Dear Rusty: I have reached my full retirement age (66 plus 8 months) and plan to apply for Social Security this month, but I’ve seen articles which say that when I apply, I must also take Medicare Part A. This, even though I am continuing to work and am covered by my employer’s health insurance (a high deductible plan). I contribute bi-weekly into an HSA (Heath Savings Account). I’ve read that Medicare back dates Part A coverage by 6 months, which suggests I would have had to stop contributing to my HSA six months ago. If this is true, will I need to pay penalties and such to the IRS? I’m not able to find anything else about this topic, and I’m wondering what you might have to say. I have my wife and two children on my employer’s HDHP. We contribute $6,000 annually to our HSA and my employer contributes $1,250 on January 1st each year. We can live without the HSA, but the taxes and IRS penalties concern me. Signed: Wanting to Claim SS (but concerned)
Dear Wanting to Claim: I’m afraid that what you’ve read is correct – it is mandatory for you to take Medicare Part A (inpatient hospitalization coverage) when receiving Social Security benefits after age 65. Medicare Part A is free to you, and even though you are still covered under your employer’s creditable high deductible healthcare plan and can delay taking Medicare Part B, you must take Medicare Part A to collect Social Security after 65. Medicare and your employer’s plan will coordinate healthcare benefit payments.
That does, however, also mean your Health Savings Account (HSA) will be affected because, as you have found, Medicare will backdate your Part A coverage by 6 months. And because Part A is not a high deductible plan (a requirement for HSA), any contributions you make after the effective date of Part A will be subject to an IRS penalty, and your HSA contributions won’t be considered tax-exempt. This will mean the IRS will likely assess a 6% excise tax on any contributions made after your Part A effective date, and you’ll need to pay income tax on those contributions.
What you may wish to consider is stopping your HSA contributions now and waiting an additional six months or so to claim your Social Security benefits (to get beyond the HSA penalty phase). This would have the advantage of avoiding the IRS penalty on your HSA contributions and would also increase your Social Security benefit due to Delayed Retirement Credits (DRCs). You earn DRCs at the rate of .677% for each month beyond your FRA that you wait to claim, which means an SS benefit about 4% higher if you wait six months longer to claim SS.
Russell Gloor is an Association of Mature American Citizens certified social security advisor. To submit a question, visitamacfoundation.org/programs/social-security-advisory or email ssadvisor@amacfoundation.org.
