Qualified High Deductible Health Plans (HDHP) paired with Health Savings Accounts (HSA) are gaining popularity with employers. An HSA offers individuals and families an opportunity to contribute pre-tax dollars into an account that can be used to pay for Qualified Medical Expenses. Sometimes, employers will also contribute funds to their employees’ HSA accounts.
When Medicare comes into the picture, the rules around HSA contributions can cause confusion and financial headaches. We’ve identified answers to five key questions we often hear from our clients to assist in understanding how Medicare affects the ability to contribute to and use HSA dollars.
1. Can I continue to contribute to my HSA when I turn 65?
The short answer is . . . it depends on your situation. Read the examples below to identify the scenario that best applies to you:
Ex. 1 – Hank is actively working for a company that has more than 20 employees and is also collecting Social Security. When he turns 65, he will automatically be enrolled in Part A & B of Medicare. Even if he wants to continue working, Hank will lose the ability to contribute to his HSA and should stop his contributions when Medicare goes into effect. (He can, however, defer Part B of Medicare until retirement because his group plan is the primary payer on his claims.)
Ex. 2 – Sandy is actively working for a company that has more than 20 employees and is not receiving Social Security. She is not required to enroll in Medicare A or B. As long as Sandy keeps working (and is enrolled in a Qualified HDHP), she can continue her HSA contributions until 6 months prior to retirement/enrollment into Medicare. *More on this in a bit*
Ex. 3 – Bruno is actively working for a company that has fewer than 20 employees. Whether or not Bruno is collecting Social Security, he needs to have Medicare A & B and cease HSA contributions when he turns 65, even if he continues to work. For employer groups with under 20 employees, Medicare is the primary payer of claims. This situation also applies to individuals who have coverage through the healthcare exchange or direct with a carrier.
2. What should I do with my HSA when I’m ready to retire?
First, feel great that you have a nest egg for your medical expenses in your HSA! Second, plan ahead. When you apply for Medicare A & B after the age of 65, Medicare Part A backdates 6 months. Your HSA contributions must end when you get either part of Medicare.
3. Can I make the maximum contribution for the year ahead of the 6-month backdating?
Unfortunately, no. Your contributions must be prorated based on the effective date of your Part A. Here’s an example:
Kim is retiring October 31 and needs to enroll in Medicare A & B for the first time. Part A will backdate to May 1 while Part B will take effect November 1. In 2023, the maximum contribution for a single individual is $3,850. Since Kim is over the age of 55, she can contribute an additional $1,000 per year. However, since her Medicare Part A is effective May 1, the most Kim can contribute to her HSA this year is $1,616.67.
$3,850 + $1,000 = $4,850 (maximum contribution with age 55+ catch up)
$4,850 ÷ 12 (months) = $404.17/month
$404.17 x 4 (months) = $1,616.67
4. Will I face a penalty for not taking Part A and B?
There is no penalty for deferring Parts A & B of Medicare as long as you (or your spouse) are actively working and covered under a group health plan. Be careful! If you call Social Security, they may advise you to enroll in Part A since there is no cost to it. They will probably not ask if you are contributing to an HSA.
5. Where can I turn for more help?
As well-intentioned as your friends, co-workers and relatives are, they may not understand the rules surrounding HSA accounts and Medicare. You can always call your Medicare Benefits Consultants at Walsh Duffield for guidance and answers to your questions. Call (716) 362-7316 or visit walshduffield.com/medicare.