While we cope with the lifestyle changes brought on by the coronavirus outbreak, we still need to be our own healthcare advocates and prepare for our next life stage.
As you know, health savings accounts (HSAs) offer account holders a triple-tax-advantage. Your contributions are not subject to income taxes, the money grows tax-free, and you can use the money tax-free for qualified healthcare expenses at any time.
You can still have an HSA once you reach age 65. But it’s important to know what changes and what doesn’t.
Here are a few questions and answers to some frequently asked Medicare and HSA inquiries.
Q: I continue to have group health insurance coverage with my employer. I’m eligible for Medicare Part A hospital insurance when I turn 65. How will this affect my HSA?
Government rules state you must participate in a high-deductible health plan (HDHP) to contribute pre-tax dollars to your HSA. Medicare is not an HDHP, so you can no longer contribute to your HSA once you reach Medicare eligibility age.
Medicare is not an HDHP, so you can no longer contribute to your HSA once you reach Medicare eligibility age.
However, you can still spend your HSA funds on eligible medical expenses and reap all the tax benefits you usually do with your HSA, even after you become Medicare-eligible.
So as long as you’re still eligible to contribute to your HSA, take advantage! In 2020, the contribution limit for those aged 55+ is $4,550 ($9,100 for you and a spouse, if you both have HSAs). Under the age of 55? Then the limits are is $3,550 for single and $7,100 for family plans.
Q: What can I use my HSA funds for when I’m retired and on Medicare?
For most of us, our health care costs will go up as we get older. And indeed, this reality is a major reason why HSAs were created—to help us save up for health care costs in retirement.
You can use your HSA funds tax-free to pay for all eligible out-of-pocket health care expenses during this time. The list is long and even includes expenses like dental and vision, copays and prescriptions… things that might not be covered under regular Medicare.
And hey, a bit more good news! Qualified medical expenses were recently expanded to include over-the-counter medicines, menstrual care products, and telemedicine visits, including virtual mental health appointments, due to the CARES (Coronavirus Aid, Relief and Economic Security) Act.
You can also use your HSA funds to pay for both Medicare Part B and Part D drug benefit premiums and copays, but not for supplemental Medigap premiums. Don’t know the difference? Medicare Part B is your “insurance” part of Medicare, while Part D is prescription drug coverage. Many people buy combined Part B and D plans called Medicare Advantage. Anything else is a Medicare Supplement, or Medigap, plan.
You can have Medigap or Medicare Advantage, but you can’t have both—and you can’t pay your premium from your HSA for Medigap.
Q: I’ve heard I should stop contributing to my HSA six months before I receive Medicare Part A hospital insurance. Why?
It gets a little complicated, so stick with us. Unless you’re permanently disabled, the earliest you can get Medicare is age 65. However, you can sign up for Medicare (and Social Security) six months in advance of turning 65—but your coverage still doesn’t start until the month of your 65th birthday.
You can also postpone your enrollment into Social Security and Medicare by several years, which means you would still be HSA-eligible past age 65 and able to contribute to your HSA.
But here’s the catch: If you postpone your enrollment past age 65, once you do finally enroll, your Medicare Part A becomes active with up to a six-month retroactive period. Anything you contribute to your HSA during that retroactive period is not an eligible contribution and you will be taxed and face penalties on that amount.
Here are four scenarios that illustrate this process:
- You enroll in Medicare six months prior to your 65th birthday, which is in May. Your last HSA contribution should be the April before your birthday.
- You postpone your enrollment in Medicare until you are 66 years old. Your last HSA contribution should be the month in which you are 65 years, 6 months old.
- You postpone your enrollment in Medicare until you are 65 years, 3 months old. Your Medicare coverage is retroactive three months because you cannot get Medicare until you turn 65. Your last HSA contribution should be in the month that you turned 65 years old.
There you have it, clear as mud. 😉
And here’s the most important part: once you’re enrolled in Medicare Part A, you are permanently unqualified to contribute to your HSA. That’s because there’s no backsies, if you will, with Medicare. And, as aforementioned, because it’s not an HDHP, you no longer qualify and never will again.
Q: What if I delay my Medicare enrollment?
If you decide to enroll in Medicare after you’ve already turned 65, you’re authorized to up to six months of retroactive benefits.
But be aware: the implications around your HSA remain! This is to say that if you don’t stop your HSA contributions at least six months prior to enrolling in Medicare, you may incur some ugly tax penalties.
If you would like to explore more ways an HSA can maximize security in your retirement, take a look at how your HSA can complete your retirement plans here.