If you are approaching Medicare eligibility and have a Health Savings Account (HSA), it is important to understand how Medicare enrollment will impact your HSA.
This blog answers the following common questions related to Medicare and HSA Contributions:
- Can I contribute to my HSA if I'm enrolled in Medicare?
- When do I have to stop making HSA contributions if I'm enrolling in Medicare?
- What are the consequences of contributing to HSA after Medicare enrollment?
- Can I still use my HSA when enrolled in Medicare?
- Can I delay enrolling in Medicare to continue contributing to my HSA?
No. Neither you nor your employer can make any new contributions to your Health Savings Account once you have enrolled in Medicare. In order to be eligible to make HSA contributions, you cannot have any health insurance other than a high-deductible health plan (HDHP). Medicare Part A, which covers hospital stays and certain other inpatient care, is usually free for people who have paid into the program through payroll taxes. Individuals who are enrolled in Medicare Part A and/or Part B (which covers doctor visits and outpatient care) are not eligible to contribute to an HSA, as they are considered to have “other health insurance” that disqualifies them from participating.
When do I have to stop making HSA contributions if I'm enrolling in Medicare?
Under current regulations, when applying for Medicare Part A or Part B you automatically receive 6 months of retroactive coverage (but not before the month of turning age 65). For this reason, it is advised that you and your employer cease contributions to your HSA at least 6 months prior to applying for Medicare.
What are the consequences of contributing to HSA after Medicare enrollment?
If your Medicare coverage overlaps with when you made HSA contributions this may lead to potential tax penalties like payment of back taxes, excise taxes, and additional income taxes on your tax-free contributions and accumulated interest.
Can I still use my HSA when enrolled in Medicare?
Although you won't be able to contribute any new funds to your HSA once enrolled in Medicare, you can still utilize the tax-free funds in your HSA to pay for qualified medical expenses. You can use your Health Savings Account to pay for certain healthcare expenses that are not covered by Medicare Part A and Part B, such as long-term care services and dental and vision care. Additionally, HSA funds can also be used to pay for Medicare premiums, deductibles, copayments, and coinsurance. This can be especially helpful for individuals who have limited income and struggle to pay for these costs out-of-pocket.
Can I delay enrolling in Medicare to continue contributing to my HSA?
Yes, but keep in mind that by delaying your Medicare enrollment while still working and contributing to your HSA, you will also need to postpone collecting Social Security retirement benefits. This is because individuals who are already receiving Social Security benefits when they become eligible for Medicare are automatically enrolled in Medicare Part A, and declining it is not possible. To continue contributing to your HSA, you'd need to delay Social Security benefits and decline Part A.
Deciding whether or not to delay Medicare enrollment to maintain HSA contributions is a decision that hinges on your individual circumstances. If you are employed by a company that has 20 or more employees, you have the option to enroll in Medicare at a later time while still being able to contribute to your HSA without any penalties. However, if you are employed by a company with fewer than 20 employees, enrolling in Medicare may be necessary in order to have primary insurance coverage, but this could result in losing the tax benefits associated with your HSA.
With all of this in consideration, it's important to understand the ins and outs of both HSAs and Medicare. Once you enroll in Medicare, you are no longer eligible to contribute to an HSA, but you can still use the funds for qualified medical expenses. Furthermore, if you are contemplating delaying Medicare enrollment so that you may continue to contribute to your Health Savings Account you must remember this means also postponing social security benefits. Therefore, you should carefully evaluate your healthcare needs and costs to decide if Medicare or a High Deductible Health Plan with an HSA is the best fit for your situation. And remember, it is important to stop contributing to your HSA at least six months prior to enrolling in Medicare to avoid potential tax penalties.
It is essential for anyone looking to maximize their benefits upon retirement age to review current legislation and weigh all options available to them. At the end of the day, it's important no matter what that you do your research thoroughly before making any decisions so you can make sure you're taking advantage of the best possible options available. For this reason, it's always best to consult with a professional tax advisor to ensure that you're fully informed and compliant with any relevant regulations. By gaining a clear understanding of the rules and benefits of each option, you can make an informed decision that puts you on the path to better health and financial security.
Connor & Gallagher OneSource (CGO) is an insurance broker based in Lisle, Illinois since 1997. We serve organizations in the areas of business insurance, employee benefits, HR & payroll, and employer sponsored retirement plans. We have consultants and service teams specializing in each of these areas.
This blog is for educational and/or informational purposes only. It doesn’t represent, and shouldn’t be construed as a substitute for, professional advice. Please consult your personal legal, financial, or tax counsel to discuss your personal situation