While most employees continue to be covered by the FEHB program once they retire from federal service and throughout their retirement years, all federal employees are eligible for Medicare once they become age 65.
This column discusses how Medicare enrollment affects employees and annuitants who own Health Savings Accounts (HSAs).
In recent years, many federal employees have enrolled in high deductible health plans (HDHP) offered through the FEHB program in which they are also eligible to contribute to a health savings account (HSA).
A HDHP is a fee-for-service plan, frequently a preferred provider organization (PPO) plan, but with a high deductible. Each year, the IRS defines the minimum deductible amount for each type of coverage in order for a health insurance plan to be considered high deductible. For example, during 2019 the minimum annual deductible for HDHP plans is $1,350 for self only coverage, and $2,700 for self plus one and self and family coverages.
The HSA allows account owners to save in a tax-advantaged way using pre-taxed dollars from the HSA to pay current and future qualified out-of-pocket medical, dental and vision expenses. Unlike a health care flexible spending account (HCFSA) (which also allows for tax savings for annual contributions), there is a limited carryover of unused HCFSA funds ($500) from one calendar year to another.
Also, when an employee leaves or retires from federal service, any unused HCFSA funds are forfeited. The HSA account has no limit on the carryover of unused funds from one year to the next, and if a federal employee leaves or retires from federal service, the HSA goes with him or her, and used to pay current and future out-of-pocket medical, dental and vision expenses.
Also, unlike the HCFSA, the HSA accrues earnings tax-free, assuming theses accrued earnings when withdrawn are used to pay qualified medical, dental and vision expenses. In short, the HSA offers potentially a trifecta tax benefit – namely, tax deductible contributions, tax-free growth, and tax-free withdrawals. In that sense, an HSA combines the features of a deductible traditional IRA and a Roth IRA, except that the HSA is used to pay for qualified out-of-pocket qualified medical, dental and vision expenses in order to make tax-free withdrawals.
As previously mentioned, a federal annuitant who has maintained his or her HSA to be used in retirement can potentially continue to contribute to the HSA and make qualified withdrawals. Qualified withdrawals include paying long term care (LTC) insurance premiums. But to contribute to the HSA, the annuitant would have to be enrolled in an HDHP. But Medicare does not meet the definition of an HDHP. This means that an annuitant could not be simultaneously enrolled in an HDHP, HSA and Medicare – even only Medicare Part A if a federal employee decides to work past age 65 and enrolls in Medicare Part A only.
A federal employee enrolled in a FEHB-sponsored HDHP with a HSA who continues in federal service past age 65 should therefore not enroll in Medicare Part A in order to continue contributing to the HSA. The employee must also wait to start collecting Social Security retirement benefits, no matter what age they are (including reaching their full retirement age – age 65 to age 67 – at which time they could collect their Social Security retirement benefits and nor be subject to the annual Social Security “earnings test”). This is because most individuals who collect Social Security retirement benefits when they become eligible for Medicare (age 65) are automatically enrolled in Medicare Part A.
An individual cannot decline Medicare Part A while collecting Social Security retirement benefits. The bottom line is that a federal employee with a HSA who works past age 65 in federal service should delay receiving Social Security benefits and decline Medicare Part A if the employee wants to continue contributing to his or her HSA.
One final point with respect to late enrollment in Medicare in order to continue making contributions to one’s HSA while continuing to work in federal service: Contributions to one’s HSA should cease at least sixth months before one enrolls in Medicare. The reason is that when an individual enrolls in Medicare Part A, the individual receives up to six months of retroactive coverage, not going farther back than one’s initial month of eligibility. If these HSA contributions are not stopped at least six months before Medicare enrollment, then the HSA owner could be subject to an IRS tax penalty. The following examples illustrate:
Example 1. Bob, age 65, is a federal employee enrolled in a HDHP and contributes to his HSA. Bob is not enrolling in Medicare Part A even though he is eligible. Bob intends to delay receipt of his Social Security retirement benefits until he is age 70.
Example 2. Same facts as in Example 1. Bob retires on December 31, 20XX. In order to avoid paying a tax penalty, Bob stops making contributions to his HSA as of June 1, 20XX.
It should be noted for federal employees enrolled in HDHPs that are part of the FEHB program, a portion of the employee’s FEHB premiums are automatically deposited into the employee’s HSA, called the HSA “premium pass-through”. This means that if an employee with an HSA works past age 65, then during the FEHB “open season” that precedes the calendar year the employee retires the employee would have to disenroll from the HDHP in order to stop the “premium-pass through” effective the first day of the new leave year (sometime in early January).
Finally, federal annuitants with HSAs and enrolled in Medicare, while they cannot contribute to their HSAs, they are permitted to make HSA tax-free withdrawals to pay for qualified medical, dental and vision expenses. Included are reimbursements for the annuitant’s Medicare Part B monthly premiums.