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Save now, spend later with an HSA

By Jennie L. Phipps ·
Tuesday, August 4, 2015
Posted: 4 pm ET

I find paying a monthly health insurance premium to be extraordinarily annoying. My husband gets Medicare, but I am too young, so I buy insurance on my own. I chose the lowest-cost Obamacare "bronze" plan, but it is still more than $6oo a month -- an absurd premium for someone whose only claim for years has been an annual physical.

I understand the concept of insurance -- I'm kicking into the pot for the time when I might need to claim more. And in the meantime, I'm helping offset the costs for those who are less fortunate. But that doesn't stop me from feeling like I am being punished for being in good health.

How an HSA can help

Aaron Tidball, manager of Medicare operations for Allsup, a company that specializes in helping people navigate the complexities of Medicare, suggests that people in my circumstances -- healthy, older than 55 but not old enough for Medicare, or old enough but still employed -- consider switching to a high-deductible health insurance plan with a health savings account, or HSA.

Having a high-deductible account probably won't cut the cost of premiums, but the HSA part of the equation has 1 big selling point: It allows pre-retirees to save a considerable sum of money toward the expenses of Medicare and other health care costs as they age.

Allsup lists these advantages:

  • Savings are tax-deductible, and the interest grows tax-free. As long as you spend it on qualified medical expenses, including most Medicare-related costs, except the cost of Medicare supplements, the money can be withdrawn tax-free.
  • Many employers contribute to their employees' HSAs. The average annual employer contribution in 2014 was $769 for single coverage and $1,347 for family coverage, according to Kaiser's Employer Health Benefits survey.
  • The maximum contribution in 2015 is $3,350, but if you are 55 and older, you also can make a $1,000 catch-up contribution.

Allsup estimates that someone who saved the maximum over 10 years and earned only 2% interest still would have saved more than $50,000 -- a tidy sum that could make a big difference in your ability to pay for health care later in life.

A few cautions

It sounds good, but there are a couple of gotchas that anyone contemplating this route should be aware of.

HSAs and Medicare don't mix. Once you enroll in Medicare, you can no longer contribute to an HSA. But if you are still working and covered by employer-provided insurance, with a couple of exceptions you don't have to sign up for Medicare, even Part A, at age 65. Those exceptions include if you're working for an employer whose coverage isn't what the government calls "creditable" -- usually because the company has fewer than 20 employees -- or if you are self-employed. Under those circumstances you must sign up for Medicare at 65, even if you are still working and are not receiving Social Security benefits.

Social Security trumps. If you take Social Security, you must take Medicare at 65, even if you are still employed and covered by your employer's plan.

Beware of the IRS. Once you decide to switch to Medicare from a private HSA-eligible plan, Social Security will automatically give you 6 months of retroactive coverage. If you have been contributing to your HSA during those 6 months, you will face tax penalties. "If you stop contributing to the HSA 6 months before you sign up for Medicare,  there will be no problem," Tidball says.

Here are some more things you should know about delaying Medicare in favor of employee coverage.

[Editor's note: An earlier version of this blog post misstated "creditable coverage" as "credible," and listed the minimum company size as having fewer than 25 employees instead of 20. We regret these errors.]

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