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HSA and Medicare: The Contribution Conundrum

Health Savings Accounts (HSAs) were created to help people with high deductible health plans (HDHPs) pay out-of-pocket costs. Contributions to an HSA are pre-tax and can cover any qualifying medical expenses. But if you’re approaching age 65, you may have some questions about your HSA and Medicare. You are likely wondering, “Can I use both?”

The Employee Benefit Research Institute estimates that HSA enrollment is between 20 and 24 million. Nearly one third of the workforce is age 65 to 75, so there’s a healthy number of Medicare-eligible people with HSAs. However, HSAs were designed to work in conjunction with HDHPs – not Medicare. This is a growing problem, so we’d like to clear up some confusion by reviewing a few HSA and Medicare rules.HSA-and-Medicare

Contributing Factors
Prior to turning 65, you may contribute to an HSA up to the IRS maximum if you’re enrolled in an HDHP and do not have other health insurance. When you turn 65, you can continue making HSA contributions as long as you don’t enroll in Medicare. Once enrolled, all HSA contributions must cease in order to avoid tax penalties.
If you’re 65 or older and questioning your HSA and Medicare enrollment, consider the following points:

  • If your employer has less than 20 employees, you may need Medicare in order to have primary health insurance. Coverage from an employer of this size pays secondary to Medicare, so failure to enroll could have a serious financial impact. Check with your medical carrier to verify how they pay. Remember, when an employee enrolls in Medicare, all contributions to an HSA must cease.
  • If you take Social Security prior to age 65, you’re automatically enrolled in Medicare Parts A and B. If you continue to work, you can delay Part B enrollment if you are on a creditable group health plan. The only way to be removed from Part A, however, is to withdraw from Social Security. Many employees (and employers) aren’t aware of this auto enrollment and continue to make HSA contributions.
  • If you enroll in Part A after turning 65, benefits are retroactive six months. However, your effective date can’t be any earlier than the first day of the month you turned 65. Many people don’t know this and continue to make HSA contributions, which could cause tax issues. Consider the following example:
    • Employee is retiring December 31, 2019 and is 67 years old
    • Employee elects Medicare for January 1, 2020
      • Part A will be effective July 1, 2019
      • Part B will be effective January 1, 2020
    • To be compliant with the IRS, both employee and employer HSA contributions need to stop on June 30, 2019
  • An HSA can’t be frontloaded, but prorated contributions can be made. To reference the previous example, the following prorated contributions would be acceptable if contributions stopped on June 30:
    • Up to $2,250 for an individual ($3,500 + a $1,000 catch-up contribution divided by 6/12 = $2,250)
    • Up to $4,000 for a family ($7,000 + a $1,000 catch-up contribution divided by 6/12 = $4,000)
  • Once enrolled in Medicare, more options are available to use existing HSA funds. Not only can you use them for qualified medical expenses, but also for Parts B & D, as well as Medicare Part C (Medicare Advantage Plans) premiums.

(For a detailed look at Medicare Parts A, B, C and D, please see, “Understanding Medicare: Preparing for Age 65,” featured in Issue Three of our 2018 SilverLink.)

Make Informed Decisions
Understanding the relationship between your HSA and Medicare can be a challenge. It’s crucial to make informed decisions to avoid serious financial and tax consequences. We’ve provided a flow chart on the following page that may answer some additional questions. For the most comprehensive guidance, we encourage you to seek advice from a tax professional or financial advisor.HSA-and-Medicare-Chart

This article originally appeared in the 2019 | ISSUE TWO of the SilverLink magazine, under the title “HSA and Medicare: The Contribution Conundrum.” To receive a complimentary subscription to the SilverLink magazine, sign up here.

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