47% of U.S. Workers Say Health Expenses Are Hurting Retirement Saving — and a Social Security Filing Slip-Up at 67 Can Spark a 6% HSA Tax Each Year

Claiming Social Security at 67 may feel like crossing a finish line, but a little-known Medicare rule can quietly reach back six months and turn otherwise valid HSA deposits into an IRS penalty that can keep recurring year after year.

Health-care costs are already weighing on retirement plans well before people leave the workforce. In WTW’s Global Benefits Attitudes Survey, 47% of U.S. workers said medical expenses make it harder to save for retirement.

That strain is one reason health savings accounts, or HSAs, are so valuable. Contributions go in tax-free, the money grows tax-free, and withdrawals for qualified medical expenses are tax-free. Consider a typical example: an operations manager keeps working beyond 65, stays on an employer HSA-eligible high-deductible plan, and continues contributing $500 a month. At 67, he finally applies for Social Security.

He may believe he has done everything correctly. But filing for Social Security can retroactively create a tax issue for those HSA deposits, even if he is still employed and covered by his employer’s health plan.

Applying for Social Security Can Trigger Retroactive Medicare

If you are 65 or older when you apply for Social Security retirement benefits, you are generally enrolled automatically in premium-free Medicare Part A. The two are linked, so taking the monthly benefit usually means taking Part A as well.

The catch is that Part A can be backdated. For someone who applies at 67, coverage generally begins six months earlier, even if the person never requested it. In this example, the worker could learn that Medicare had already started half a year before he realized it, making his $500 monthly HSA deposits over that stretch no longer eligible.

Backdated Medicare Can Turn Legitimate Deposits Into Excess Contributions

Under federal tax rules, your HSA contribution limit is zero for the first month you are entitled to Medicare and for every month after that. The IRS applies that rule to retroactive coverage too, so you are treated as a Medicare enrollee for those earlier months even if you did not know it at the time.

Those backdated months can leave you with excess HSA contributions. Your annual limit shrinks because Medicare coverage makes you ineligible for those months, and employer contributions count toward the same cap. If total deposits go beyond what is allowed for the year, the excess loses its tax benefits and may lead to additional taxes.

How serious the problem becomes depends on how far back Part A reaches and how much money was contributed during that period. Someone making the maximum family contribution has more exposure than a worker saving a smaller amount.

The 6% Tax Can Repeat Every Year

If excess HSA contributions are not corrected, the IRS can impose a 6% annual tax on the remaining excess, subject to the account’s year-end value. That charge can show up again in later years until the issue is fixed. It is one of several subtle IRS rules that can slowly erode retirement savings over time.

The remedy is straightforward if you catch it in time. Remove the excess contributions, along with any earnings they generated, by the tax filing deadline for the year they were made, including extensions. The earnings are reported as other income, and the excise tax is avoided on the amount withdrawn.

How to Stop HSA Contributions Before Filing

1. Stop your own payroll contributions early. If you plan to apply for Social Security after 65, Medicare advises ending HSA contributions six months beforehand so retroactive Part A coverage does not create an unexpected tax problem.
2. Also stop employer contributions. Company deposits count toward the same zero limit, so ask HR to shut those off on the same timeline.
3. Coordinate the application date with payroll. Choose your Social Security filing month first, then make sure your final HSA payroll deduction is taken before the backdated Medicare window begins.

Money already in the HSA is not affected. The balance remains yours, and withdrawals for qualified medical expenses stay tax-free after Medicare begins. Once you reach Medicare age, the 20% penalty on non-medical withdrawals no longer applies, though those withdrawals are still taxed as ordinary income. The only thing that stops is new contributions.

Plan the HSA Cutoff Before You Submit

The safest time to protect an HSA is before applying for Social Security. Work backward from the planned filing date and make sure both you and your employer stop contributing early enough. That one step can shield years of tax-advantaged savings from a penalty that repeats.

If you have already filed and kept contributing, the withdrawal deadline still offers a way to correct the mistake. Medicare start dates and employer plan rules vary, so a quick call to Social Security to confirm when Part A would begin can help avoid an expensive surprise.