Medicare and HSAs: What You Need to Know

Are you thinking about enrolling in Medicare or applying for Social Security benefits? If so, this could automatically trigger you to start for Medicare Part A, which would make you ineligible to contribute to your Health Savings Account. The timing of your decision to enroll into Medicare impacts your HSA eligibility, so be careful not to trigger any penalties. Here are a few things you can consider before enrolling into Medicare:

Do I automatically lose my HSA eligibility at age 65?

Simply turning age 65 does NOT change your HSA eligibility. As long as you remain in an HSA-qualified health plan and meet other eligibility requirements (no other health insurance—including Medicare, not someone else’s tax dependent, not covered by an FSA or HRA) then you can continue to contribute to your HSA after age 65.

How does enrollment in Medicare impact my HSA eligibility?

Medicare does not offer a plan which qualifies for an HSA, so enrolling into Medicare disqualifies you from contributing to your HSA. However, you can still withdraw funds from your HSA tax-free for qualified medical expenses.

How does Medicare enrollment affect my HSA contribution limit?

Your annual HSA contribution limit is prorated based on the date you enroll in Medicare. If you enroll mid-month, Medicare backdates your enrollment to the first of the month.

For example, if your birthday is March 14 and you enroll in Medicare on your birthday, your plan start date will be March 1. Assuming you were otherwise HSA-qualified prior to March 1, you can contribute to your HSA for January and February of that year.

Your contribution limit for the year is prorated based on the number of months you were eligible. In this example, you were eligible for two months, your limit is 2/12ths of your annual limit for that year.

Am I automatically enrolled in Medicare at age 65?

No, you will not be automatically enrolled in Medicare unless you are receiving Social Security or Railroad Retirement benefits at age 65, in which case you are automatically enrolled in Medicare. Otherwise, you must sign up to begin Medicare coverage. For more information on Medicare enrollment, visit Medicare & You or call 1-800-MEDICARE (1-800-633-4227).

What happens if I apply for Social Security benefits at age 65?

Receiving Social Security benefits automatically triggers enrollment in Medicare Part A. There is currently no way to opt-out of Medicare when enrolling in Social Security, so be sure to stop your HSA contributions in advance of enrollment to prevent paying any kind of penalties.

What happens if I apply for Social Security benefits beyond my full retirement age?

Full retirement age is the age at which you are eligible for full retirement benefits as defined by the Social Security Administration. If you wait to apply for Social Security benefits until at least six months (or more) after you reach full retirement age, Social Security provides six months of “back pay” retirement benefits.

Applying for Social Security benefits triggers automatic enrollment in Medicare Part A, which will also be backdated by six months, meaning any contributions you made to your HSA in the previous six months will be subject to tax penalties. To avoid this, you should plan to stop contributing to your HSA six months before you apply for Social Security (if you are beyond your full retirement age).

Can my spouse stay HSA-eligible if I enroll in Medicare?

Yes. If your spouse has an HSA-qualified health plan and meets other eligibility requirements, they can continue to contribute to an HSA even if you are covered by Medicare. Additionally, if you enroll in Medicare Part A, continue to work, and continue to cover yourself and your spouse with your employer’s HSA-qualified plan, your spouse can open their own HSA and either of you can make contributions to your spouse’s HSA.

What happens if I contribute to my HSA after enrolling in Medicare?

Contributions made to your HSA after Medicare enrollment must be withdrawn from your HSA and are subject to IRS penalties including payment of income tax on the amount of the contribution, excise taxes (typically 6%), and taxes on any interest or investment gains made on the excess contributions.

Can I continue to pay for qualified expenses with my HSA after enrolling in Medicare?

Yes, throughout your lifetime you can always pay for qualified medical expenses with your HSA, even if you are no longer eligible to contribute to an HSA. These payments remain income tax-free as long as the expense is qualified.

Are there additional qualified expenses I can pay with my HSA once I turn 65?

Yes, in addition to the expenses you can pay with an HSA before you turn 65, once you reach age 65 you can also pay for certain insurance premiums with your HSA. These include premiums for Medicare Parts B and D, Medicare Part C (Medicare Advantage), and certain Medicare supplement plans.

Can I pay my spouse’s Medicare premiums with my HSA before I turn 65?

No. If you are the HSA owner and your spouse turns 65 before you, the funds in it cannot be used for your spouse’s Medicare premiums. But there is a solution for this with a little extra planning. As long as you are on an HSA-qualified plan with family coverage, your spouse is allowed to open their own HSA before they enroll in Medicare.

Your spouse is entitled to their own $1,000 annual catch-up contribution (in addition to you, if you are both over age 55), plus you can split the annual family contribution limit as you wish between two HSAs. By pre-funding their own HSA, when your spouse begins Medicare, they can reimburse their Medicare premiums income-tax-free with funds from their HSA.

Can I make penalty tax-free distributions from my HSA for non-qualified expenses when I turn 65?

Yes, when you turn 65 the 20% penalty for paying for non-qualified expenses with your HSA no longer applies. Although you will need to pay income taxes for non-qualified expenses paid with your HSA after age 65, these distributions are taxed on par with those from a traditional 401(k) or traditional IRA.

Where can I go if I have more questions?

Please talk with a tax professional if you have additional questions. You can also visit the official Medicare website for more information.

Disclaimer: The information contained within this document is intended to be informational only and is not legal or tax advice. Please consult a legal and/or tax professional for advice specific to your personal situation.