Workers who are approaching age 65 and Medicare eligibility don’t necessarily want to stop receiving employer contributions or making their own contributions into an HSA. This is especially true if they anticipate working for a few more years and are in good health, having comparatively low out-of-pocket medical costs. HSAs can be good retirement savings accounts for older workers, as an HSA allows them to save for the future, when their health deteriorates, health care expenses rise, and their income decreases.

Employees need to understand how Medicare, HDHPs and HSAs interact in order to make informed health care decisions. Here’s what you, your clients and their employees need to know.

Medicare and HSA contributions. Simply gaining eligibility for Medicare doesn’t disqualify employees from staying on a high deductible plan or from contributing into an HSA. However, enrollment in Medicare (Parts A, B, C, and/or D) disqualifies an employee from making or receiving contributions to an HSA. Enrollment in Medicare does not impact an individual's eligibility to enroll in the HDHP (HSAs are independent offerings from a HDHP), or to request reimbursements from an HSA. Note that when individuals choose to delay enrollment in Medicare Part A at age 65,and enroll at a later date (during a special enrollment period), Medicare Part A coverage will become effective on a retroactive basis. Medicare Part A coverage can become effective up to six months earlier than the date of the request for enrollment, but not earlier than the date the individual turns age 65.

Medicare eligibility and Medicare secondary payer rules: If an employee enrolls in Medicare and the organization has 20 or more employees, the organization’s plan is the primary payer. It pays first and Medicare pays second. When the plan is primary payer, there is minimal coordination of coverage between the plan and Medicare. For this reason, employees should consider remaining covered under the employer plan over Medicare. However, if an organization has fewer than 20 employees, Medicare will be primary payer. If the employee chooses to waive enrollment in Medicare and remain enrolled in the group health plan, the insurance carrier will process claims taking Medicare into account, exposing employees to very high out-of-pocket expenses. This means most employees aged 65 or older working for employers with less than 20 employees, should consider enrolling in Medicare over the employer plan. However, if employees choose to enroll in both Medicare and the HDHP, they are no longer eligible to contribute to an HSA or receive contributions, as enrollment in Medicare disqualifies employees from contributing to HSAs.

What receiving Social Security benefits means to HSA holders. Workers receiving Social Security benefits are automatically enrolled in Medicare Part A if they have contributed 40 quarters into Medicare. When they choose to receive Social Security benefits six months past the full retirement age of 66, Social Security gives six months of benefits in “back pay.” As enrollment in Medicare Part A is associated with Social Security benefit payments, the employee will be enrolled in Medicare Part A retroactively, six months before the request to receive Social Security benefits. The retroactive enrollment in Medicare Part A disqualifies employees from contributing to or receiving contributions to an HSA, and subjects them to six months of tax penalties. To avoid penalties, older workers should be advised to stop contributing to their HSA account six months before applying for their Social Security benefits.

Opting out of Medicare. If older workers at organizations employing 20 or more employees enroll in Medicare Part A without understanding what it means to their eligibility to contribute to an HSAs, they can withdraw their Medicare enrollment as long as they have not yet applied to receive Social Security benefits. Doing so will not subject them to penalties, and they will be allowed to reenroll in Medicare Part A at a later time.

The disability factor. People on disability are automatically enrolled in Medicare after their 25th disability check from Social Security. When they return to work, their disability payments stop, but the Medicare entitlement extends for 93 months. If their employer offers an HSA that’s tied to a high deductible plan, they are thus ineligible to enroll in or receive or make contributions to an HSA. Opting out of Medicare Part A once on disability is unlikely.