Questions about Medicare and HSAs Keep Surfacing - Part B 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 continue to fund a Health Savings Account.

This is the second installment in a three-part series on the interaction of Medicare and Health Savings Accounts. Last week's article addressed the collision between Health Savings Accounts and Medicare Part A. Next week, we look at Part D in the crosshairs.

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 that reflect the state of medical insurance in 1965, the year that Medicare launched. Inpatient and outpatient services were then covered by separate insurers. The market changed, but Medicare didn't. So, the program today has three distinct parts (prescription drugs, the third part, weren't covered by insurance in the 1960s) 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 B Enrollment and Premiums

If you're age 65 or older and receiving Social Security or Railroad Retirement benefits, you're enrolled automatically in Part A and Part B. You can waive Part B enrollment, which may make sense if you're covered on your own or your spouse's employer-sponsored plan. You cannot waive Part A coverage, even if you're enrolled in and happy with your coverage under a group plan.

Medicare Part B applies a deductible of $226 (2023 figure) before it pays any benefits. After you satisfy the deductible, Part B covers 80% of the allowable charge. You are responsible for the other 20%. There is no annual or lifetime limit on your financial responsibility. Many enrollees in traditional Medicare (Part A and Part B) purchase a Medicare Supplement plan to cap their out-of-pocket responsibility.

Example: Sonja undergoes an $80,266 outpatient regimen to treat cancer. She pays the first $226 as her deductible. She then pays 20% of the remaining allowable charges, or $16,000. Her total out-of-pocket cost is $16,226. If she has purchased a Medicare Supplement policy, that plan will pick up a large portion of her $16,226 financial responsibility (benefits vary by Medicare Supplement plan design).

Part B enrollees pay a monthly premium (which most pay through a deduction from their Social Security check). In 2023, the monthly premium is at least $164.90. Higher-income enrollees, whether actively-at-work or retired, pay a higher premium. That's because most of the cost of Part B claims (about 75%) is paid from general revenues. That subsidy declines on a sliding scale based on income.

Note: It takes two years for the higher income to result in a reduction in the subsidy. For example, you report your 2022 income when you file that year's income tax return by April 2023. Your 2024 Part B premium will be based on that reported 2022 income.

Part B Penalty

If you remain enrolled in an employer-sponsored plan when you turn age 65 and transition promptly (within eight months of disenrollment) to Part B, you won't pay a penalty. You are entitled to a Special Enrollment Period, during which you can enroll in traditional Medicare with Part B prescription-drug coverage and a Medicare Supplement plan, or you can choose a Medicare Advantage plan as an alternative to Medicare.

Example: Keith wants to continue to fund his Health Savings Account once he turns age 65. He doesn't enroll in Part A or Part B. He remains active at work until his 68th birthday, when he retires. He enrolls in Medicare promptly, thereby avoiding any late-enrollment penalties.

The penalty is applied for each 12-month gap after your 65th birthday between your enrollment in a group plan and Medicare. You are assessed a permanent Part B premium surcharge of 10% for each 12-monthy period. The percentage is constant, but the dollar amount varies with future premium increases and higher premiums due to a reduction in subsidies.

Example: Caroline's income in 2021 was $42,000, so she doesn't pay a higher Part B premium in 2023. She delayed enrolling in Part B for 15 months without group coverage during that gap. She pays a permanent 10% premium surcharge. In 2023, her Part B premium is $181.39 ($164.90 plus $16.49).

Special Rules for Small Groups

As we noted last week, insurers offering group coverage for companies with fewer than 20 employees may (and usually do) require working seniors (employees age 65+) to enroll in Part A and Part B as a condition of remaining covered on the company's plan. See last week's article for more information.

Another Avenue to Tax Savings

What happens if you're a working senior, remain enrolled in your company's HSA-qualified plan (perhaps because it's the only coverage offered), and are enrolled in any Part of Medicare? You can't contribute to a Health Savings Account, not can your employer deposit money into your account as it can for your HSA-eligible co-workers.

Health FSA. You can enroll in a general Health FSA and elect up to $3,050 (or less, if your company imposes a lower limit in 2023). A Health FSA doesn't provide the flexibility or long-term time horizon of a Health Savings Account. But it does offer the same immediate tax benefits. Plus, it offers uniform coverage - your opportunity to spend you full balance early in the plan year, before you've accumulated sufficient balances through payroll deductions.

Health Reimbursement Arrangement. Your company can establish an HRA to provide funds to reimburse expenses incurred by employees who aren't HSA-eligible but enrolled on the HSA-qualified plan. For example, a company that contributes $1,500 to HSA-eligible employees' accounts is permitted (but not required) to offer an HRA of that amount (or another figure) to help employees who aren't HSA-eligible to pay their out-of-pocket expenses. No employee can be offered the choice of a Health Savings Account or an HRA, however.

In addition, if your company integrates a disqualifying HRA with the HSA-qualified plan, you and every other enrollee are disqualified from funding a Health Savings Account and can receive reimbursement from the HRA.

The Bottom Line

Enrollment in any Part of Medicare is disqualifying, whether the enrollment is voluntary or mandatory. If you want to remain eligible to fund a Health Savings Account after your 65th birthday, you must understand before age 62 (when you can begin to collect Social Security) that you control whether you remain HSA-eligible. But only if you make the right decisions (including inaction) at the right times.

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