Most of us know that an individual enrolled in Medicare Part A or B isn't eligible to contribute to a health savings account. This can create a problem for employees who work beyond their 65th birthday, which seems to be the norm these days.
If the employee chooses to stay on his company’s health insurance, and if the only benefit option is a high deductible health plan, he can have the health coverage but will not be able to pay for his out-of-pocket expenses with pre-tax dollars through an HSA – unless, of course, he already has an HSA; he can continue to spend his existing HSA funds but cannot contribute additional money to the account.
So why would somebody who’s eligible for Medicare remain on his company’s health plan? Couldn’t he just purchase a Medicare supplement or sign up for a Medicare Advantage Plan instead? It's an option, but a lot of employees choose to keep their employer-sponsored coverage because they’re also covering a younger spouse who’s not yet Medicare-eligible.
The good news is that there’s no requirement to be primary on the insurance to participate in an HSA. So while the employee with Medicare cannot contribute to an HSA, his younger wife can set up an HSA in her own name and contribute the full family maximum of $6,150 in 2011 since she has a family plan, and if she’s over the age of 55, she can even contribute an additional $1,000 per year in catch-up contributions. And best of all, she can still use her HSA money to pay for her husband’s eligible expenses.
Of course, there is no employer-employee relationship between the company and the employee’s spouse, so the employee would forfeit any employer contribution to the HSA and would not be able to contribute pre-tax dollars to his wife’s account through a 125 plan. Instead, his wife would contribute after-tax dollars and take the deduction as an above-the-line adjustment to income when she files her taxes.
Keep in mind that if the employee chooses not to stay on his employer’s health plan when he becomes eligible for Medicare, this is a 36-month COBRA event for his spouse. If his wife is within three years of her 65th birthday and if the employer is not supplementing the cost of the dependent premiums, this might be an option worth considering. The employee could take advantage of one of the Medicare Advantage or Medicare supplement options available to him, and his wife could continue her HDHP coverage and continue to put money into her HSA, though she’d now be limited to the single amount of $3,150 plus her $1,000 catch-up contribution if she has no dependent children on the plan.
As HSAs become more popular, baby boomers begin to age into Medicare, and people work longer and longer before retiring, these sorts of questions will continue to come up. Perhaps it’s time for Congress to reconsider the rule about HSA participation for people with Medicare.