Before You Continue: This article is intended for individuals who currently contribute to a Health Savings Account (HSA) or expect to contribute in the future.
If you do not have an HSA, some of the contribution rules discussed below may not apply to your situation.
Any Medicare enrollment ends HSA contributions, though you can still spend the balance. Taking Social Security enrolls you in Part A automatically. If you delay Medicare past 65, stop contributing six months before you enroll. As you approach the age of 65 while still working, you may be considering the benefits of Medicare compared to your employer’s group health coverage. One of the most common questions we get is, “How does Medicare affect HSAs?” We’ll outline what the different parts of Medicare mean for Health Savings Account contributions, and how to weigh the decision between enrolling in Medicare while working.
What is an HSA?
An HSA is a tax-advantaged savings account designed to help individuals with
high-deductible health plans (HDHPs) save for medical expenses. Contributions made to an HSA are tax-deductible, earnings grow tax-free, and withdrawals used for qualified medical expenses are also tax-free.
You can think of this as a special savings account just for medical expenses. These
qualified expenses include things like doctor visits, prescriptions, and even some dental and vision care. Because HSAs are only available with high-deductible health plans, you’ll pay more out of pocket before your insurance kicks in.
Important Note: If you are already enrolled in any part of Medicare, you can no longer contribute new funds to an HSA. However, you may continue to use existing HSA funds for qualified medical expenses.
Medicare Part A and HSA
Medicare Part A (Hospital Insurance) is considered “disqualifying coverage” for HSA
purposes. Per IRS regulations, once you are enrolled in any part of Medicare, you can no longer contribute to an HSA.
However, Medicare enrollment can be different depending on whether you are still
working or already drawing Social Security benefits. See the following scenarios below:
Medicare Part A “automatic enrollment” and Social Security
If you have already started receiving Social Security benefits, the government will
automatically enroll you in Medicare Part A when you turn 65.
Once you are receiving Social Security, you cannot decline Part A.
You must stop all HSA contributions (including employer contributions) before your Part A coverage begins to avoid tax penalties.
What to do about HSAs if you are still working (and not on Social Security)
If you are 65 or older, still working, and covered by a qualifying High-Deductible Health Plan (HDHP), you have more flexibility:
Your employer can continue to contribute to your HSA as long as you have not officially enrolled in any part of Medicare.
If you haven’t applied for Social Security or Medicare yet, you don’t need to call Medicare to “decline” Part A. You simply delay your application.
You will not face a late-enrollment penalty for delaying Part A or Part B as long as you have “creditable coverage” through your (or your spouse’s) current employer.
What is the 6-month backdating rule for Medicare and HSAs?
The 6-month backdating rule is important to know, as this is the specific time period in which you have to stop contributing to your HSA, even before you actually enroll in
Medicare Part A or Part B. When you enroll in Part A after turning 65, your coverage is backdated up to six months (though never earlier than the month you turned 65). If you contribute to your HSA during that backdated period, you could face tax penalties. A safe rule of thumb: stop HSA contributions six months before you plan to enroll in Medicare or file for Social Security.
Delaying Medicare Part A
If you wish to continue contributing to your HSA and want to delay your Medicare Part A enrollment, you must meet specific requirements. You need to be eligible for Social Security benefits but not yet have filed for them. If you are not drawing Social Security, you can maintain your HSA eligibility and continue contributing until you decide to stop working.
Medicare Part B and HSA
Medicare Part B (Medical Insurance) is optional and covers services such as doctor
visits, outpatient care, and medical supplies. However, enrolling in Medicare Part B ends your ability to contribute to a Health Savings Account, because enrollment in any part of Medicare ends HSA eligibility.
Note: You can’t use HSA funds to pay for Medigap premiums.
HSA and Prescription Drug Coverage
If you enroll in Medicare prescription drug coverage (Part D), you are no longer eligible to contribute to your HSA. Part D is Medicare coverage, and enrollment in any part of Medicare ends HSA eligibility. However, you can still use your existing HSA funds to cover prescription drug expenses.
Avoid HSA Contribution Penalties
Confirm whether you are enrolled in any part of Medicare, including Medicare Part A. Enrollment in any part of Medicare ends your eligibility to make HSA contributions.
Determine whether you are receiving Social Security benefits. If you are receiving Social Security, you are generally automatically enrolled in Medicare Part A and can no longer make HSA contributions.
If you plan to enroll in Medicare after age 65, stop HSA contributions at least six months before your Medicare enrollment date or before applying for Social Security benefits. Medicare Part A may be applied retroactively for up to six months, which can create excess HSA contributions and potential tax penalties.
Review any employer HSA contributions to ensure they also stop when your HSA contribution eligibility ends. Employer contributions are subject to the same Medicare eligibility rules.
Continue using your existing HSA funds for qualified medical expenses after Medicare enrollment. While you can no longer contribute to the account, you may continue to spend existing HSA funds tax-free on qualified expenses.
Enrolling in Medicare can have implications for your Health Savings Account, depending on the specific Medicare parts you choose to enroll in. It is crucial to carefully consider your options, taking into account your current HSA contributions, employer contributions, and medical coverage needs to make an informed decision that aligns with your financial goals and healthcare requirements.