Approaching Age 65? Understand the Intersection of HSAs and Medicare!

Be careful what you read about enrolling in Medicare at age 65. Except what you read below.

An old friend from my youth sent me a birthday card the other day. We were born four weeks apart and both turned 64 this spring. He wrote in the card that it's time to think about retirement and he knew that he had to enroll in Medicare in a year when he turns age 65.

Oops! No, he doesn't. He's eligible to enroll, but he won't be enrolled automatically or be forced to enroll unless he falls into one of several categories. If he doesn't, he can delay enrolling in Medicare for as long as he wants. Yes, delaying enrollment may result in permanent premium surcharges or gaps in coverage. But if you understand these penalties and can balance that risk with rewards stemming from not enrolling in Medicare, you can make the optimal decision on when to enroll.

The intersection of Medicare and Health Savings Accounts is fraught with danger. Let's examine the traffic patterns so that we can navigate this intersection without a collision.

Is enrollment in Medicare mandatory at age 65?

It depends. Yes, if you're age 65 or older and collecting Social Security or Railroad Retirement benefits. Under current Medicare administrative guidelines, anyone who receives these federal retirement benefits and is eligible to enroll in Medicare must enroll in Medicare Part A (which covers inpatient, home health, and hospice services). But if you delay collecting retirement benefits, you may not have to enroll in any Part of Medicare (though see the next question about employer size). If you're not enrolled in any Part of Medicare and have no disqualifying coverage, you (and your employer, if applicable) can continue to fund a Health Savings Account past your 65th birthday.

If I continue to work after age 65, can I defer Medicare?

It depends. If your company (or your spouse's, if you're enrolled on his or her plan) has fewer than 20 employees, its insurer may (and usually does - but not always) require you to enroll in Medicare Part A and Part B (which reimburses outpatient services like doctor visits, imaging, and outpatient therapy) as a condition of remaining enrolled in the company's coverage. You then choose whether to enroll in both the company plan and Medicare or only Medicare.

If you are enrolled in your own or a spouse's plan and the company has 20 or more workers, you won't be forced to enroll in any Part of Medicare. If you delay receiving Social Security or Railroad Retirement benefits and are otherwise HSA-eligible, you can continue to fund a Health Savings Account.

Do I face penalties if I delay enrolling in Part A or Part B after my 65th birthday?

It depends. If you're covered on your own or a spouse's employer-sponsored coverage, you can delay enrolling in Medicare without facing penalties for Part A or Part B. Thus, you can retire at age 65, be enrolled on your spouse's employer-sponsored plan, and defer collecting Social Security until your full retirement age (64 years and six months for someone born in 1957). When you disenroll from that group plan, you will be entitled to a Special Enrollment Period of eight months during which you can enroll in Part B without penalty or additional delay in coverage.

If you are age 65 or older and aren't covered by an employer-sponsored plan, you face a penalty when you do enroll. That penalty is a permanent 10% surcharge for every 12-month period without qualifying coverage. In other words, if you don't have qualifying coverage between age 65 and 67, you pay a permanent 20% surcharge on your Part B premium.

Most Americans prepay their Part A premiums with payroll taxes during their working years. They don't incur penalties for not enrolling promptly. But anyone who must pay a Part A premium who delays enrollment without qualifying group coverage must pay a 10% premium surcharge for double the number of months of the coverage gap.

Example: You didn't pay federal payroll taxes long enough to receive Part A premium-free. You sign up for Part A at age 68 (three years after you become eligible) without qualifying coverage during the three-year gap. Your monthly premium is $274. You pay an additional $27.40 (and more in future years as the premium increases) or the next six years before the surcharge is eliminated.

What about Part D late enrollment?

Part D, which covers prescription drugs, was created after original (Part A and Part B) Medicare and has different rules. If you delay enrolling when first eligible, you must maintain prescription-drug coverage at least as rich as Part D during the gap between age 65 and your enrollment in Part D. If your coverage doesn't meet this standard (called Medicare Creditable Coverage, or MCC), you pay a permanent premium surcharge equal to 1% of the average part D premium (about $33 this year) for each month that you don't have creditable coverage.

Example: You delay enrolling in Part D until your 70th birthday. Your prescription plan from age 65 to age 70 wasn't creditable. You pay a permanent 60% premium surcharge (five years = 60 months) for as long as you retain Part D coverage.

HSA-qualified plans often have prescription coverage that does not meet the MCC standard. If the deductible is at the lower limit of the statutory minimum ($1,400 for self-only and $2,800 for family coverage in 2022, rising to $1,500 and $3,000 in 2023) or the plan covers preventive prescriptions below the deductible, the coverage may be creditable. Otherwise, you probably will pay a permanent surcharge if you delay enrollment at age 65.

Does y spouse's Medicare enrollment affect me?

No. Medicare issues individual policies only. You won't be covered by a spouse's Medicare plan. Also, a spouse who's enrolled in Medicare won't affect your opportunity to open and fund a Health Savings Account (even if you're covered on an HSA-qualified plan through your spouse's company).

How do I sign up for Medicare after age 65?

If you are covered by your own or your spouse's qualified employer-sponsored plan, you're entitled to a special enrollment period for up to eight months after you disenroll from the group coverage (though you want to enroll immediately to avoid a gap in coverage). You won't face any Part A or Part B penalty. But you may face a permanent Part D premium surcharge as described above.

If you delay enrollment when you turn age 65 and aren't covered by a qualified group plan, you're not entitled to a special enrollment period (late autumn for Part A and Part B). You can sign up for coverage during Medicare's annual enrollment period. You may pay Part A or Part B penalties. And you won't be covered until the new Part A/Part B plan year beginning July 1.

At what age do I have to enroll in Medicare?

Never. More realistically, probably age 70. At that point, you won't increase your monthly Social Security benefit by continuing to delay enrolling in that program. When you do, you're automatically enrolled in Medicare Part A. This coverage is retroactive for six months, so you must stop contributions to your Health Savings Account at age 69 1/2.

If I'm enrolled in an HSA-qualified plan, should I just enroll in Medicare at age 65 to avoid penalties?

That's up to you. As a point of reference, I won't. Here's why:

I plan to work to age 70 and remain covered on an employer-sponsored plan (so that I avoid Part A and Part B penalties). I'll continue to fund my Health Savings Account to the tune of more than $8,000 annually, or about $43,000 over the five years. I'll reduce my tax bill by about $2,800 annually (about $14,000 total). And I'll have $40,000 that I can withdraw tax-free to pay my Part D surcharges, as well as all other qualified expenses.

Let's say my surcharge amounts to $60 per month ($720 per year) on average for the rest of my life. That figure seems high, but it's an average, and the premium on which it's based will increase over time. With the extra $43,000 (not including any principal growth), I can fund the premium surcharge for 59 years and eight months (or until I'm nearly age 121). If I use only the tax savings to fund the surcharge, I'm covered for 19 years and five months (or until age (89).

My Dad recently died at age 91 and my Mom is age 89, so I may continue to live a long time. But I'll never spend all the additional five years of funding into my Health Savings Account to pay Part D premium surcharges. Never. And anything left over will go to my heirs, so it won't be lost.

The Bottom Line

When to retire, whether to enroll in Medicare at age 65 or later, and how to manage retirement medical expenses are all very personal decisions. And the examples and illustrations above reflect one perspective on the topic - not recommendations. But it's important to understand how Medicare works, what you gain and lose by enrolling at age 65, and how you might benefit (and at what cost) if you delay enrollment.

Don't follow the herd or rely on your brother-in-law, your barber, your employer, or authors who live in Spain for accurate advice. Seek the counsel of a professional who understands these issues and has tools to help you determine the optimal time to begin to collect Social Security benefits and enroll in Medicare.

The difference between the best decision and another option may be at least five figures and possibly $100,000 or more over your remaining life. It's a wise investment to spend a few dollars up-front to receive the right counsel.

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