“You can only put money in a health savings account, if you are covered by a high-deductible insurance plan, which means you must stop those contributions once you’re on Medicare.”
If you routinely contribute to a health savings account and you expect to start taking Social Security after you’ve reached your full retirement age, there’s a little bump in the road you need to be aware of, warns CNBC in the article “This account might cause snags when you claim Social Security.”
Once you are enrolled in Medicare, no matter whether you sign up for just Part A hospital coverage (free) or additional parts of the program that require paying premiums, you are no longer allowed to make contributions to an HSA.
Sounds easy, right? However, if you delay both Social Security and Medicare, there can be complications.
When you delay claiming Social Security benefits beyond your FRA, you get a lump sum of retroactive benefits of up to six months, dating no further back than your full retirement age, which is now 66 for most people.
And if you’re not yet on Medicare when that happens and are contributing to an HSA, there could be problems. If you accept that lump sum from Social Security, it triggers Medicare Part A effective retroactively. Therefore, any contributions to an HSA during that time are subject to an excise tax of 6% on those contributions—and income taxes.
Anyone who might have done this unwittingly, should remove the improper contributions to their HSA and alert their HR department to remove any matching contributions made on their behalf. This action needs to be taken before the tax return filing date for the year it occurs in. If you sign up for Social Security this year, you need to remove those contributions by April 15 of next year to avoid any tax issues.
This situation is likely to occur more and more often, as more people are staying in the workforce into their 60s and 70s and delay taking both Medicare and Social Security.
As long as you have qualified health insurance through work, you can delay going on Medicare without a late-enrollment penalty. This means that you can continue to contribute to the HSA in combination with a high-deductible healthcare plan.
In 2019, the maximum HSA contribution is $3,500, if you have self-only health insurance and $7,000 for family plans. People who are 55 and over can put in an additional $1,000. There’s a triple-tax benefit: the contributions are deductible, the money grows tax-free, and withdrawals are tax-free, as long as they are used to pay for qualifying medical expenses.
Delaying Social Security is always a good deal, since benefits increase by 8% every year you delay until age 70.
The lump sum offered by Social Security and the retroactive Medicare coverage depends upon how far past FRA you are when you claim Social Security. You can get up to six months’ worth of retroactive benefits.
The lump sum can be rejected, as can the retroactive effective claiming date. If you say no to the offer, your base benefit will be 4% higher. Based on an 8% increase in your base benefits for each year you delay claiming Social Security, the effective date that’s six months later, means a 4% permanent increase in monthly benefits.
Taking the lump sum would fix your monthly benefit at the earlier date of claiming. This is one time when a lump-sum offer may not be such a great thing. It all depends upon your unique situation.
Reference: CNBC (Oct. 24, 2019) “This account might cause snags when you claim Social Security.”