How Do HSAs Work with Social Security or Medicare?

If you routinely contribute to a health savings account and you expect to start taking Social Security after you’ve reached your full retirement age, there’s a little bump in the road you need to be aware of, warns CNBC in the article “This account might cause snags when you claim Social Security.”

Once you are enrolled in Medicare, no matter whether you sign up for just Part A hospital coverage (free) or additional parts of the program that require paying premiums, you are no longer allowed to make contributions to an HSA.

Sounds easy, right? However, if you delay both Social Security and Medicare, there can be complications.

When you delay claiming Social Security benefits beyond your FRA, you get a lump sum of retroactive benefits of up to six months, dating no further back than your full retirement age, which is now 66 for most people.

And if you’re not yet on Medicare when that happens and are contributing to an HSA, there could be problems. If you accept that lump sum from Social Security, it triggers Medicare Part A effective retroactively. Therefore, any contributions to an HSA during that time are subject to an excise tax of 6% on those contributions—and income taxes.

Anyone who might have done this unwittingly, should remove the improper contributions to their HSA and alert their HR department to remove any matching contributions made on their behalf. This action needs to be taken before the tax return filing date for the year it occurs in. If you sign up for Social Security this year, you need to remove those contributions by April 15 of next year to avoid any tax issues.

This situation is likely to occur more and more often, as more people are staying in the workforce into their 60s and 70s and delay taking both Medicare and Social Security.

As long as you have qualified health insurance through work, you can delay going on Medicare without a late-enrollment penalty. This means that you can continue to contribute to the HSA in combination with a high-deductible healthcare plan.

In 2019, the maximum HSA contribution is $3,500, if you have self-only health insurance and $7,000 for family plans. People who are 55 and over can put in an additional $1,000. There’s a triple-tax benefit: the contributions are deductible, the money grows tax-free, and withdrawals are tax-free, as long as they are used to pay for qualifying medical expenses.

Delaying Social Security is always a good deal, since benefits increase by 8% every year you delay until age 70.

The lump sum offered by Social Security and the retroactive Medicare coverage depends upon how far past FRA you are when you claim Social Security. You can get up to six months’ worth of retroactive benefits.

The lump sum can be rejected, as can the retroactive effective claiming date. If you say no to the offer, your base benefit will be 4% higher. Based on an 8% increase in your base benefits for each year you delay claiming Social Security, the effective date that’s six months later, means a 4% permanent increase in monthly benefits.

Taking the lump sum would fix your monthly benefit at the earlier date of claiming. This is one time when a lump-sum offer may not be such a great thing. It all depends upon your unique situation.

Reference: CNBC (Oct. 24, 2019) “This account might cause snags when you claim Social Security.”

Suggested Key Terms: Social Security, Health Savings Account, HSA, Full Retirement Age, FRA, Medicare

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Bored in Retirement? Here’s a Good Way to Return to Work

Ah, retirement—you’re finally here! All those years of getting up early, working late and saving have paid off. However, after a few months, you’re a little bored. Something’s missing. Could it be working? What draws people back to the workforce, says the article “How To Retire From Retirement And Keep Your Balance” from Forbes, isn’t always the money.

The non-financial rewards of work, particularly work that is meaningful and rewarding, is what people find they miss as much as the paycheck. Work offers more than money. There’s community, purpose, meaning and identity. Take them away, and people miss them. If that describes you, you’re not alone. However, just going back to the workplace you left behind, is not the best way to go.

The transition back to the workplace will be more successful, if you take a thoughtful approach. Here are some steps to consider, to make a successful “unretirement” happen:

Why are you going back? Maybe you don’t need to retire as much as take a break—what teachers call a sabbatical. One woman, an attorney who retired at age 62, didn’t go back to her position with a big law firm, but to a local nonprofit organization with a focus that matters to her. She can do good, while serving a cause with meaning.

What’s your ideal workweek? Don’t get back on the rollercoaster, unless you really want to. What would your best life work week look like? Maybe you want to work a certain number of hours, or a certain number of days. Leave yourself the free time you want, after all, you’re retired (sort of) now.

Keep your best self going forward. Consider what you like about retirement. For one 63-year old who had retired at 60, consulting at a start-up was tempting. However, he did not want to give up his morning workout. He negotiated a four-day workweek and a later start to his day, so that his commute was not so onerous and he could continue to stay fit. He also discovered that his commute would be better spent thinking about work, rather than putting out email fires.

Be a mentor and a mentee. You bring years of experience, but chances are your sector has changed a lot since you began your career. Keep your eyes open for anyone who can mentor you, who you can mentor in return. Share your knowledge with others.

Retirees returning to the workforce is new for many companies. However, the opportunities for both employers and senior employees are still present. Just be thoughtful about what you want out of your work/life retirement. Ideally, you’ll find yourself with the best of both worlds.

Reference: Forbes (Oct. 21, 2019) “How To Retire From Retirement And Keep Your Balance”

Suggested Key Terms: Retirement, Workforce, Mentor

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Remaining Even and Fair in Estate Distribution

Treating everyone equally in estate planning can get complicated, even with the best of intentions. What if a family wants to leave their home to their daughter, who lives locally, but wants to be sure that their son, who lives far away, receives his fair share of their estate? It takes some planning, says the Davis Enterprise in the article “Keeping things even for the kids.” The most important thing to know is that if the parents want to make their distribution equitable, they can.

If the daughter takes the family home, she’ll need to have an appraisal of the home done by a certified real estate appraiser. Then, she has options. She can either pay her brother his share in cash, or she can obtain a mortgage in order to pay him.

Property taxes are another concern. The taxes vary because the amount of the tax is based on the assessed value of the real property. That is the amount of money that was paid for the property, plus certain improvements. In California, property taxes are paid to the county on one percent of the property’s “assessed value,” also known as the “base year value” along with any additional parcel taxes that have become law. The base year value increases annually by two percent every year. This was created in the 1970s, under California’s Proposition 13.

Here’s the issue: the overall increase in the value of real property has outpaced the assessed value of real property. Longtime residents who purchased a home, years ago still enjoy low taxes, while newer residents pay more. If the property changes ownership, the purchase could reset the “base year value,” and increase the taxes. However, there is an exception when the property is transferred from a parent to a child. If the child takes over ownership of the home, they will have the same adjusted base year value as their parents.

If the house is going from parents to daughter, it seems like it should be a simple matter. However, it is not. Here’s where you need an experienced estate planning attorney. If the estate planning documents say that each child should receive “equal shares” in the home, each child receives a one-half interest in the home. If the daughter takes the house and equalizes the distribution by buying out the son’s share, she can do that. However, the property tax assessor will see that acquisition of her brother’s half interest in the property as a “sibling to sibling” transfer. There is no exclusion for that. The one-half interest in the property will then be reassessed to the fair market value of the home at the time of the transfer—when the siblings inherit the property. The property tax will go up.

There may be a solution, depending upon the laws of your state. One attorney discovered that the addition of certain language to estate planning documents allowed one sibling to buy out the other sibling and maintain the parent-child exclusion from reassessment. The special language gives the child the option to purchase the property from the other. Make sure your estate planning attorney investigates this thoroughly, since the rules in your jurisdiction may be different.

Reference: Davis Enterprise (Oct. 27, 2019) “Keeping things even for the kids”

Suggested Key Terms: Estate Planning Attorney, Assessment, Real Property, Real Estate Taxes, Equal Shares

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