A health savings account (HSA) is a financial account available for health care costs. Typically, if you have a high-deductible health plan, your benefits include an HSA. But if you plan to enroll in Medicare, when should you stop your HSA deposits?
The short answer:itdepends on when you apply for Medicare.
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Medicare Coverage and Your Health Savings Account
If you apply for Medicare before your 65thbirthday month, you can continue to contribute to your HSA with your employer through the day prior to your Medicare effective date. If you wait to sign up for Medicare after you turn 65, when you eventually enroll, MedicarePart Aincludes up to six months of retroactive coverage. In other words, Medicare Part A will cover yourapplicable past health servicesonce your coverage goes into effect.
For example, if you qualify for Medicare in April but wait to apply until October of the same year, Medicare will assist with covered health care expenses dating back to April. But because you are retroactively “enrolled” in Medicare for an extra six months, you could be penalized after the fact if you contribute to your HSA during those months. It’s important to note that your annual HSA contribution limit will be prorated by the number of months you are eligible to contribute, which is the number of months you do not have Medicare Part A or Part B during that calendar year. To avoid paying penalties, you must ensure your contributions fall within the prorated annual contribution limit. The specific date to stop your HSA contributions will depend on when you apply for Medicare.
Once you apply for Medicare, you can no longer receive new HSA deposits from your employer. However, you can use your existing HSA funds to pay for Medicare costs even after you enroll. As long as you withdraw from your account to cover qualified Medicare expenses, your money is not taxed. This applies to deductibles, copays, coinsurance, and Part B or prescription drug planpremiums.
If You’re Retiring and Enrolling in Medicare
First, it's important to remember that retirement is NOT a requirement for Medicare. On youremployer group coverage, both you and your employer can contribute funds to your HSA. You do not pay taxes on HSA deposits. The federal government setsannual limitsfor HSA deposits. You can withdraw money from this account tax-free, as long as it is used for covered medical expenses.
Keep a close eye on your HSA deposits—especially the nearer you are to your retirement. Both you and your employer must take action regarding your HSA. Make a clear plan with your employer about when exactly you plan to retire and get off employer health care coverage. Not only will this smoothen your transition to Medicare—it will also help you avoid potential penalties.
When enroll in Medicare, you can use your existing HSA funds to pay for health care services. While you can’t deposit new funds, you can access all the money in your HSA tax-free, so long as you use it for approved expenses.
If You’re Still Working When You Enroll in Medicare
You can sign up for Medicare without retiring from your job. If you are still working and eligible for Medicare, you can forego your employer's health coverage. Your employment status does not impact your Medicare eligibility and vice versa. Learn more about working past 65 and Medicare.
However, once you enroll in Medicare—even if you are still working—the guidelines for contributions to your HSA remain the same. If you apply for Medicare prior to your 65th birthday month, you can contribute to your HSA up until the day before your Medicare effective date. If you apply after that time, you should plan to stop depositing funds to your HSA up to six months prior to signing up for Medicare because you could face penalties if you continue to contribute.
Decide when you plan to retire and when you plan to sign up for Medicare; those may not be the same date. If you plan to enroll in Medicare within the calendar year of your retirement, you can pro-rate your HSA deposits to avoid exceeding the limit and receive the maximum value. Your employer must also stop contributing HSA funds once you sign up forMedicare, regardless of how long you plan to continue working. If you’ve already contributed to your HSA while enrolled in Medicare, our advisors can explain the steps you should take to get back on track.
Questions about your Health Savings Account?
If you’d like clarification on how to handle your health savings account as you approach Medicare enrollment, our local advisors are standing by to help.
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