Medicare and Health Savings Accounts – A Bad MixBy Michele A. Lazzara | August 4, 2021
When I speak with my taxpayer clients about retirement issues, I always advise them to educate themselves on Medicare well before they reach their mandatory enrollment age. This includes consulting with their employer’s human resources advisors, if possible, and going to medicare.gov to find remarkably easy-to-follow information. Medicare is a life-long benefit that doesn’t have to be scary or confusing, but it all starts with understanding your rights and obligations.
It’s important to get the Medicare process right, and much of that has to do with timing. There are many good guides from health care providers that describe how to sign up for Medicare, but the key is to get started early. Medicare Part A, which covers hospitalization, is automatic and free when you reach age 65 and are already receiving Social Security. Part B covers medical services like doctor visits, and Part D covers prescription drugs – these latter two, after deductibles, generally require payments by enrollees.
Here’s where the timing issue comes in. Failing to sign up for Part B when you are first eligible to enroll may result in a premium increase of 10% for every 12 months you could have had Part B. This is a lifetime penalty that you will incur each time you pay your premium. The penalty increases the longer you go without coverage. For example, your enrollment period ended Dec. 31, 2020, but you waited until January 1, 2023 to sign up. Your premium penalty would be 20%, and would continue as long as you have Part B. This is a costly and avoidable mistake.
But, there is another lurking penalty to avoid if you have set up a Health Savings Account (HSA). Like so many people who work past age 65, you need to be very clear on the Medicare rules to avoid penalties for excess HSA contributions. This is not an uncommon scenario. In fact, I recently had a client realize that they had been over-contributing to their HSA for six months. They will owe back taxes on any contributions made after their Medicare enrollment date. These contributions will also be considered excess and will be taxed an additional 6%.
In short: Medicare and HSAs don’t mix. You should consider stopping contributions to your HSA six months before you enroll in Medicare to avoid penalties. That’s because contributions to a HSA are disallowed when you are covered under any health plan that is not a high deductible plan (IRC Section 223(c), Health Savings Accounts), including Medicare. Individuals enrolled in Medicare Part A are not permitted to continue funding their HSA account.
These timelines and penalties are well established, so there is little excuse for not knowing the rules or being late in enrollments. This is why it is important to make a Medicare discussion part of your next tax advisor conversation.
About Michele A. Lazzara
Michele A. Lazzara, CPA, CGMA, is a Partner at Marks Paneth LLP. She has more than 20 years of public accounting experience and provides practical, comprehensive planning, consulting and advisory services to clients in a variety of industries. Her broad background includes experience with corporate/partnership tax planning, financial planning and individual tax planning as well as matrimonial and divorce planning. She has a proven track record serving closely held businesses, nonprofit organizations, professional services firms... READ MORE +