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Little Known Issues When Health Savings Accounts Meet Social Security

“You can only put money in a health savings account, if you are covered by a high-deductible insurance plan. This means you must stop those contributions, once you’re on Medicare.”


If you have put off filing claims for both Social Security and Medicare, there may be complications.

When Social Security benefits are delayed beyond Full Retirement Age (FRA), there’s generally a lump sum in retroactive benefits of as much as six months offered. Sounds like a great deal, right? However, if you are not yet on Medicare when that lump sum is accepted and you’re also contributing to an HSA, there are some costly issues that may occur.

By accepting the lump sum from Social Security, you also trigger Medicare Part A being effective retroactively. Therefore, any contributions made to an HSA during that time, are now subject to an excise tax of 6%, in addition to income taxes.

If that is something you have unwittingly done, or might do in the near future, the solution is to alert your employer (or the HR department) to remove any matching contributions made on your behalf. You’ll also need to do that by the tax return filing date for the year it happened in.

If you signed up for Social Security this year, remove those contributions by April 15 of next year.

With more and more people remaining in the workplace into their sixties and seventies, this is a situation that is more and more likely to occur.

As long as you have qualified health insurance through your employer, you can delay going on Medicare without facing a late-enrollment penalty. You may continue to contribute to your HSA, in combination with a high-deductible health plan.

What about that lump sum from Social Security? Rejecting it and the retroactive claiming date isn’t necessarily a bad idea. If you reject it, your base benefit will be 4% higher. Based on an 8% increase in benefits for each year claiming Social Security is delayed (up to age 70), the effective date that is six month later would mean a permanent 4% increase in monthly benefits. If you take the lump sum, your base benefit will be pinned to the early date of claim.

The lump sum may be tempting but consider whether or not you’d prefer to receive the higher monthly benefit, before jumping at the offer.

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