Why you should stop your health savings contributions when Medicare begins

Medicare enrollment mandatory for Social Security recipients age 65+

I’m still sifting through the hundreds of e-mailed questions I received following last week’s Social Security Boot Camp webcast.

Steve, a financial adviser from Ft. Lauderdale, posed an interesting question about the interaction between Medicare and Health Savings Accounts that may affect many other advisers and their clients.

Steve’s wife started collecting her Social Security retirement benefits at her full retirement age of 66. Now that Steve is approaching his full retirement age, he plans to file a restricted claim for spousal benefits so he can collect a Social Security benefit equal to half of his wife’s monthly amount while his own benefits earn delayed retirement credits up until age 70.

Sounds like a great plan to maximize his retirement benefits while locking in the maximum survivor benefit for his wife if he dies first.

But here’s Steve’s question: If he claims Social Security spousal benefits, must he also enroll in Medicare Part A? Although Medicare Part A, which covers hospital costs, is free, enrolling in it is not without financial consequences. That’s because anyone who is enrolled in Medicare cannot make contributions to a tax-deductible Health Savings Account.

HSAs are tax-exempt accounts that help people save money for eligible medical expenses. In order to qualify for an HSA, the policyholder must be enrolled in an HSA-qualified high deductible health plan, and must not be covered by other non-HDHP health insurance or Medicare.

“The Social Security Administration tells me that I must have Medicare Part A,” Steve wrote in an e-mail. “Is SSA correct in its interpretation?”

Yes, it is. If you are at least 65 and you collect Social Security benefits, you must enroll in Medicare Part A.

“By law, Social Security benefits and Medicare Part A are linked together,” Social Security spokesperson Kia Anderson said in an e-mail. “A person cannot restrict the scope of the application to exclude Medicare Part A,” Ms. Anderson explained. “If a person is entitled to Social Security benefits and meets the Medicare requirements, they are entitled to Medicare Part A.”

So Steve has a choice: he can file a claim for Social Security spousal benefits and forfeit future tax-deductible contributions to his Health Savings Account. Or he can delay claiming Social Security benefits and hang on to his HSA deduction.

For simplicity’s sake, Steve may want to continue making tax-deductible HSA contributions for the remainder of 2013 and file for Social Security benefits and relinquish his HSA tax break in 2014.

For 2013, the HSA contribution limit is $3,250 for individuals and $6,450 for family coverage.

But even if Steve’s loses the right to contribute to an HSA next year, he will still be eligible to take tax-free distributions from the account to pay for qualified medical expenses, including prescription drugs, long-term care insurance premiums and Medicare premiums (but not supplemental Medigap premiums).

Medicare Part B, which covers visits to a doctor’s office or out-patient services, is optional at age 65 or older as long as you have other health insurance through your employer, your spouse’s employer or through a former employer’s retiree health insurance plan.

But if you don’t have other qualified health insurance and you delay signing up for Medicare B beyond the seven-month window surrounding your 65th birthday (three months before your birthday, your birthday month and three months afterwards), your premium will be permanently increased by 10% for every year you delay. In 2013, most Medicare benefits pay $104.50 per month for Medicare Part B coverage.