When will you become enrolled in Medicare? And how should that influence your use of a Health Savings Account (HSA)?
Even though both HSAs and Medicare govern your medical-related finances, these two programs are overseen by two different federal agencies. HSAs are managed by the Department of the Treasury, while Medicare is run by the Department of Health and Human Services. Although the two programs overlap, the rules governing them do not, which can leave participants understandably concerned and confused about what to do with their HSA once they enroll in Medicare.
Understanding HSAs (and How They Affect Medicare Coverage)
Before we discuss Medicare, it’s vital to understand what it means to be HSA eligible. You can have an HSA and put money into it so long as you meet the following eligibility requirements:
- You’re covered by an HSA-qualified medical plan
- You are not a tax dependent
- You don’t have conflicting coverage
You can start an HSA at any time in your life. However, as a U.S. citizen, you become eligible for Medicare when you turn 65, which is considered ‘conflicting coverage.’ If you choose to enroll in the program, you are no longer eligible to hold an HSA. If you don’t enroll in Medicare when you turn 65, you’re still able to open and contribute to an HSA, so long as you meet the criteria above.
Upon qualifying for Medicare, you cannot make any more contributions to an HSA going forward, nor can anyone else contribute on your behalf. If you automatically enroll in Medicare when you turn 65, you can no longer contribute to your HSA as of the first day of the month you turn 65. For instance, if you’re turning 65 on March 15th, your last HSA contribution should be for the month of February. If your birthday is March 1st, your last contribution should be for January. If your employer takes your HSA contributions directly out of your salary, let them know that you are enrolling in Medicare.
Enrolling in Medicare
However, not everyone chooses to enroll in Medicare as soon as they become eligible. If this is true for you, you’ll have to sign up for coverage retroactively—but be cognizant that this comes with its own set of rules and restrictions.
Retroactively enrolling in Part A Medicare involves a six-month retroactive coverage plan, and you should anticipate and arrange for it accordingly.
Enrolling in premium-free Part A within six months of turning age 65 will trigger retroactive Part A coverage, which becomes effective the month of your 65th birthday—or the month prior, if your birthday is on the first. Enrolling in premium-free Part A more than six months after turning 65 will make Part A coverage retroactive for six months (but no earlier than the month one turns 65).
If you intend to enroll in Medicare, you should plan ahead: select the date you would like to receive Medicare coverage and work backward from that point. You should expect to stop contributing to your HSA during the preceding six-month period or calculate them for partial year HSA eligibility.
A Case Study
Take Maria, for instance. At 67, Maria chooses to delay her enrollment in Medicare because she’s still working and is covered by her employer’s group plan. She enhances her employer coverage by opening and making maximum annual contributions to an HSA. At age 67, Maria retires and chooses to enroll in Medicare. She actively enrolls in July, which means that she’ll be retroactively enrolled in Part A by January. In November and December of her retirement year, Maria is eligible to contribute to her HSA ([the maximum HSA contribution allowed for the year ÷ 12] × 2 months of eligibility). Maria would have until February 15 of next year to make her allowable two-month HSA contribution for this year.
Retroactive coverage in Medicare Part A could also affect those whose HSA contributions are subject to any testing period. Suppose an individual ceases to be HSA eligible during a testing period. In that case, a portion of the HSA contributions made will be “recaptured,” included in your total yearly income, and subject to an additional 10 percent tax penalty.
Once enrolled in Medicare, you can no longer make contributions to your HSAs. Any residual funds in the account can be taken as tax-free distributions to pay for qualified medical expenses. Such costs include Medicare Part B and Part D premiums, out-of-pocket medical costs, dental and vision costs, and an employee’s share of retiree medical insurance premiums, to name a few. However, the money cannot be used to purchase a Medigap policy. If you use the money for anything non-medical-related, ordinary income tax will be due on the amount withdrawn, but no penalty applies since the HSA holder is 65 or older.
Planning for the Transition
If you’re still concerned about transitioning from HSA to Medicare coverage, speak with your advisor today to discuss your options. At URS Advisory, we help individuals and families on the Treasure Coast and throughout the Palm Beaches to effectively work Medicare coverage into their comprehensive retirement plan. If you or a loved one are in need of guidance, we encourage you to reach out to us. Schedule a call directly through our site or call our office at (561) 594-0100.