Coordination of HSA and Medicare Timeline Explained
By Steve Christenson, Executive Vice President, Ascensus®
As I travel the country speaking about health savings accounts (HSAs), I am asked in-depth questions by financial services personnel about how consumers can benefit from HSAs. Many of our colleagues immediately discuss the triple tax benefits of HSAs—tax-deductible contributions, tax-deferred growth on earnings, and tax-free distributions if used for qualified medical expenses. These are key points and should continue to be discussed, but we should also expand the discussion by asking the following question.
Can individuals still contribute to an HSA after age 65 and receive the same tax benefits?
The answer is… possibly, yes!
HSA Contributions After Age 65
The rules for contributing to an HSA do not change once an individual turns age 65. So if the individual meets the eligibility requirements, he can contribute his annual limit, including a $1,000 catch-up contribution because of his age (age 55 or older). Thus, an HSA owner
- must be covered only under a qualified high-deductible health care plan,
- cannot be covered by a non-high deductible health plan (HDHP),
- cannot be eligible to be claimed as a dependent on someone else’s tax return, and
- cannot be enrolled in Medicare.
The last bullet causes some confusion, so let’s explore that for a moment.
In our industry, it is common knowledge that individuals generally become eligible for Medicare when they reach age 65. What most of us don’t fully understand, but make certain assumptions about, is how and exactly when an individual enrolls in Medicare. Their HSA contribution eligibility ends the month they enroll in Medicare.
There are essentially two ways individuals can enroll in Medicare.
Automatic enrollment: Individuals are automatically enrolled in Medicare Parts A and B if they receive Social Security benefits or Railroad Retirement benefits. This enrollment generally takes place on the first day in the month they reach age 65. Individuals may be enrolled automatically before they reach age 65 if they are receiving Social Security disability benefits, or have Lou Gehrig’s disease.
Active enrollment: If individuals are not automatically enrolled in Medicare, they generally must sign up during a seven-month initial enrollment period. This seven-month period is broken into three phases and the start date of certain Medicare coverages may be affected by the month enrolled. These phases run three months before the month they turn age 65, the month they turn age 65, and the three months following the month they turn age 65. Some individuals may decide to opt out or delay Medicare to a later date during a special enrollment period (SEP) or the general enrollment period (GEP), discussed next.
For the year enrolled in Medicare, the HSA owner still can contribute a prorated amount to an HSA based on her actual months of eligibility—contribute the monthly contribution limit for the months not enrolled in Medicare.
All of that seems fairly straightforward, but…
Can someone who still is working after age 65 delay his Medicare enrollment, maintain his HDHP, and continue to contribute to his HSA?
Again, the answer is… yes!
Delaying Medicare Enrollment
Individuals can delay enrollment in Medicare Parts A and B at age 65 without ramifications if they meet certain requirements. This includes being covered by a qualifying employer-provided group health insurance plan that covers at least 20 employees—if less than 20, the individual is considered to not have qualifying health insurance coverage and must enroll in Medicare. Individuals covered by a qualifying plan then qualify for the Medicare special enrollment period. It is important to note, however, that those who delay enrollment but do not qualify for the special enrollment period generally must pay higher Medicare premiums or a late-enrollment penalty when they finally sign up during the Medicare general enrollment period. In some cases, this penalty may apply for as long as they are enrolled in Medicare.
Medicare Part A generally is “free” for most individuals who have at least 10 years of qualifying employment. If individuals meet the qualifications for delayed enrollment as described above, but take advantage of and accept premium-free Part A Medicare, they are ineligible to continue funding their HSAs. If they want to opt out of automatic enrollment in Medicare Parts A and B in order to continue funding their HSAs, they must contact the Social Security Administration to opt out of both Medicare Parts A and B.
Covered by Spouse’s Plan
As noted, in order to delay Medicare enrollment, one must be covered under a group health plan that covers at least 20 employees. Individuals generally won’t meet this 20-employee requirement if they work for a small employer or are self-employed. However, if they are covered by their spouse’s qualified group health plan that is an HDHP, they may still be eligible to delay enrollment and continue to fund their HSAs.
Individuals who delay Medicare beyond age 65 generally will have retroactive coverage for Medicare Part A when they do enroll. Premium-free Part A coverage begins six months before the date the individual applies for Medicare, but no earlier than the first month he was eligible for Medicare. This reduces the number of months an individual is eligible to fund his HSA for the year of Medicare enrollment. Therefore, if someone enrolls in Medicare after age 65, he generally should plan on having retroactive coverage and reduce his HSA contribution appropriately. This may prevent making an excess HSA contribution.
Enrollment in Medicare and determining the months someone is enrolled is complicated. So, it’s always a good idea for HSA owners to consult with Medicare staff for answers specific to their situations.
Now, let’s review one of the main benefits of having an HSA after age 65.
Once someone is enrolled in Medicare, can he still have an HSA?
Continue Using the HSA
HSAs are not “use it- or lose-it” accounts. Although individuals enrolled in Medicare are no longer eligible to make HSA contributions, they can continue to use their HSA savings to take tax- and penalty-free distributions for future qualified medical expenses, as defined in IRS Publication 502, Medical and Dental Expenses. If they don’t use their HSA withdrawal to pay for qualified medical expenses after age 65, then they include the distributed amount as taxable income but won’t have to pay the additional penalty tax because reaching age 65 is an exception to this tax.
If an individual is drawing Social Security benefits while enrolled in Medicare, some premiums generally are deducted directly from the monthly payment. If an individual is enrolled in Medicare and not drawing Social Security benefits, he can either
- submit payments (including automatic payments) directly from his bank account,
- pay by check or money order, or
- pay by credit or debit card.
So how does the payment of Medicare premiums relate to HSAs?
Paying Medicare Premiums With the HSA
Individuals who are age 65 or older can use their HSAs to pay for the following qualified medical expenses.
- Medicare Premiums Part A, B, C, D, and Medicare Advantage plans (like an HMO or PPO)
- Employee share of premiums for employer-provided health insurance
- Premiums deducted from their Social Security checks
- Premiums for retiree health insurance, and out-of-pocket co-pays, co-insurance, and deductibles
To be clear, while Medicare premiums are qualified distributions and tax-exempt, other insurance premiums are not qualified medical expenses, such as
- Medicare premiums if under age 65,
- Medigap (Medicare supplement) premiums, and
- a spouse’s Medicare premiums if the HSA owner is under age 65.
The Take Away
HSAs offer a wide variety of benefits during retirement that most people simply do not know about or don’t fully understand. These discussion topics are the types of consumer education that can help people of all generations make better decisions while saving and planning for their retirement.
Steve Christenson is Executive Vice President of Ascensus Retirement Products and Solutions (RPS) Group. Steve is responsible for managing and developing Ascensus' product lines and services, which includes PC-based software and online technology, education, resources development, forms and documents, telephone and on-site consulting, and resource materials. Prior to becoming Executive Vice President of RPS, Steve was Executive Director of the company's ERISA Professional Services Group.