Overview of the Relationship Between HSAs and Medicare

Health Savings Accounts (HSAs) were created in 2003 as a mechanism for individuals who participate in a High Deductible Health Plan (HDHP) to save tax-free dollars to pay for qualified medical expenses. There are certain eligibility requirements that must be met in order for an employee to contribute to an HSA.

  • They must be enrolled in a qualified High Deductible Health Plan
  • They cannot be covered be any other impermissible health care coverage
  • They cannot be claimed as a dependent on someone else’s tax return
  • They are NOT enrolled in Medicare A or B

The law is clear that if an employee is entitled to and enrolls in Medicare A or B, HSA contributions can no longer be made by that employee or the employer.

If an employee wishes to contribute to an HSA even though they are Medicare eligible, their enrollment in Medicare could be delayed. Employees who work for an employer with more than 20 employees could possibly delay Medicare enrollment because health care coverage provided by the employer pays primary to Medicare (pays first). The scenarios include:

  • Working employees could decline Medicare Part B and enroll when employer coverage is lost.
  • Working employees could decline Part A as long as they are not accepting Social Security benefits.
  • If the employee declines both Medicare Parts A & B, they could still contribute to the HSA as long as the other conditions are met.
  • Employees of small employers (20 or less for Medicare based on age or 100 or less for Medicare based on disability) most likely will take Medicare when first eligible as Medicare pays primary to any group health coverage.

Employees that are NOT collecting Social Security benefits at the time of Medicare eligibility and choose not to until they retire should take special precautions when it comes to HSA contributions. All HSA contributions should be stopped up to 6 months before collection of Social Security benefits because Medicare Part A will be retroactive up to 6 months. If the contributions are not stopped, there may be tax penalties due to being ineligible to contribute to the HSA because of Medicare eligibility.

If employers mistakenly contribute to the HSA of an employee who is enrolled in Medicare, corrections can be made but only if the mistakes are corrected in the same year in which the contributions were made.

Key Takeaway:

Employers and employees should understand the Medicare eligibility of their employee population and how that can affect eligibility to participate in a health savings account. Organizations would be well-served by doing a regular audit of their employee population to understand current and future eligibilities to avoid compliance issues.

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