What Seniors Need to Know About their HSA

Health Savings Accounts (HSAs) are one of the most powerful tax-advantaged tools available for healthcare and retirement planning. But as you approach age 65 and Medicare eligibility, the rules around HSA contributions become more complicated — and many people unknowingly make costly mistakes.

If you are nearing retirement, still working past 65, or planning your Medicare enrollment, understanding how HSAs interact with Medicare is extremely important.

Here’s what you need to know.

First of all, what is a HSA?

Before we get ahead of ourselves, it's important to know what a HSA is and how it works: A Health Savings Account (HSA) is a tax-advantaged savings account available to people enrolled in a qualified High Deductible Health Plan (HDHP).

HSAs offer a unique “triple tax advantage”:

• Contributions are typically tax-deductible

• Earnings grow tax-free

• Withdrawals for qualified medical expenses are tax-free

Many people use HSAs to pay for current healthcare expenses, while others treat them as long-term retirement healthcare savings accounts.

However, once you enroll into ANY part of Medicare - Part A, B, C, or D - you are no longer able to contribute to a HSA without penalties and tax implications...we'll get into that in a bit.

Can You Keep Your HSA After Enrolling in Medicare?

The short answer is Yes. You can still use the money already in your HSA after enrolling in Medicare. The restriction applies only to new contributions.

Your existing HSA funds remain yours indefinitely and can still be used tax-free for qualified medical expenses.

In fact, HSAs can become extremely valuable during retirement because they may help pay for:

• Medicare premiums

• Deductibles

• Copayments

• Coinsurance

• Prescription drug expenses

• Dental care

• Vision care

• Hearing aids

• Long-term care premiums (subject to IRS limits)

*Notice that Medicare Supplement Insurance (Medigap Plans) are not mentioned in the above list. HSA balances cannot be used to cover these monthly premiums!

After age 65, you can also withdraw HSA funds for non-medical purposes without the usual 20% penalty, although ordinary income taxes would apply.

What if You Retire After Age 65?

A major HSA pitfall is the retroactive enrollment in Medicare Part A. Numerous individuals choose to enroll in Part A at 65, despite being employed and covered by their employer's health insurance. They may opt for this if their Part A costs are fully covered - in this case it serves as a no-cost secondary insurance for inpatient hospital care. They might also choose to continue their HSA contributions after their 65th birthday during the months/years leading up to retirement...

...and this is where the pitfall is...

When someone applies for Medicare after age 65, Medicare Part A coverage is often retroactively effective for up to six months (but not earlier than the month the person became eligible for Medicare).

This means you may accidentally make excess HSA contributions for months you were technically considered enrolled in Medicare.

Example

Suppose you retire in June after your 68th birthday and apply for Medicare to begin July 1.

Your Medicare Part A effective date may be backdated to January.

If you contributed to your HSA between January and June, those contributions could become excess contributions subject to taxes and penalties unless corrected.

Because of this rule, it is commonly recommend that you stop HSA contributions at least six months before applying for Medicare.

Also keep in mind: a sudden disability or job termination may trigger an unplanned need for Medicare, which may also lead to taxes and penalties related to HSA contributions. Therefore, the safest option would be to end contributions when you turn 65.

What are the Taxes and Penalties We're Talking About?

If you made HSA contributions after you enrolled in Medicare, the IRS treats these as "excess contributions."

Potential consequences include:

• Income taxes on excess contributions

• A 6% excise tax penalty

• Additional paperwork and correction requirements

Fortunately, excess contributions can often be corrected if caught early.

Typically, the excess contribution and any associated earnings must be removed before the tax filing deadline.

Working with a qualified tax professional is usually recommended if this situation occurs.

To maximize your HSA benefits and simultaneously avoid unwanted taxes and penalties, it's best to work closely with your HR department, a Medicare insurance broker/advisor, and your tax advisor.

HSA accounts are valuable resources when used correctly!