Health Savings Accounts operate in tandem with high deductible employer medical insurance plans. HSA funds are deductible and not taxed when used to pay for qualified medical expenses. But what happens to HSA plans when one is eligible for Medicare?
Answer! It all depends. Those who work for an employer with fewer than 20 employees must use Medicare as primary insurance and can no longer contribute to an HSA plan in any month they are enrolled in Medicare.
Existing funds can be withdrawn for qualified medical expenses but new contributions made cannot receive the same tax exempt status while on Medicare.
If you work for an employer with 20 or more employees, you can decline Part A and B of Medicare and continue contributing to your Health Savings Account until you begin receiving Social Security benefits at the mandatory age of 70.
It’s important to stop making HSA contributions six months before you start drawing Social Security benefits because when you apply, Medicare Part A (Hospital) becomes mandatory and retroactive up to six months (assuming you are eligible) prior to your Social Security effective income withdrawal date.
A tax penalty can be incurred on your HSA contributions during that six month period or longer if you continued contributing to an HSA account even if you were only enrolled in Part A (Hospital) of Medicare as secondary coverage while remaining on your employer health insurance plan.
Just remember, if you are eligible to remain on your employer health insurance plan beyond age 65, and have prescription coverage as good as or better than what Medicare Part D offers, then do not enroll in Part A or B of Medicare if you want to continue making contributions to your HSA plan at work.
And be sure to stop making payments to the HSA plan six months prior to the effective date you enter Social Security to avoid the Part A (Hospital) penalty because you are disqualified from putting money into your HSA plan while you had a Medicare benefit.
This is certainly a quirky part of the law that needs to be changed.
When he applies for Social Security and Medicare coverage, his Social Security entitlement and Part A coverage will be retroactive for 6 months, as outlined in law. He can’t apply just for Social Security benefits and not also get Medicare Part A as he is over age 65. IRS rules for the HSA state that someone can’t contribute to an HSA when they have Medicare, so the individual will need to stop contributing 6 months in advance of applying for Social Security benefits and Medicare. If he contributes to the HSA after Medicare coverage begins (not when he applies for Social Security/Medicare), he may be subject to IRS penalties.
