Health savings accounts (HSA) are highly popular and allow you to save pre-tax dollars for future medical expenses. If you are beginning to think about Medicare enrollment and have an existing HSA, it’s important to understand how to handle your HSA deposits moving forward.
First and foremost, you need to stop making any HSA contributions six months before you sign up for Medicare for the first time.
Navigating Medicare Coverage and Your Existing HSA
High-deductible health plans typically include HSA benefits, which means many people will have existing HSA plans prior to joining Medicare.
Once you enroll in Medicare (even if you are still employed), you can no longer receive new HSA deposits from your employer. However, you can use your existing HSA funds to pay for Medicare costs as soon as your Medicare coverage goes into effect. As long as you withdraw from your account to cover approved medical expenses – including copays, coinsurance, deductibles, Part B, or drug plan premiums – your money is not taxed.
If you wait to apply for Medicare after you become eligible (3 months prior to turning 65), Medicare will include up to six months of retroactive coverage once you eventually enroll.
Let’s say you qualified for Medicare in August 2022 but do not apply until October 2022, for example. Medicare will cover qualified health care expenses dating back to April. Keep in mind, however, because you are “retroactively enrolled” in Medicare for an extra six months, you could be penalized if you contribute to your HSA during those months. To avoid this, you must stop depositing HSA funds to your account six months in advance of your Medicare application.
Medicare Enrollment Upon Retirement
For employer-sponsored coverage plans in which both you and your employer make contributions to your HSA, you are not required to pay taxes on HSA deposits. While you can no longer make new deposits, you can continue to withdraw money tax-free so long as it is used to pay for Medicare-approved expenses.
As you near your retirement date, be sure to pay close attention to your HSA deposits because there are important steps both you and your employer must take to avoid potential penalties. This may mean notifying your employer about your retirement in advance so you can make a clear plan for transitioning off employer-sponsored coverage.
Enrolling in Medicare, But Still Employed
The good news for many people planning to work beyond the age of 65 is that you can still enroll in Medicare without retiring. This means you have the opportunity to forego employer health coverage in favor of Medicare coverage. Often, Medicare can be the more cost-effective option.
Just know, once you enroll in Medicare you still must stop all HSA deposits six months prior to applying for Medicare benefits.
When you do start planning for retirement, keep an eye on your Medicare enrollment period, as it may not necessarily align. If you end up enrolling in Medicare within the same year, you can pro-rate HSA contributions to avoid exceeding the annual limit. This applies to your employer as well, who must also stop contributing HSA funds once you sign up for Medicare.
Need Advice on Next Steps?
Medicare Choice Group can help answer any questions you might have about Medicare enrollment, rules and requirements for HSA contributions, as well as creating a plan for your individual health care needs.
Reach out to our team of experts online or over the phone at (855) 482-0574.
