Introduction
Health Savings Accounts (HSAs) are tax-advantaged accounts that individuals with high-deductible health plans (HDHPs) can use to save for future medical expenses. As individuals approach age 65 and become eligible for Medicare, it's crucial to understand how enrolling in Medicare affects their ability to contribute to an HSA. Failure to comply with the rules can lead to tax penalties, so knowing how these two systems interact is essential for financial planning.
Common HSA Myth
A widespread misconception is that once you turn 65, you can no longer contribute to a Health Savings Account (HSA). However, this isn't entirely accurate. The ability to contribute to an HSA is not directly tied to turning 65, and in fact isn't even a Medicare rule. Instead, it is an IRS rule that dictates whether someone in general is eligible to contribute to an HSA. The key factor is whether you're enrolled in a high-deductible health plan (HDHP) and have no other disqualifying health coverage. Medicare would be considered a disqualifying coverage. You will want to consult a tax professional, but as long as you would otherwise be eligible to contribute to an HSA and have not enrolled in either Medicare Part A or Part B, you may still be eligible to contribute to your HSA beyond age 65.
Understanding the 1/12 Contribution Rule
The IRS has specific guidelines regarding HSA contributions, including the "1/12th rule." This rule means that for each month you're eligible, you can contribute 1/12th of the annual HSA contribution limit. If you're only eligible for part of the year, your contribution limit is prorated based on how many months you were HSA-eligible. For example, if you enroll in Medicare for July first (7/1) you may be eligible to contribute 6/12ths or 1/2 of the annual HSA contribution limit. Some people wrongly assume they can contribute the full of the annual HSA contribution amount as long as they do it before they enroll in Medicare. That would not be true.
HSA Eligibility Requirements
To contribute to an HSA, certain criteria must be met:
- Enrollment in a high-deductible health plan (HDHP): An individual must be covered under an HDHP to contribute to an HSA.
- No other health coverage: You cannot have other health coverage, such as Medicare, that disqualifies you from HSA contributions.
Medicare Enrollment and HSA Contributions
Medicare impacts HSA contributions because, once enrolled in any part of Medicare, you can no longer contribute to an HSA. Here’s how it works:
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Automatic enrollment in Medicare Part A: If you are already receiving Social Security benefits when you turn 65, you will be automatically enrolled in Medicare Part A. Once enrolled, you are no longer eligible to contribute to an HSA, even if you continue working and are covered under an employer’s HDHP.
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Impact of enrolling in any part of Medicare (A, B, C, or D): Enrolling in any part of Medicare (A, B, C, or D) disqualifies you from contributing to an HSA. However, you can continue using existing HSA funds for qualified medical expenses, including paying for Medicare premiums (excluding Medigap premiums).
Key Considerations
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Timing of Medicare enrollment: It’s essential to carefully time your Medicare enrollment if you wish to continue contributing to an HSA.
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Six-month lookback period for Medicare Part A: When you enroll in Medicare Part A, it retroactively covers the six months before your application date (but not before your 65th birthday). If you continue contributing to an HSA during that six-month lookback period, you may face tax penalties. It's advisable to stop contributing to your HSA at least six months before applying for Medicare to avoid complications.
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Continuing to work past age 65: If you are still working and have employer-provided health coverage, you can delay Medicare enrollment (and remain HSA-eligible). However, when you eventually apply for Medicare, the six-month lookback for Part A will apply.
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Delaying Social Security benefits: If you delay claiming Social Security benefits, you can also delay Medicare enrollment and continue contributing to an HSA. Once you apply for Social Security benefits, you will be automatically enrolled in Medicare Part A, which will affect your HSA eligibility.
Examples
- Example 1: Automatic Medicare Enrollment
- John turns 65 and is already receiving Social Security benefits. He is automatically enrolled in Medicare Part A and, therefore, must stop contributing to his HSA immediately.
- Example 2: Delaying Medicare Enrollment
- Sarah continues working past age 65 and delays her Medicare enrollment to keep contributing to her HSA. She must ensure she stops HSA contributions at least six months before she applies for Medicare to avoid penalties.
- Example 3: Spouse on Medicare
- Tom, age 63, contributes to his HSA through his employer's HDHP. His wife is 65 and enrolls in Medicare. Tom can continue contributing to his HSA up to the family maximum, as long as he remains enrolled in an HDHP.
Sources
IRS Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans https://www.irs.gov/publications/p969
Medicare.gov: Health Savings Accounts (HSAs) and Medicare https://www.medicare.gov/basics/costs/medicare-and-health-savings-accounts
Social Security Administration: Medicare Information https://www.ssa.gov/benefits/medicare/
Journal of Accountancy: Medicare's tricky rules on HSAs after age 65 https://www.journalofaccountancy.com/issues/2021/jul/medicare-rules-on-hsa-after-age-65.html
Centers for Medicare & Medicaid Services: Medicare and You 2023 https://www.medicare.gov/publications/10050-Medicare-and-You.pdf