Ask Ms. Medicare: Can I Have a Health Savings Account as Well as Medicare?

Q. I have health insurance from my employer in the form of a Health Savings Account. But I’m told I can’t use it if I’m eligible for Medicare. Is this correct? If so, what can I do to keep this insurance if I continue working after age 65?

A. A Health Savings Account (HSA) is a type of health insurance offered by an increasing number of employers. It combines a high-deductible health plan with a tax-free medical savings account to which the employee and the employer can contribute. (It is not the same as a Medicare Medical Savings Account, a health plan available only to Medicare beneficiaries, which is not discussed in this article.)

Current law says that you can’t use an HSA if you’re entitled to Medicare Part A (hospital insurance). But it’s important to know the difference in meaning between “eligible” and “entitled” as defined by government officials:

Eligible for Medicare means that you’ve met the requirements to qualify for Medicare Part A—in other words, you or your spouse has enough Social Security work credits—but you haven’t yet applied for it.

Entitled to Medicare means that you’re eligible, you’ve filed an application to receive Medicare Part A, and your name is already in the system—or that the application has been processed and you’ve been sent a Medicare card showing the date your coverage starts.

(Enrolled in Medicare means that you’ve chosen to sign up for Part B—coverage of doctors’ and outpatient services—or that you’re one of the relatively few people who pay premiums to purchase Part A. Most people don’t need to actively enroll in Part A because if they have sufficient work credits, they’re automatically eligible and pay no premiums for it.)

These definitions are not just bureaucratic wordplay. They really matter if you have an HSA from your employer and you want to continue to use it and contribute to it after age 65 while you’re still working. Here’s how they apply to different circumstances:

•  If you’re eligible for Medicare but have not filed an application for either Social Security retirement benefits or Medicare, you need do nothing. You can continue to use your HSA after age 65 and postpone applying for Social Security and Medicare until you stop working. There is no penalty for this delay.

•  If you’re entitled to Medicare because you signed up for Part A at age 65 or later (perhaps not realizing that it can affect the use of your HSA) but have not yet applied for Social Security retirement benefits, you can withdraw your application for Part A. (To do so, contact the Social Security Administration at 1-800-772-1213.) There are no penalties or repercussions and you are free to reapply for Part A at a future date.

•  But if you have applied for, or are receiving, Social Security benefits—which automatically entitles you to Part A—you cannot continue to use your HSA. And in these circumstances, the only way you could opt out of Part A is to pay back to the government all the money you’ve received in Social Security payments, plus everything Medicare has spent on your medical claims. You must repay these amounts before your application to drop out of Part A can be processed. If you take this action, you’re no longer entitled to Social Security or Medicare—but you can reapply for both at any time in the future (for example, if you end or lose your HSA coverage).

What if you received Medicare Part A under age 65 through disability? In this situation, you’re entitled to Medicare as soon as you’ve received your 25th disability check from Social Security. In other words, you automatically go into the Medicare system. If you’re able to return to work, eventually your disability payments will stop—but your Medicare entitlement continues for up to 93 months from the time you first applied for disability. For most people, this is an advantage. But if your employer offers health insurance in the form of a health savings account, you’re ineligible to take it because you have Medicare. Again, the only way you can opt out of Part A is to repay Social Security for all the disability payments you’ve received, even if you’ve never used Medicare for medical services, and to repay Medicare for any services that you have used.

This situation is currently the focus of a lawsuit that alleges that denying Social Security benefits to people who wish to opt out of Part A is unlawful and unconstitutional. A bill introduced in Congress in February 2009 would allow people with HSAs to opt out or suspend their Part A entitlement without affecting their Social Security payments.

Patricia Barry is a senior editor at the AARP Bulletin.