A common concern of HSA owners who are getting closer to retirement age is how Medicare enrollment affects their eligibility to have an HSA.
Currently, at age 65, people can enroll in the federal Medicare program. Given the strict rules around health plans for HSA enrollment and contributions, knowing how Medicare could change things for HSA owners is crucial.
Created in 2003, HSAs are a very popular healthcare benefits account. In fact, there were over 30 million accounts open at the end of 2020. People enrolled in HSA-qualified health plan can open an HSA to pay for qualified medical expenses for themselves and their families. A large part of the HSA’s popularity lies in its generous tax-advantages, account ownership, and flexible spending options.
With an HSA, people make tax-free contributions, get tax-free distributions for eligible expenses, and can grow the account tax-free through interest or investment earnings. The account is owned by the individual, not the employer. In other words, it goes with you if you change employment. At the end of each year, the account’s unused balance carries over to the next year. Upon reaching age 65, account owners can use the funds for any purpose without penalty, like a supplementary retirement account. This includes non-healthcare expenses, which 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.
What is Medicare?
Medicare is a federal health insurance program created in 1965 under President Lyndon B. Johnson. In 2020, there were approximately 62 million people enrolled in the Medicare program.
Currently, Medicare is available for:
- People aged 65 or older
- Certain younger people with disabilities
- People with End-Stage-Renal-Failure (permanent kidney failure that requires a transplant or dialysis)
There are three different parts of Medicare:
- Part A (Hospital insurance)
- Part B (Medical insurance)
- Part D (Prescription drug coverage)
Possible Medicare Changes
Following the 2020 election, a new White House administration is looking to make some significant changes. While Medicare is currently available for people age 65 and older, President Joe Biden has supported lowering the qualifying age for Medicare coverage to under 65 as an optional enrollment.
Reducing prescription drug prices under Medicare is another possible change. Biden will be trying to work with Congress to change a law that prohibits the federal government from negotiating drug prices and they are also looking to allow people to buy medications from other countries.
How do I know if I’m HSA-eligible?
Whether through an employer plan or as an individual, you must meet the following criteria to enroll in and contribute to an HSA:
- Have 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 one of these criteria, you cannot enroll in a new HSA. However, you can continue to use an already established account.
Does Medicare enrollment impact my HSA eligibility?
Yes. To open an HSA account, you cannot have any health insurance other than an HSA-eligible HDHP. Since Medicare Parts A and B are both considered another type of health insurance, enrolling in either would make you ineligible to open a new account and affect your ability to contribute.
If you have reached the age to enroll in Medicare but want to stay eligible for HSA benefits, you can postpone your 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 will be automatically enrolled in Medicare Part A. You cannot decline Part A while collecting Social Security benefits. To be eligible for an HSA, then, you will need to delay Social Security benefits so you can 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.
Can I continue to contribute to my HSA once I’m enrolled in Medicare?
It depends. According to the IRS, you are not allowed to contribute to an HSA once you become enrolled in Medicare.
If you plan to continue working beyond age 65 and want to continue contributing to an HSA, postpone applying for Medicare, Social Security or Railroad Retirement Board benefits. 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.
Can I use my HSA after I have Medicare coverage?
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. These could include Medicare premiums and prescription drugs.
After age 65, you could also use the HSA like a retirement account and spend the money on non-qualified expenses without penalty.
If I pass away first, can my spouse use my HSA?
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 your death, simply name him or her as your beneficiary. The surviving spouse can use the money tax-free, even if he or she is not enrolled in a High Deductible Health Plan. Keep in mind that the money must be used for qualified healthcare expenses. If your spouse is not 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.
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