HSAs and Medicare
By Stacy Torkelson, CISP, CHSP, CFCI, QKA, SDIP
I am still working at age 65 and my wife and I are both enrolled in my employer’s high deductible health insurance (HDHP). Am I eligible to contribute to an HSA or am I no longer able to because of my age?
It is not turning age 65 that makes people ineligible to contribute to HSAs, but rather enrollment in Medicare that prevents HSA owners from making further contributions. And while most people do enroll in Medicare when they turn 65, it is not necessarily required. Individuals who are still working for “large” employers (currently 20 or more employees) can continue to be covered (and cover their spouses) under their employer’s health insurance and enroll in Medicare later when they retire. Once individuals retire and lose their employer coverage, they will have eight months to enroll in Medicare during a “Special Enrollment Period” and will not have to pay late enrollment penalties for enrolling after age 65. As a result, individuals who are still enrolled in their employer’s HDHP (and waiting until retirement to enroll in Medicare) can continue to contribute to an HSA.
I am enrolling in Medicare at age 70 after dropping my employer coverage. What is my contribution limit this year?
When enrolling in Medicare, HSA owners will have to prorate their HSA contribution amount for the year. This is done by determining the monthly limit for the type of coverage that they were enrolled in and multiplying that amount by the number of months they were HSA-eligible.
For example, John (age 70) has family coverage and is retiring on October 15, 2024. Because John will enroll in Medicare after he loses his employer health insurance, he will have to prorate his contribution limit for 2024.
There is one complicating factor affecting John’s prorated contribution limit. Because John is enrolling in Medicare after losing his employer coverage, his Medicare Part A coverage will be retroactive 6 months. So if John signs up for Medicare after his coverage ends and begins Medicare coverage as of November 1, 2024, just his Part B coverage is effective as of that date: his Part A coverage will be retroactive to May 1, 2024. Instead of prorating his contribution limit for 10 months (January-October) he should instead prorate his contribution limit for just 4 months (January-April) because he was covered by Medicare as of May 1, 2024.
John’s prorated monthly limit for family coverage is $691.66 ($8,300/12). He will also have to prorate his catch-up limit, which is $83.33 per month ($1,000/12). After prorating both of those limits for four months of HDHP coverage, John is eligible to contribute $3,099.98.
This issue with retroactive Part A coverage does not affect individuals who enroll in Medicare when they turn age 65.
If I enroll in Medicare what happens to the money I have in my HSA?
Medicare enrollment only prevents HSA owners from making additional contributions. It does not mean that individuals are required to spend or forfeit the HSA dollars that they have already saved. And while HSA owners no longer have to pay the additional 20 percent penalty tax for nonqualified HSA distributions after turning 65, HSA owners must still pay income tax on nonqualified distributions. HSA owners may continue to use their HSA assets to pay for qualified medical expenses incurred after they enroll in Medicare, which can help maximize tax savings. Medicare premiums for Parts B and D are also considered qualified medical expenses, so many HSA owners may want to reimburse themselves for those costs from their HSA.
