If you want to try to self-induce a headache, give Medicare and Social Security a thought. Employers and employees need to understand how Medicare and Social Security affect contributions to a health savings account (HSA).
While there are straightforward rules, the penalties for making improper contributions are high. Employees and employers should be educated to ensure they don’t break these rules.
How Does Federal Retirement Benefits Affect HSA Contributions
If you are an employer who offers an HSA or use an HSA with your individual health insurance policy, it is important to understand how federal retirement benefits affect HSAs.
Per IRS rules: Employers can not make contributions to an employee’s HSA once the employee enrolls in Medicare. Employees aren’t allowed to contribute to an HAS, if they are enrolled in Medicare.
The same is true for Social Security. An individual who enrolls in Social Security is automatically enrolled in Medicare Parts A and B. And while it’s possible to opt out of Part B, Social Security recipients are stuck with Medicare Part A — which means they cannot contribute to an HSA.
Postponing Social Security and Medicare Benefits
Some employees choose to delay their Social Security benefits. For those workers who are healthy enough to continue working, deferring these benefits can be a sound financial strategy.
For example: A worker who postpones Social Security benefits until age 67 will receive 108% of the monthly benefit. Workers who wait until age 70 get 132% of the monthly benefit.
The beneficial news is that employees who defer their Social Security benefits while working for a company with 20 or more employees can continue donating to their HSA without penalty. Keep in mind, however, that they must also suspend enrolling in Medicare during this time.
Avoiding Improper HSA Contributions
Employees and employers should also be conscious of a potential Social Security drawback that can result in improper HSA payments — and the tax penalties that go with them.
Workers who ask for Social Security retirement benefits when they are at least six months past retirement age automatically receive six months of owed benefits. This is helpful for many people, but it also makes a worker’s enrollment in Medicare Part A retroactive by six months. This means that any HSA contributions made by the employee or the employer during this six-month period are improper.
To avoid penalties, employers and workers should cease in making HSA contributions at least six months before they request Social Security retirement benefits.
HSAs are an affordable way for employers to help their workers help embrace the cost of individual health insurance. As employees approach retirement it is crucial for both employers and employees to stop contributions far enough in advance to avoid paying penalties.
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