A quick guide to HSAs and Medicare
As you approach 65, you are inundated with “Medi-scares”—mailings and phone calls telling you that if you do not enroll you will be penalized.
While this could happen, it’s important to understand your options and the implications behind your decision on whether and when to take Medicare.
An HSA is an account for individuals enrolled in high-deductible health plans (HDHPs) prior to Medicare.
An HSA works by collecting contributions from the covered individual, and the contributions are not taxed before or after use when used for qualified medical expenses.
We’ve put together an HSA cheat sheet for how to best handle your or your family member’s Medicare decision:
How will enrolling in Medicare Part A and/or Part B for the first time affect my HSA?
Having an HSA in general means that the contributions you make will not be taxed before you put money in the account, nor will it be taxed when taken out to be used on qualified medical expenses.
When you enroll in Medicare Part A or B, neither of those coverages qualify as an HDHP. Therefore, you will no longer be able to contribute to your HSA. ‘
The rules regarding HSA withdrawals over age 65 are also different than those when you are under 65.
However, you can continue to withdraw HSA money for most qualified health expenses.
Should I delay Medicare enrollment so I can continue contributing to my HSA?
This answer is purely circumstantial.
The following are reasons you would and wouldn’t want to delay Medicare coverage based around on having an HSA*:
Reasons to enroll in Medicare right away:
You work for an employer with fewer than 20 employees or do not have creditable RX coverage. In this case, Medicare Parts A and B become primary and you need to sign up even though you are losing the HSA tax advantage.
You are retiring at age 65 and are collecting Social Security benefits. If you plan on drawing Social Security benefits, you will need to stop contributing to your HSA to do so.
Reasons to delay Medicare enrollment:
You are not drawing your or your spouse’s Social Security benefits at this time. This will allow you to continue your HSA contributions and the accompanying tax advantages.
You wish to continue contributing to your HSA.
PLEASE NOTE: You must maintain all three of these qualifying events while over 65 in order to avoid Medicare’s penalty for delaying Parts A&B when you were first eligible:
- You are covered under your or your spouse’s active employer group plan. If you or your spouse are not currently working, then you must sign up for Medicare A&B
- Your employer group plan has 20+ employees on the plan. Employer group plans that are under 20 employees become secondary to Medicare. Therefore, you need to take Medicare A and B as it is your primary coverage.
- Your employer group coverage contains creditable RX coverage. Once over 65, Medicare requires your employer group plan to meet or exceed their standards. This is called “creditable RX coverage.”
Is there anything else I should know if I delay Medicare to continue contributing to my HSA?
If you delay enrolling in Medicare, make sure you know the date you will be enrolling in Medicare or take Social Security benefits ahead of time.
If you are older than 65 and still covered under you or your spouse’s active employer group coverage but plan on starting your Social Security benefits prior to retirement, understand that your Medicare Part A will be automatically backdated six months to when the Social Security benefits kick in. Based on this timing, you would need to prorate the HSA contributions for the year based on when your Part A coverage started.
To prorate your contribution, take the allowed contribution for the year (including any catch-up contribution) and divide it by 12, then multiply it by the number of months for which you can contribute.
For example, if you turn 65 in April, you can contribute January through March—three months. You would multiply your monthly prorated rate by three to get your maximum allowed contribution amount.
Is there a tax penalty if I contributed to an HSA while having Part A and/or Part B of Medicare?
You’ll pay tax penalties if your HSA contributions and your Medicare enrollment overlap. The amount of penalty you’ll pay depends on the situation. Scenarios you might encounter include:
- You’ll be subject to back taxes on any contributions made after your Medicare enrollment date. Your contributions will be added back to your taxable income for the year.
- Your contributions after you’re enrolled in Medicare might be considered “excess” by the IRS. Excess contributions will be taxed an additional 6% when you withdraw them.
- You’ll pay back taxes plus an additional 10% tax if you enroll in Medicare during your HSA testing period. An HSA testing period is the full year after you enroll in an HSA midyear if you make the maximum contributions when you first sign up. So, if you signed up for an HSA in July 2019 and contributed a full year’s amount, your testing period would have ended in January 2021.
If you have any further questions or special circumstances surrounding your coverage that may need a little more help considering your Medicare or health insurance options, please reach out to the Medicare Supplement team at email@example.com.