Medicare & Health Savings Accounts
A health savings account (HSA) is an account that someone with a high deductible health plan (meaning your deductible is at least $1,200 a year for an individual or $2,400 for a family before your insurance benefits kick in) has that they can contribute to on a tax-free basis.
HSA funds are not taxed when they are withdrawn from the HSA as long as they are used to pay for qualified medical expenses. Your current employer may oversee your HSA or you may have an individual HSA that is overseen by a bank, credit union or insurance company. If you have an HSA and you will soon be eligible for Medicare, it is important to plan ahead and understand how enrolling in Medicare will affect your HSA.
If you enroll in Medicare Part A and/or Part B you can no longer contribute to your HSA. The month you enroll in Medicare (typically the month of your 65th birthday), the account overseer switches the contributing balance to your HSA to zero dollars per month. By law, people with Medicare are not allowed to put money into an HSA. This is because you must have a high deductible health plan if you are putting money into an HSA.
The Good News
The good news is you may withdraw money from your HSA after you enroll in Medicare to help pay for medical expenses (deductibles, premiums, copays or coinsurances). If you use the account for qualified medical expenses, it will continue to be tax-free.
Triple Tax Advantage of HSAs
- Your account contributions are pre-tax or tax-deductible.
- All earnings, interest, and, yes, investment returns are tax-free.
- Any withdrawals for qualified medical expenses are tax-free. Plus, once you reach age 65, all non-medical withdrawals are taxed at your current tax rate, just like a traditional IRA. (If you withdraw money for non-medical expenses before you’re 65, then there’s a 20% penalty.)
Should you delay enrolling Medicare?
Whether you should delay enrollment in Medicare so you can continue contributing to your HSA depends on your circumstances. If you work for a small employer (fewer than 20 employees), you typically need to take Medicare when you first qualify even though you will lose the tax advantages of your HSA. Health care coverage from small employers pays secondary to Medicare. This means that if you fail to enroll in Medicare when you are first eligible, you may have little or no health coverage. Health care coverage from large (20 or more employees) employers pays primary before Medicare so you may not need to have Medicare in order to pay your health expenses. This means that if you are currently working for a large employer and you wish to decline Medicare Part B, you can do so and enroll in Part B later when you lose your current employer coverage. [Read more about working past age 65.]
Should you delay collecting your Social Security?
When you are collecting on your Social Security benefit you are automatically enrolled in Medicare Part A and Part B when you turn 65. As long as you are not accepting Social Security benefits, you can choose to decline Part A, which preserves your HSA tax benefit. As soon as you want to stop contributing to the HSA (and are if you are still currently working) you can enroll in Part A and get 6 months of retroactive coverage.
Remember that if you delay enrollment in Medicare when you are first eligible, you must enroll when you lose your current employer coverage.
If you are not collecting Social Security retirement benefits when you turn 65, you must actively enroll yourself during your initial enrollment period. You can enroll by calling your local Social Security office or call 800-772-1213. You can also go to www.ssa.gov for more information. Whether you are enrolled in Part A and Part B automatically or you enroll yourself, you cannot continue to contribute to an HSA once you have Medicare.
What if you enroll after age 65?
If you do not enroll in Medicare when at age 65, you must take special precautions if and when you do decide to collect Social Security benefits (either while working or when you retire). You need to be sure to stop all contributions to your HSA up to six months before you collect Social Security. This is because when you apply for Social Security, Medicare Part A will be retroactive for up to six months (as long as you were eligible for Medicare during those six months). If you do not stop contributing the six months before you apply for Social Security, you may have a tax penalty for the dollars that were contributed during that time. The penalty is because you were not supposed to put money into your HSA while you had Medicare.
No matter how long you choose to work, there’s no reason not to take advantage of the benefits you’ve earned. Keep in mind, this information is no substitute for an individualized consultation. You can Contact Me to schedule an appointment and we can sit down and talk about your individual needs and answer any of your questions. There is no cost or obligation to talk or meet with me. I would be glad to talk to you and answer any questions you have. You can reach me toll free at (866) 976-9038 or (207) 370-0143. CLICK HERE if you would prefer to e-mail me. I am looking forward to answering your questions and helping you.