Health Savings Accounts (HSAs) offer healthcare consumers who are enrolled in a high-deductible health plan (HDHP) a tax-advantaged tool for setting aside money to pay for qualified medical expenses. In addition to the tax benefits, what makes an HSA especially valuable is the ability to grow the account funds through investing. Then, upon reaching age 65, account owners can use the funds for any purpose, including non-healthcare expenses without penalty (those withdrawals are subject to income tax).
Since retirement and Medicare enrollment often occur around the same age, it’s not surprising that some frequently asked HSA questions involve issues related to age, Medicare and eligibility.
Does Medicare enrollment impact my HSA eligibility?
Yes it does. In order to qualify for an HSA, you can’t have any health insurance other than your HSA-eligible HDHP. Since Medicare Part A and/or B qualify as another type of health insurance, enrolling in either would make you ineligible.
If you have reached the age to enroll in Medicare but want to stay eligible for HSA benefits, you have the option to delay Medicare enrollment. However, this decision will also delay your ability to collect Social Security retirement benefits. If you’re already receiving Social Security benefits when you become eligible for Medicare, you are automatically enrolled in Medicare Part A; it’s important to note that you can’t decline Part A while collecting Social Security benefits. To be eligible for an HSA, you need to delay Social Security benefits, which allows you to decline Medicare Part A.
If you decide to enroll in Medicare after delaying it, you should stop contributing to your HSA at least six months in advance. Otherwise you may be hit with a tax penalty because Part A of Medicare provides six months of retroactive coverage upon enrollment.
How do I know if I’m HSA-eligible?
One big advantage of having an HSA is you don’t have to be employed to open an account. You must meet the following criteria in order to participate in an HSA:
- Enroll in a high-deductible healthcare plan (HDHP)
- Cannot have coverage under any other non-HDHP health plan (certain exceptions apply)
- Are not enrolled in Medicare
- Can’t be claimed as a dependent on someone else’s tax return
If you fail to meet even one of these criteria, you cannot enroll in an HSA.
Once I enroll in Medicare, can I continue to contribute to my HSA?
According to the IRS, you are not allowed to contribute to an HSA once you become enrolled in Medicare. Since an HSA is portable, you can keep your HSA and use the funds to pay for qualified healthcare expenses, even after enrolling in Medicare. If you have an HSA and plan to continue working beyond age 65, and haven’t already applied for Medicare, Social Security or Railroad Retirement Board benefits, don’t apply. This will allow you to continue making contributions to your health savings account.
There are situations in which you can remain eligible for an HSA account. For example, if your employer has at least 20 employees, you can postpone applying for Social Security and Medicare without any penalty. This allows you to continue making contributions to your HSA until you stop working. Upon retirement, you will have a special 8-month enrollment period to sign up for Medicare.
If I die before my spouse, can s/he use my HSA to get reimbursed for eligible expenses tax-free?
It depends on who owns the account, and in this case the decision is up to you.
To ensure your spouse continues to enjoy the benefits of your HSA after you die, simply name him or her as your beneficiary. The surviving spouse can use the money tax-free – even if not enrolled in a high-deductible health plan. Keep in mind that the money must be used for qualified healthcare expenses. If your spouse hasn’t reached age 65 and uses the funds for non-approved expenses, he or she will incur a 20% penalty on the amount withdrawn plus income taxes.