurers were Blue Cross and Blue Shield - yes, the verb were is correct, since these were two distinct plans. Blue Cross covered inpatient care and Blue Shield reimbursed outpatient services. Blue Cross and Blue Shield merged in the early 1980s, and the managed-care revolution has led to single medical plans that cover inpatient care, outpatient services, and prescription drugs. But Medicare's design was fixed by Congress and can't be changed without congressional action. So, the program has three distinct parts that cover different services, have different premium structures, don't accumulate out-of-pocket expenses into a common deductible, have different enrollment periods and effective dates, and impose different penalties for eligible people who don't enroll when they're first eligible around their 65th birthday.

Medicare Part A

As noted above, Medicare covers inpatient care, plus home-health services and hospice care. Enrollees (or spouses of workers) who paid their 2.90% payroll tax (split evenly between employers and workers) for 40 quarters of work with qualifying wage levels receive Part A premium-free. If you or your spouse have worked fewer than 40 quarters, you pay a monthly premium to enroll.

Part A imposes a deductible of $1,600 in 2023 for each unique (excluding readmission for the same condition) hospitalization. The benefit is limited to 90 days per hospitalization, with a daily charge of $400 imposed for days 61 through 90 (total $11,670 if the stay extends to 90 days). You're also entitled to 60 reserve days per lifetime, with higher coinsurance imposed, that you can use to extend an inpatient stay as medically necessary beyond 90 days. The daily out-of-pocket expense when using these reserve days is $800, or $48,000 total. These figures are all indexed, so you'll pay a higher deductible and higher daily cost-sharing in future years.

Part A Enrollment

If you're age 65 or older and collecting Social Security or federal Railroad Retirement benefits, you're automatically enrolled in Part A (and Part B, though you can waive that coverage). Period. You cannot avoid Part A enrollment if you're collecting federal retirement benefits. This policy is not the result of a law passed by Congress, but rather an administrative (presidential administration) rule created nearly three decades ago. But it was affirmed by a judicial decision, which means that it probably will take an act of Congress to alter it.

If you're not collecting federal retirement benefits, you are not automatically enrolled in Part A at age 65 or any other point in time. Your delay in action - whether conscious or unintentional - automatically delays your enrollment in Part A.

Implication: If you're a working senior who's collecting Social Security or Railroad Retirement benefits, your enrollment in Part A disqualifies you from making or receiving (from your employer, or anyone else) Health Savings Account contributions. This restriction most often affects lower-income working seniors who apply for Social Security benefits while still working to bridge the gap between their earned income and their life expenses.

Part A Penalty

You may pay a penalty if you enroll in Part A after your 65th birthday. But almost no one does. If you're enrolled in group coverage (your own or a spouse's or domestic partners) between your 65th birthday and your enrollment in Part A, you face no penalty. You're entitled to a Special Enrollment Period during which you can enroll and begin coverage without a gap.

If you've paid federal payroll taxes for at least 40 work quarters (10 years total, not consecutive years or quarters), you have prepaid your Part A premium for the rest of your life (under current law). You don't face a penalty because Part A penalties are a surcharge on premium. No premium, no surcharge.

If you worked fewer than 40 quarters and delay enrollment past your 65th birthday, you do incur a financial penalty (and quite possibly a gap in coverage). The penalty is a 10% premium surcharge for double the number of years between your 65th birthday and your enrollment in Part A that you weren't enrolled in group coverage.

Example: You started working for the first time after your divorce at age 60. Your employer doesn't offer group coverage, so you were covered on a nongroup plan from age 60 until your retirement at age 68. You face a penalty for those three Medicare-eligible years (age 65 to 68) that you weren't enrolled in group coverage. Your penalty is a 10% surcharge on your Part A premium (you didn't accumulate enough work quarters to prepay your full Medicare premium) for six years (twice as long as your three-year gap without group coverage). In 2023, the 10% surcharge is $27.80 on top of the regular premium of $278, or a total of $305.80.

Special Rules for Small Groups

If you're a working senior employed at a company with 19 or fewer workers, federal law stipulates that Medicare is your primary payer. This means that if you're enrolled in both Medicare and your company's medical plan, your providers must bill Medicare for services. After Medicare pays its share, your providers then submit claims, along with Medicare's explanation of what it paid, to your company's insurer, which then reimburses what it would normally reimburse less what Medicare has paid already.

Example: You're age 66 and enrolled on your company's plan with a $1,500 annual deductible. You're also enrolled in Medicare Part A. You incurred no claims prior to a short hospital stay. The hospital bills Medicare, which pays its obligation less your $1,600 deductible. The hospital then sends the claim and Medicare's explanation of payment to your company's medical plan, which reimburses $100 (the difference between Medicare's deductible and the company plan's deductible). The hospital then bills you for the $1,500 balance.

Most - but not all - insurers require working seniors at these small companies to enroll in Medicare Part A and Part B when they're first eligible as a condition to remaining covered on the company plan. Their rationale is simple: In the scenario above, the company plan would be financially responsible for your entire hospital bill (less your $1,500 deductible) if you weren't enrolled in Medicare. It doesn't want to assume a financial responsibility that another party (Part A) is legally obligated to pay.

Implication: If your company's coverage is an HSA-qualified plan, you're no longer eligible to make or receive (from your employer, or anyone else) contributions to your Health Savings Account. You can remain covered on that plan, but no additional contributions from any source are permitted under federal law.

Another Avenue to Tax Savings

If you're no longer HSA-eligible and your company offers a general Health FSA, you can enroll in that plan. Enrolling in a general Health FSA (which provides first-dollar reimbursement of qualified medical expenses) is disqualifying, but you're already disqualified from funding a Health Savings Account. The Health FSA offers the same immediate tax advantages of a Health Savings Account, but it doesn't provide the flexibility (you can't change your election without a qualifying life event) or the time horizon (it's an annual plan, so you can't accumulate balances over time) as a Health Savings Account. But it's a great option if you have out-of-pocket medical, dental, and vision expenses and want to reduce your taxable income.

Part A Retroactive Coverage

Part A has a retroactive-coverage provision unique among insurance products. When you delay enrolling after your 65th birthday, you may be covered up to six months retroactively. Here's how it works:

Enroll effective the month of your 65th birthday. In this case, you have no retroactive coverage because you're not eligible to enroll in Medicare (unless you're disabled) before the month of your 65th birthday.

Enroll six months or more after your 65th birthday. Your Part A coverage is retroactive six months, which means that you were covered for six months prior to what you thought was your effective date of coverage. In most cases, this retroactive coverage provides no additional benefit of claims payment beyond what your commercial plan paid.

Enroll between the month of your 65th birthday and five months after that date. Your coverage is retroactive, but only back to the first day of the month that you turn age 65. Coverage doesn't begin before your 65th birthday, so your retroactive period is cut short. Again, the retroactive coverage usually doesn't provide any benefit.

Implication: If you're contributing to a Health Savings Account, you're no longer eligible to make additional deposits for the months that you're covered retroactively by Part A. If you don't plan carefully and overfund your Health Savings Account during the months prior that you're covered by Medicare, you're not out of compliance. You simply must withdraw any contribution over your prorated amount (and any earnings on those funds) and include that amount in your taxable income.

The Bottom Line

Enrollment in any Part of Medicare always disqualifies you from opening or funding a Health Savings Account. As a working senior, you can enroll in an HSA-qualified plan as your medical coverage. But you can't make or receive any additional contributions for those months that you're enrolled in Medicare. Be sure you understand by age 62 (when you're first eligible to receive Social Security benefits) through the end of your working career the implications of collecting retirement benefits and your small company's insurer's policy toward Medicare enrollment as they relate to your opportunity to open and fund a Health Savings Account.

#HSAMondayMythbuster #HSAWednesdayWisdom #HealthSavingsAccount #HSA #TaxPerfect