Do I Lose My Eligibility at Age 65? Maybe. Maybe Not.

You're not automatically disqualified from continuing to fund a Health Savings Account once you turn age 65. Unless . . .

The intersection of Health Savings Accounts and Medicare is tricky to navigate. Health Savings Account experts often don't know the ins and outs of Medicare. Medicare gurus often don't understand Health Savings Accounts. The result can be confusion. And I infer from anecdotal evidence that seeking answers from Medicare customer service or an employer often leaves about-to-be seniors frustrated.

Let's break down the issues.

How Is Medicare Coverage Relevant to Health Savings Accounts?

To fund a Health Savings Account, you must

1. be covered by an HSA-qualified plan,
2. not have any disqualifying coverage, AND
3. not qualify as someone else's tax dependent.

Medicare is disqualifying coverage. If you're enrolled in any Part of Medicare, you can't contribute to a Health Savings Account, even if you're covered on an HSA-qualified plan and have no other disqualifying coverage.

Thus, if you want to continue to fund your account, you must understand when you can defer enrollment in Medicare and when you must enroll in this disqualifying coverage.

What Does It Mean to Be Entitled to Medicare?

Most Americans are entitled to Medicare when they turn age 65. Entitled to Medicare is a synonym for eligible to enroll in Medicare. Some people are entitled to enroll at an earlier age due to a disability. For the rest of us, we're entitled to enroll around our 65th birthday, with an effective date of coverage as of the first day of the month of our 65th birthday (or the first day of the prior month for someone with a birthday on the first of the month).

Traditional Medicare is composed of Part A (inpatient, home-health, and hospice care) and Part B (outpatient services). Most enrollees also choose Part D (prescription-drug coverage). Nearly half of all Medicare enrollees choose Part C, a private alternative to Medicare. All these options are disqualifying.

Must I Enroll in Medicare at Age 65?

It depends.

When you start collecting Social Security (or federal Railroad Retirement) benefits, you're automatically enrolled in Medicare Part A (generally premium-free) and Part B (with a monthly premium). You can waive Part B, which many people enrolled on their own or a spouse's employer-sponsored medical plan do. But you're locked into Part A.

Example: You begin to collect Social Security benefits at age 64 because you need the additional income. You remain active at work at a large company and enrolled on your company's medical plan. You waive Part B coverage to avoid the $164.90 (or higher, depending on your income) monthly premium. Your group plan will cover those services. But you're automatically enrolled in Part A and can't disenroll, even though your employer's plan will cover those services and Part A will probably pay little or none of your inpatient claims.

If you work for a company with fewer than 20 employees (head count, not FTEs), your company's insurer may require you to enroll in Part A and Part B as a condition of remaining on the group plan. The reason: In companies this size, Medicare is the primary payer, which means that providers bill Medicare first for services. After Medicare pays, the provider submits the claim and the Medicare benefit statement to the group plan, which may pay an additional amount if its benefit is richer than Medicare's.

Example: You undergo a $900 MRI after satisfying your annual Part B deductible. Medicare pays 80% of the claim ($720), leaving you with a $180 balance. Your group plan covers MRIs in full after a $50 copay. Your group plan pays the provider $130 (your $180 financial responsibility less the $50 copay) rather than its contracted rate less your $50 copay, which would have been its responsibility if you weren't covered by Medicare. You pay a $50 copay to the imaging center.

What typically happens in this situation is that the employee, particularly if she has self-only coverage, drops the group plan, and uses Medicare as her sole coverage. If she covers another family member who isn't eligible for Medicare, she may retain her group coverage as her secondary insurer (and the other family member's primary coverage).

It's important to note that mandatory enrollment for workers at these small companies is not a Medicare requirement. It's an insurer option. Not all insurers require working seniors at companies with fewer than 20 employees to enroll in Medicare to remain covered on the group plan. But most do. Check with your company as you approach age 65 if remaining HSA-eligible is important to you. You may need to change employers - either working for a larger company or a small firm whose insurer doesn't impose this requirement. Or you may be able to convince your company to find a new insurer that doesn't require working seniors to enroll in Part A and Part B coverage.

How Can I Defer Enrolling in Medicare?

Simple: Do nothing. That's right, just procrastinate.

Unless you're collecting Social Security benefits, you won't be enrolled automatically in Medicare. You must proactively enroll to receive the benefit. This is true even if your group plan requires you to enroll in Part A and Part B. Because that's not a Medicare requirement, you won't be prompted to enroll by Medicare or be enrolled automatically. You must initiate enrollment.

Be careful if you defer enrollment when you're first entitled to coverage around your 65th birthday. You must remain covered on your own or another family member's (typically a spouse or domestic partner) group medical plan to trigger a Special Enrollment Period that allows you to enroll in Medicare without a gap in coverage or permanent surcharges to you Part B premium as a penalty.

Note: There are also potential Part D premium surcharges that we discussed in a prior column.

How Long Can I Defer Medicare Enrollment?

Forever. If you don't collect Social Security benefits or work for a small company whose insurer requires you to enroll in Medicare to remain in the group plan, you can continue to fund a Health Savings Account if you continue to meet eligibility requirements.

Practically, at age 70, you'll begin to collect Social Security benefits, which will trigger your mandatory enrollment in Part A and thus end your eligibility to contribute to your Health Savings Account.

Why?

You can begin to collect Social Security benefits as early as age 62. But you receive a lower monthly benefit because you're expected to collect more months of benefits. Your future monthly benefit increases by about 8% annually until age 70, at which point it stops increasing. Thus, you can't increase your monthly benefit by deferring benefits beyond your 70th birthday.

You may still want to contribute to your Health Savings Account after age 70. But you'll typically come out behind financially if you continue to delay receiving Social Security benefits to avoid mandatory enrollment in disqualifying Medicare Part A coverage.

Example: You turn age 70 in early 2024. Your annual Social Security benefit is just over $22,000 (the average in 2024). If you fund your Health Savings Account to the $9,300 limit ($8,300 family contribution maximum plus your $1,000 catch-up contribution) and have a 35% marginal tax rate, you save about $2,900 in federal and state income and federal payroll taxes. But you forego $22,000 in Social Security benefits.

Thus, in practical terms, your financial opportunity to fund a Health Savings Account ends at age 70. And because of the six-month retroactive coverage rule on Part A coverage, you won't be eligible to make a contribution for your final six months prior to enrolling in Medicare.

The Bottom Line

As you approach age 62 and are eligible to begin drawing Social Security benefits, consider carefully when it makes sense for you to begin to receive a monthly Social Security check. Remember that doing so will trigger mandatory enrollment in Medicare Part A, which will disqualify you from making additional contributions to your Health Savings Account. Be sure you understand the implications of deferring enrollment in Medicare (additional Health Savings Account contributions, possible lifetime Medicare premium surcharges) when determining the right age to begin to collect Social Security benefits.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.