One of life’s most desirable milestones is reaching retirement. Along with this incredible event is enrollment into Medicare. Most individuals enroll in Medicare when they first turn 65, while others may work longer and delay Medicare enrollment until they retire. If you are working past 65 and planning to fund a Health Savings Account (HSA), there are some important details you need to know. Let’s discuss the important rules and options to be aware of that guide using your Health Savings Account once you’ve enrolled in Medicare.
What is a Health Savings Account (HSA)?
Health Savings Accounts are a special type of account where funds are used solely to pay for qualifying healthcare, dental and medical health expenses. The benefits of having this type of account is that your contributions are exempt from taxes, both when placed into and withdrawn from your HSA. In addition, many HSA accounts offer investment and interest earnings options that accumulate on a tax-exempt basis. Enrolling in a qualified high-deductible health plan entitles you to create a Health Savings Account. The primary benefit of these accounts is your ability to fund your account with pre-tax dollars that will provide funds for medical expenses. Another benefit is these plans do not have a requirement to spend your funds in a specific timeline.
Medicare Enrollment and Your HSA
You cannot simultaneously have Medicare and fund a Health Savings Account. The reasoning is simple: Medicare plans do not meet IRS qualifications as a high-deductible health plan. Therefore, once enrolled in Medicare, you can no longer contribute funds to your HSA. The good news is that any existing funds in this account roll over each year and can be used to pay for Medicare-related health and prescription drug expenses such as premiums, deductibles, copayments and coinsurance. Be careful about funding your HSA if you enroll in Medicare as continuing to fund the account can subject you to a tax penalty.
How Delaying Retirement and Medicare Enrollment Impacts Your HSA
For most people, Medicare enrollment will be required when turning 65 years old. If you do not have alternative creditable coverage when turning 65, you can face enrollment delays and penalties. Individuals that can delay enrollment into Medicare would be those who have creditable health and prescription drug coverage – from your or your spouse’s employer (with over 20 employees), union or the Department of Veterans Affairs. These individuals can maintain their current coverage and defer enrollment into Medicare penalty-free.
If you do work past 65 for a large employer and are enrolled in an HSA plan, you should not enroll in Medicare Parts A or B under any circumstance. By delaying enrollment into Medicare, you can contribute to your HSA and continue to reap the tax and spending benefits of these plans.
If you are receiving Social Security income (SSI) benefits prior to age 65, you will be automatically enrolled in Medicare Parts A and B. While you can cancel your Part B if you have other coverage, receiving SSI benefits prevents you from cancelling Part A. Therefore, you cannot fund an HSA, and can only use the money that you have in your HSA account for eligible Medicare expenses. If you delay enrollment into Medicare to fund your HSA, it is important to note that when you do apply for Medicare after age 65, your Part A will retroactively start six months prior to when you apply. What this means is that any contributions made within six months of your Part A application will be negated and, if not reversed, you could face tax penalties from the IRS. It’s also important to understand that the IRS regards HSA contributions as a monthly contribution; therefore, funding your entire year of contributions in, for example, January, but enrolling in Medicare in June would wipe out your entire year of contributions. If you don’t plan properly, you could incur a tax penalty for contributions made to your HSA during this time, so it may be best to stop your contributions in the months ahead of your retirement.
Retirement is cause for celebration, so it can be helpful to reduce your stress by knowing ahead of time how your Medicare enrollment impacts your Health Savings Account. A licensed Medicare agent can help you determine how to avoid tax penalties and late enrollment penalties and enroll in Medicare on time while using your HSA properly. At Medicare Portal, we can help answer all your questions about the impact of Medicare enrollment on your Health Savings Account usage. Contact us today and let our local Medicare agents aid your smooth transition to retirement and Medicare coverage.