If you are among the many Americans enrolling in Medicare for the first time during the October 15-December 7 open enrollment period, you have probably done a good bit of research on plans and specifics and feel confident in the coverage you have selected.
However, if you’ve been contributing to a Health Savings Account (HSA), it’s crucial to understand how your Medicare eligibility status and enrollment can affect your HSA and your taxes. This is an important aspect to consider, so take some time now to ensure you’re fully informed before taking the next steps.
A Health Savings Account (HSA) is a tax-advantaged account that allows you to save money to pay for allowed medical expenses. Your contributions to this account are tax-deductible or pre-tax depending on how you contribute. If the contribution is made by payroll deduction, the funds are taken out of your paycheck before taxes. The funds in these accounts can grow and earn tax-free interest over time and when needed, the tax-free HSA money can be used to pay qualified medical expenses such as deductibles and copays as well as covered drug, dental and vision care costs. Once you reach the age of 65, your HSA can be used for any expense; however, you will need to pay taxes on any withdrawals that are not used for qualified medical expenses. There are limits to how much you can contribute to your HSA annually. For those who are 55 and older, you can contribute up to $1,000 extra each year as a “catch-up” contribution. For more information on HSA limits and other specifics, visit the IRS website.
Once you are enrolled in Medicare Part A and/or B, you may continue to use your pre-tax dollars from your previously established HSA account toward qualified medical expenses, including paying your Medicare premiums. That account remains yours regardless of your enrollment status. However, once enrolled, you will no longer be allowed to contribute to your HSA. Additionally, those who have not established an HSA prior to Medicare enrollment will no longer be allowed to do so once enrolled.
If you are approaching Medicare eligibility and plan to apply for Social Security retirement benefits, it’s important to stop contributing to your Health Savings Account (HSA) at least six months before you submit your Social Security application. This is because applying for Social Security automatically enrolls you in Medicare Part A, even if you choose to delay receiving your retirement benefits. If you apply for Social Security after reaching your full retirement age, your benefits—and your Medicare Part A coverage—can be retroactively applied for up to six months of coverage, though never earlier than the month you turned 65. This backdating could result in a situation where you were technically enrolled in Medicare while still contributing to your HSA, which is not allowed and may lead to tax penalties.
If you are already receiving Social Security retirement benefits, you are automatically enrolled in Medicare Part A and are no longer eligible to contribute to an HSA. The only way to opt out of Part A in this case is to repay all Social Security benefits you’ve received, along with any Medicare payments made on your behalf. Only then can you resume HSA contributions—but you will forfeit both your Social Security benefits and Medicare Part A coverage until you reapply in the future.
However, if you have applied for Medicare Part A but have not yet applied for Social Security retirement benefits—and you realize the impact this has on your HSA eligibility—you may still have an option. You can withdraw your Medicare application and continue contributing to your HSA without penalty. To do this, contact your local Social Security office and request to withdraw your Medicare enrollment. You’ll then be free to reapply for Medicare at a later time that aligns better with your financial and healthcare planning goals. Timing your HSA contributions, Social Security benefit application, and Medicare application can be challenging. It’s important to consider all your options, as these decisions can significantly impact your overall financial plan. If you have questions about your specific situation or want to review your plan as you transition into this stage of life, don’t hesitate to reach out to your advisor for guidance.
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