Have an HSA? Watch out for Medicare’s retroactive benefit trap

 

Those of us who have a Health Savings Account (HSA) appreciate and love the triple tax benefits that HSAs provide. First, the money you put into an HSA is tax deductible (or pre-tax if made through payroll deduction.) Second, your contributions grow tax-free. And third, money you take out from an HSA is tax-free so long as you spend it on qualifying medical expenses. Many financial planners maintain its one of the best—if not the best—tax avoidance instrument available to the average investor.

However, those approaching age 65—the age for Medicare eligibility need to be aware of two times when they are at major risk of being tripped up by arcane HSA and Medicare rules. HSA rules state that anyone who has Medicare (either Part A or B) is no longer eligible to make new contributions to their HSA account.

This is where employees working past 65 and receiving health benefits from their employer’s group plan, can get tripped up. Most people on a group plan with 20 or more employees will waive their Part B coverage since it costs $134 per month, but will often sign up for Part A, since its free. This is where the first trap can catch you, because if you have any part of Medicare, you become ineligible to contribute to an HSA. If you discover that you made erroneous contributions, you’ll want to talk to your CPA about how to correct the error.

The second time that a person can fall into a trap is when they are about to quit working and drop their group coverage. Let’s say you plan to retire on December 31st, 2018 and start your Medicare A and B as of January 2019. You apply for Medicare in October–three months prior to when your desired Medicare start date of January 1st. A month later you receive your Medicare card. You open the envelope take out your card. It shows that Part B starts on January 1st 2019—just as you requested. But then you are shocked to discover that your Part A shows an effective date of April 1st, 2018.

Is this a mistake? No. You’ve just been caught in Medicare’s retroactive benefit trap. Since you now have Medicare Part A as of April 1st, it means that you have overfunded your HSA from April 1st through the end of the year! There is no way to avoid this retroactive benefit from Medicare, even though it is harming you. For some unknown reason Medicare thinks they are doing you a favor by forcing you to take Part A six months prior to when you signed up (but never earlier than age 65).

So, to avoid scenario, you must make sure that you stop contributing to your HSA six months prior to applying for Medicare.

 

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