This account might cause snags when you claim Social Security


If you regularly contribute to a health savings account and plan to tap Social Security past your full retirement age, watch out.

For starters, that’s because you can no longer contribute to an HSA once you’re on Medicare, no matter whether you sign up just for Part A hospital coverage (which is free) or additional parts of the program that require premiums.

While this sounds straightforward, complications can arise for people who delay both Social Security and Medicare.

Here’s why: When you delay claiming Social Security beyond your full retirement age, you’re generally offered a lump sum in retroactive benefits of up to six months, dating no further back than your full retirement age — now 66 for most people.

If you’re not yet on Medicare when that happens and are contributing to an HSA, there’s the potential for issues.

“The problem is that if you take the lump sum from Social Security, it triggers Medicare Part A being effective retroactively, as well,” said certified financial planner Peggy Sherman, a lead advisor at Briaud Financial Advisors in College Station, Texas. “So if you made contributions to an HSA during that time, you face an excise tax of 6% on those contributions in addition to income taxes.”

Anyone in that situation should remove those so-called improper contributions and alert their employer to remove any matching contributions made on their behalf, she said.

“That would need to be done by the tax return filing date for the year it’s happening in,” Sherman said. “If you sign up for Social Security this year, you have to remove those contributions by April 15 of next year to avoid the tax issue.”

With more people staying in the workforce well into their 60s and 70s, it’s a situation that’s likely to crop up as those workers delay claiming Social Security and enrolling in Medicare.

As long as you have qualified health insurance through work, you can delay going on Medicare without facing a late-enrollment penalty. This means you can continue contributing to your HSA in combination with a high-deductible health plan…Read more>>