Dear Rusty: I have reached my full retirement age (FRA) (66 years, plus 8 months) and plan to apply for Social Security (SS) this month. However, I’ve seen articles which say that when I apply, I must also take Medicare Part A. This, even though I am continuing to work and am covered by my employer’s health insurance (a high deductible plan). I contribute bi-weekly into a heath savings account (HSA). I’ve read that Medicare back dates Part A coverage by six months, which suggests I would have had to stop contributing to my HSA six months ago. If this is true, will I need to pay penalties and such to the IRS? I’m not able to find anything else about this topic, and I’m wondering what you might have to say. I have my wife and two children on my employer’s high-deductible health plan (HDHP). We contribute $6,000 annually to our HSA and my employer contributes $1,250 on January 1 each year. We can live without the HSA, but the taxes and IRS penalties concern me.

Signed: Wanting to Claim SS (but concerned)

Dear Wanting to Claim: I’m afraid that what you’ve read is correct — it is mandatory for you to take Medicare Part A (inpatient hospitalization coverage) when receiving Social Security benefits after age 65. Medicare Part A is free to you, and even though you are still covered under your employer’s creditable HDHP and can delay taking Medicare Part B, you must take Medicare Part A to collect Social Security after age 65. Medicare and your employer’s plan will coordinate health-care benefit payments.

That does, however, also mean your HSA will be affected because, as you have found, Medicare will backdate your Part A coverage by six months. And because Part A is not a high-deductible plan (a requirement for HSA), any contributions you make after the effective date of Part A will be subject to an IRS penalty, and your HSA contributions won’t be considered tax-exempt. This will mean the IRS will likely assess a 6 percent excise tax on any contributions made after your Part A effective date, and you’ll need to pay income tax on those contributions.

What you may wish to consider is stopping your HSA contributions now and waiting an additional six months or so to claim your Social Security benefits (to get beyond the HSA penalty phase). This would have the advantage of avoiding the IRS penalty on your HSA contributions and would also increase your Social Security benefit due to delayed retirement credits (DRCs). You earn DRCs at the rate of 0.677 percent for each month beyond your FRA that you wait to claim, which means an SS benefit about 4 percent higher if you wait six months longer to claim SS.      

Russell Gloor is a national Social Security advisor at the AMAC Foundation, the nonprofit arm of the Association of Mature American Citizens (AMAC). The 2.4-million-member AMAC says it is a senior advocacy organization. Send your questions to: ssadvisor@amacfoundation.org.

Author’s note: This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained, and accredited by the National Social Security Association (NSSA). The NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity.