2024 signified the year of “Peak 65”—the name for the record numbers of Baby Boomers reaching age 65. According to a report by the Alliance for Lifetime Income, more than 4.1 million Americans will turn 65 each year through 2027. With so many turning 65, it’s natural for employees still working to wonder what to do about their health insurance options, especially when they have a health savings account (HSA) as well. This blog focuses on employer health insurance and Medicare coordination for active workers at age 65. It does not cover every aspect of Medicare (such as medical conditions caused by disabilities resulting in eligibility for Medicare prior to age 65).
Understanding How Medicare Works at Age 65
In general, Medicare rules are complex, especially for those who continue to work while covered by employer health insurance. Medicare also has specific enrollment timing rules to understand, based on when the individual turns 65.
Medicare Parts A and B
- Medicare Part A (Hospital Insurance): Available at age 65. Most people get Part A premium-free based on working for a specific number of quarters, but some may have to pay for this coverage. If receiving Social Security retirement benefits, individuals are automatically enrolled in Part A at age 65 with no opt-out available.
- Medicare Part B (Medical Insurance): Available at age 65. Individuals can opt in to Part B at age 65 or delay enrollment based on coverage in an employer-sponsored health plan. However, if coverage in Part B is delayed, there is a late enrollment penalty based on health plan creditable coverage status. See the International Foundation’s previous blog for more information: “CMS Creditable Coverage Updates for Group Health Plans.”
Two key aspects of Medicare coordination for employers are the Medicare Secondary Payer rules and ceasing HSA contributions upon Medicare enrollment.
Medicare Secondary Payer (MSP) Rules
As the Centers for Medicare & Medicaid Services (CMS) describes, “The MSP policy is designed to ensure that Medicare does not pay for healthcare expenses for which another entity is legally responsible.” MSP rules generally address which plan is the primary payer of claims when an employee is enrolled in both Medicare and a group health plan.
MSP requires the secondary payer to be responsible for paying medical claims that the primary payer does not cover. The MSP rules are based on the number of employees employed at a company (not just on the health plan).
- Company with 20 or more employees:
- Medicare is the secondary payer after the group health plan.
- Company with fewer than 20 employees:
- Medicare is the primary payer instead of the group health plan.
Why do the MSP rules matter?
- For employees who enroll in Medicare and remain on their group health plan, MSP rules on “who pays first” may cause confusion with how health care claims are paid and result in additional out-of-pocket costs for the employee.
- For companies with more than 20 employees, MSP rules prohibit employers from terminating the employee’s coverage or incentivizing the employee to terminate when they enroll in Medicare.
- For companies with fewer than 20 employees, MSP rules generally allow plans to terminate the employee’s coverage when enrolled in Medicare. However, employers should consult with their consultants and attorneys in this process regarding additional considerations such as federal age discrimination issues.
High-Deductible Health Plans (HDHP) and HSAs
To be HSA eligible, individuals must:
- Have no other health insurance,
- Have health insurance that is a qualified HDHP and HSA eligible according to Internal Revenue Service (IRS) requirements,
- Not be enrolled in any part of Medicare, and
- Not be claimed as a tax dependent on someone else’s tax return.
The IRS considers the following types of coverage not disqualifying for HSA purposes: dental, vision, disability and long-term care as well as coverage for specific diseases or illnesses (e.g., those offered under voluntary benefits programs). In addition, the IRS also confirmed that an employee assistance plan (EAP) is not disqualifying if it does not “provide significant benefits in the nature of medical care or treatment.”
The Journal of Accountancy has written several articles on HSAs and Medicare enrollment and notes, “the guidance on how HSA contribution rules intersect with Medicare enrollment is limited.”
Contributing to HSAs
Enrollment in any part of Medicare disqualifies an individual from making contributions to their HSA and from accepting employer contributions. Individuals who delay Medicare enrollment, including Part A, and remain on their employer HDHP may remain HSA eligible.
Using HSA Funds After Medicare Enrollment
Over the years, many have positioned HSAs as an effective tool for saving money with a long-term approach, utilizing savings today to pay for medical expenses in retirement years. The accounts provide a triple tax-savings advantage: contributions made through a Section 125 program are pre-tax, account earnings are not taxed as they grow, and withdrawals remain tax-free if used for qualified medical expenses.
Individuals can use their existing HSA funds to pay the premiums for Medicare Parts B, C (Medicare Advantage) and D but generally cannot use them for Medicare supplement or Medigap insurance premiums.
Takeaways for Plan Sponsors
Employers have typically avoided assisting employees with the transition from a group health plan to Medicare coverage. According to Fidelity, only around 58% of employers guide their employees during this time. For some employers, this could be an opportunity to ensure that employees at all life stages feel engaged and valued. Considerations for employers on this topic include:
- Understanding MSP laws governing your size company
- Tapping into resources available from consultants and service providers
- Engaging with employees to understand their concerns about their next steps.
- Communicating with a strategy, including providing access to a third party who can individually consult with employees prior to age 65.
Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.
Additional Resources:
CMS Eligibility and Enrollment
Newfront articles: The HSA Eligibility Requirements: Parts I and II
