Health Savings Accounts [HSAs] are one of the only types of “triple tax advantaged” investment accounts. This means contributions are tax-deductible, investment growth is tax-deferred, and withdrawals are tax-free if used for qualified medical expenses. They can also be an attractive option to supplement your retirement plan because you can withdraw the money in your HSA after you reach age 65 for any reason without owing a penalty.
Due to the significant tax advantages, many individuals and business owners use HSAs to cover their healthcare costs and add to their retirement savings. However, HSAs have important limitations – particularly for those enrolled in Medicare. If you don’t understand this relationship and the limitations it creates, you could face significant penalties.
Medicare and HSAs Overview
To be eligible for an HSA, you must have a High Deductible Health Care Plan as your only form of health coverage. Since Medicare is not a high deductible plan, you cannot have any form of contribution to your HSA once you are enrolled in Medicare. This includes money that you add to the account and money that your employer contributes on your behalf.
While you cannot contribute, you can continue to maintain and withdraw from your HSA after enrolling in Medicare. In fact, you can withdraw the money in your HSA tax-free to pay for some Medicare expenses. These include Medicare Part B, C, and D premiums and Income Related Monthly Adjustment Amounts [IRMAA]. However, it is important to keep in mind that you cannot use the funds to pay for Medigap Plan premiums.
When must you stop HSA contributions if enrolling in Medicare?
You must stop HSA contributions before the effective date of your Medicare benefits – the date you are considered enrolled in Medicare. The effective date varies based on when you sign up for the program and can sometimes be backdated.
Enrolling in Medicare at Age 65
You will be automatically enrolled in Medicare Parts A and B at age 65 if you begin receiving Social Security benefits at least 4 months prior to your 65th birthday. In this situation, you and your employer will need to stop HSA contributions before the first day of the month you turn age 65.
If you are not receiving Social Security benefits when you turn age 65, you will need to apply for Medicare. You can do this during your initial enrollment period – the 7-month period surrounding your 65th birthday.
When you sign up during your initial enrollment period, your Part B benefits will be effective the first day of the following month or the first day of the month you turn age 65, whichever is later. On the other hand, your Part A benefits will begin the first day of the month you reach age 65 no matter when you sign up during the initial enrollment period. For this reason, you should still stop HSA contributions prior to the month you turn age 65 – even if you file your application in the latter part of your initial enrollment period.
Enrolling in Medicare Past Age 65
If you are covered by an employer’s healthcare plan when you turn age 65, you may be eligible to delay Medicare coverage. In this case, you would generally apply for Medicare later during a special enrollment period, such as when you leave your job and lose company health coverage.
When enrolling in Medicare after age 65, the Medicare effective date will be backdated 6 months from the date you apply but not before the month of your 65th birthday. Therefore, you and your employer will need to stop all HSA contributions made in your name 6 months before enrolling in Medicare or the first day of the month you turn age 65, whichever is later.
Consider this example to illustrate. You are age 67 and plan to retire in October. You submit your Medicare application in September to ensure your benefits begin at the same time your employer sponsored health coverage ends. In this case, the six-month look-back period begins in September – the month of application – and you would be ineligible to contribute to an HSA beginning in March.
It is also important to note that if you enroll in Social Security past age 65 you will be automatically enrolled in Medicare and your Part A coverage will be backdated 6 months. For this reason, you will need to stop HSA contributions 6 months before beginning Social Security benefits if you sign up after age 65.
What should you do if you contribute to an HSA after enrolling in Medicare?
Additions to your HSA after enrolling in Medicare are treated as excess contributions. That means you must remove the money – plus earnings – as soon as possible and pay tax on it.
If you remove the excess contribution before the tax filing deadline – including extensions – you will not owe a tax penalty. On the other hand, if you leave the excess funds in the account past the tax filing deadline, you will owe a 6% penalty for the over-contribution and earnings. The penalty continues to be assessed each year until you withdraw the funds, so it is best to correct the error as soon as possible.
Coordinating Medicare Enrollment and HSA Contributions
The annual maximum contribution to an HSA in 2024 is $4,150 for an individual and $8,300 for a family. These limits will rise to $4,300 for individuals and $8,550 for families in 2025.
While it may be tempting to contribute the annual maximum to your HSA before starting Medicare to “fatten up” your account, this is not allowed. Although the HSA limit is expressed in annual terms, the government technically considers it a monthly limit. Therefore, lump sum deposits to your HSA are treated as advance payments for the monthly contribution limit.
For example, if you are starting Medicare October 1st, you can only contribute for the months January through September. This means you are limited to 75% of that year’s HSA maximum.
The same holds true for employer contributions to your account. Suppose your employer typically contributes $750 in January and $750 in July each year to your HSA. If you begin Medicare on October 1st, they can contribute $750 in January as usual since that lump sum is considered an advance payment for the months January through June. In July, however, your employer could only contribute half of the usual amount as an advance payment for the months of July, August, and September.
Keep in mind that the lookback period for HSA contributions is six months from the date of application – not the start of benefits – if you are applying for Medicare after age 65. This rule applies to contributions from you and your employer.
Family HSA Contributions After Enrolling in Medicare
Your Medicare enrollment doesn’t impact your spouse’s ability to contribute to an HSA. In fact, if your spouse is under age 65, they can continue contributing to the HSA family maximum until they reach age 65 – or 6 months before enrolling in Medicare when they enroll after age 65. However, they can only contribute their own catch-up contributions – the additional $1,000 those over age 55 can contribute.
As you can see, coordinating Medicare enrollment and HSA contributions can be tricky. That’s why you need an experienced financial advisor to guide you through the process.
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If you need help understanding your Medicare and HSA options, the team at Meld Financial can help. We will develop your Financial Fingerprint® – a comprehensive wealth management plan that is quick to assemble, easy to understand, and simple to modify as your circumstances change.
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