You’re doing the right things.
You’re delaying Social Security to increase your future benefit. You’re still working past 65. And because you’re covered by an HSA-eligible health plan, you’re continuing to fund your Health Savings Account, one of the most tax-efficient savings vehicles available.
Then you file for Social Security.
And suddenly, some of those perfectly legitimate HSA contributions may become “excess contributions,” leaving you with an unexpected tax bill and possibly even penalties.
That’s because Social Security, Medicare, and HSA eligibility are more connected than they appear.
The Rule Most People Don’t See Coming
Once you enroll in Medicare, you can no longer contribute to an HSA. That part is fairly straightforward. The wrinkle comes when someone over 65 delays Medicare while continuing to work and then later files for Social Security.
When Social Security benefits begin, Medicare Part A enrollment may be applied retroactively, potentially going back as far as six months. That retroactive coverage can create a problem if you were still contributing to an HSA during those months.
Consider a 67-year-old employee who is still working and covered by an HSA-eligible employer plan.
In January, his employer contributes $5,150 to his HSA.
In July, he decides to file for Social Security. As part of the process, his Medicare Part A enrollment is backdated to January.
Now the problem becomes clear: he was technically enrolled in Medicare during the same months he was receiving HSA contributions.
The $5,150 contribution that looked perfectly valid at the time may now be treated as an excess contribution.
What Does That Actually Cost?
If the problem is caught and corrected, the contribution and associated earnings may need to be removed, and an employer contribution may need to be treated as taxable compensation.
At a 24% federal income-tax rate, making $5,150 taxable could mean roughly $1,236 in additional federal income tax.
If the excess contribution is not corrected, the consequences can compound. Excess HSA contributions can be subject to a 6% excise tax for each year they remain in the account.
On $5,150, that is another $309 per year.
The frustrating part is that neither strategy was necessarily wrong.
Delaying Social Security may have been a smart decision.
Continuing to fund the HSA may have been a smart decision.
The problem was failing to coordinate them.
The Date That Matters May Come Six Months Early
For someone over 65 who is still contributing to an HSA, the Social Security filing date should not be treated as a standalone decision.
If Medicare Part A could be backdated by six months, HSA contributions may need to stop well before Social Security benefits actually begin.
So if you plan to claim Social Security at age 70 while continuing to work, the important planning date may not be your 70th birthday.
It may be six months earlier.
That relatively small timing adjustment can prevent the need to unwind contributions, report additional taxable income, and potentially pay penalties.
Good Decisions Still Need to Work Together
Retirement planning is full of decisions that look sensible in isolation.
Delay Social Security.
Maximize an HSA.
Work a little longer.
Manage taxes.
Each may be a good strategy on its own. But the real value of planning is understanding what happens when those strategies collide.
At Hanover, we believe Social Security, Medicare, taxes, employer benefits and retirement savings should be evaluated as parts of one coordinated plan. Because sometimes the biggest financial mistakes do not come from making a bad decision.
They come from making two good decisions that were never connected.