HSA Distributions After Age 65
By Agatha Schmidt, CISP, SDIP, CHSP
We have a client who will be turning 65. Should we distribute his entire account because he will be enrolled in Medicare?
Generally, Medicare enrollment is effective the first of the month that an individual turns age 65 (though some delay enrollment if covered by qualifying employer-provided health coverage). An individual who is enrolled in Medicare loses his eligibility to contribute to an HSA, but he is still entitled to keep his HSA and use it to pay for qualified medical expenses incurred at any time after the HSA was established. There is no deemed distribution or requirement to distribute the entire account to the individual once he or she is no longer eligible to contribute to an HSA.
Can an HSA owner who is 65 or older use her HSA to pay for Medicare premiums?
Yes, certain Medicare premiums may be considered qualified medical expenses:
Medicare Part A (hospital insurance) – If an individual is not receiving Social Security benefits and is not a government employee who paid Medicare tax, the premiums paid to voluntarily enroll in Medicare Part A are considered a qualified medical expense. Typically, if an individual is receiving Social Security benefits or if the individual is a government employee who paid Medicare tax, she is automatically enrolled in Part A; the payroll tax that was paid to participate in Part A is not considered a qualified medical expense.
Medicare Part B (medical insurance) – Premiums paid for Medicare Part B, a supplemental medical insurance, are considered a qualified medical expense.
Medicare Part C (Medicare Advantage Plan) – This is similar to a health maintenance organization (HMO) or preferred provider organization (PPO) plan. Insurance premiums paid to private insurance companies that offer these “bundled” Medicare plans are considered a qualified medical expense.
Medicare Part D (prescription insurance) – Individuals who are enrolled in Medicare Part A or Part B are eligible to participate in this voluntary prescription drug insurance program; premiums paid for this program are considered a qualified medical expense.
For a comprehensive list of other qualified medical expenses that may be paid for using HSA funds, see IRS Publication 502, Medical and Dental Expenses.
What happens if an HSA owner who is 65 or older uses his HSA to pay for nonqualified expenses?
Distributions taken from an HSA that do not go toward paying or reimbursing a qualified medical expense are included in the HSA owner’s gross taxable income and are generally subject to a 20 percent penalty tax. However, Internal Revenue Code Section 223(f)(4)(C) provides an exception to this rule for HSA owners who have attained the age of Medicare eligibility; nonqualified distributions are not subject to the 20 percent penalty tax for individuals who are age 65 and older. They are, however, included in taxable income.
