Do you have questions about HSAs and Medicare? Listen up and we're going to explain HSAs and Medicare in one minute.
We hear this all the time. What do I do with my HSA?
Number one, HSA stands for a health savings account. This is different from a FSA, a flexible spending account. FSAs have no bearing on your Medicare.
Basically, there are two situations in which both the employer and employee need to stop making contributions to the health savings account.
The first situation is if you take Medicare at age 65. You'll need to stop your HSA contributions by the age of 65. The second situation is if you decide to work beyond age 65 and take Medicare later. You will need to turn off those contributions six months prior to applying for Medicare.
Now, it is important to know that even after you stop making contributions to the health savings account, the dollars that are already in there are still yours. You can still use them for all the appropriate medical expenses.
If you have a spouse, you can contribute to an HSA on their behalf, even if they're on Medicare. But those situations can get complicated very quickly. That's why it's important to give us a call or click the below to clarify. You'll be glad you did.
Many employers offer employees a Health Savings Account (HSA) as part of their health benefits. HSAs are financial accounts made available to employees, so they may contribute funds without paying any taxes on them. All funds that are put into an HSA must be used for qualified medical expenses. If the funds are used for any other purpose, the money will be taxed.
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: it depends on when you apply for Medicare.
If you apply for Medicare before your 65th birthday 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, Medicare Part A includes up to six months of retroactive coverage. In other words, Medicare Part A will cover your applicable past health services once 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 plan premiums. However, it's important to note that premiums for Medicare Supplement plans are not eligible to be paid with HSA dollars.
On your employer group coverage, both you and your employer can contribute funds to your HSA. You do not pay taxes on HSA deposits. The federal government sets annual limits for 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 actions 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 you retire and 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.
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 health coverage. Your employment status does not impact your Medicare eligibility and vice versa.
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 for Medicare, 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.
Working past 65 may mean that you decide to defer your Medicare enrollment. Depending on your personal situation, you may consider delaying Medicare enrollment if you are 65 years old (or older) and work for an employer with 20 or more employees, or if you are under age 65 and work for an employer with more than 100 employees.
It’s possible that one person’s given situation could mean that contributing to an HSA with pre-tax dollars is the right fit for their health care needs, while for another individual, it may mean that enrolling in Medicare at age 65 is the right choice.
If you decide to defer your enrollment in Medicare when you are first eligible and continue with your employer-provided health insurance, it is important to know that this decision impacts your ability to collect Social Security benefits. You must stop all contributions to your HSA up to six months before you sign up for Medicare Part A. This is because Medicare Part A provides six months of retroactive coverage from the time you apply for Social Security benefits, assuming you were eligible for Medicare during those six months. Depending on the date you enroll in Part A, any contributions you make to your HSA after enrolling will likely be subjected to a penalty because you are not able to contribute to an HSA if you are enrolled in Medicare, even retroactively.
If you’d like clarification on how to handle your health savings account as you approach Medicare enrollment or after you enroll, our local advisors in Cincinnati and Dayton are standing by to help. Simply call 866.939.8436.
Are you a RetireMed client? You can reach out to your client advisors by sending an email to client@retiremed.com or by calling 877.222.1942.