Health Savings Account Contributions and Medicare Coverage

As more individuals with an HSA continue working beyond age 65, questions arise about coordinating Health Savings Account contributions and Medicare coverage. Know the rules to avoid tax penalties when participation in these two valuable retirement benefits overlap.

The Health Savings Account (HSA) is a tax-free way for individuals to set aside money for eligible medical expenses today and build more savings for retirement. Since HSA contributions are not subject to any kind of “use it or lose it” provision at the end of the year, many financial advisors see it as an ideal solution for persons looking to maximize tax-advantaged savings.

When an employer sponsors an HSA for employees through a Section 125 Cafeteria plan, the savings are even greater. First, the employee saves an additional 7.65% by eliminating Social Security and Medicare tax (FICA) on their HSA contributions in an employer-sponsored HSA vs. a self-administered HSA; then, the employer gets a matching FICA tax savings bonus by reducing the company’s taxable payroll by the same amount. Some employers also make contributions to their employees’ HSA, but employer contributions are not required.

Health Savings Account Contributions and Medicare overage

An HSA is a valuable retirement savings vehicle that coordinates well with a 401k, IRA, company pension plan, and Medicare. However, Health Savings Account contributions and Medicare enrollment are mutually exclusive. Once Medicare coverage begins, HSA eligibility ends.

Here’s why it is that way and how to determine when HSA contributions should end.

HSA Eligibility

While eligible for an HSA, the participant must be covered by a high-deductible health plan (HDHP). An HDHP carries lower premiums with higher deductibles and annual out-of-pocket limits. The HDHP can be part of an employer-sponsored group health plan or it may be an individual health care policy purchased through an agent or the healthcare marketplace.

Medicare is not an HDHP. That is why contributions to an HSA are no longer allowed once Medicare coverage starts. Existing HSA funds can be withdrawn for eligible medical expenses while on Medicare, but no further contributions can be made to the HSA once Medicare coverage begins.

When to stop HSA contributions

Contributions to an HSA must end before Medicare coverage starts. For example, with a June 1 Medicare enrollment date, HSA contributions can be made through May 31. Otherwise, all employee contributions for that plan year are subject to taxation.

Medicare enrollment

Individuals applying for Social Security benefits at age 65 and older are automatically enrolled for Medicare at that time.

Medicare coverage is not automatic for individuals who do not apply Social Security benefits at age 65, but they may apply for it at age 65 and older even if they wish to delay Social Security benefits to a later time.

Delaying Medicare

One way to continue making contributions to an HSA beyond age 65 is to delay Medicare enrollment. There is no requirement from the government to enroll in Medicare as soon as a person becomes eligible.

Persons thinking about delaying both Social Security and Medicare benefits should carefully weigh the tax savings of continued contributions against the cost of continuing to pay HDHP premiums and out-of-pocket expenses.

Also, a health insurance provider may require covered individuals to enroll in Medicare or otherwise be cancelled from their plan. This is especially likely for small employer groups with fewer than 20 members.

On the other hand, if the health insurance premium will continue past Medicare eligibility* because others are covered (spouse, children), and the policy does not requirement enrollment, delaying Medicare while continuing to feed the tax-free HSA may have advantages.

*For an individual not taking Social Security benefits.

Retroactive Medicare coverage

When an individual delays Medicare enrollment, coverage is automatically retroactive for up to six months prior to the date of enrollment (but no earlier than attaining age 65). Here are two examples of how that changes when HSA contributions must stop:

• Martin turns 65 years old in January 2019 but delays Medicare enrollment to January 1, 2020. His Medicare coverage begins six months earlier, on July 1, 2019. Martin (and his employer) must stop making HSA contributions on June 30, 2019.
• Ellen turns 65 years old in November, 2019, but delays Medicare enrollment to the beginning of 2020. Medicare covers Ellen’s medical expenses retroactively to November 1, 2019, when she turned 65. Contributions to her HSA must end on October 31, 2019.

Related blog posts:

Tax-saving health benefits: HSA, FSA, HRA | What’s the difference?

Why should employers provide HSA administration through CoreAdmin?

HSA nondiscrimination testing vs. comparability rule depends on employer contribution method

Video: How to set up a pre-tax Health Savings Account for your employees

Updated for 2020: Core Documents product brochures

Disclaimer: The information in this blog post is not meant as legal or tax advice. Core Documents and our staff are not attorneys or tax professionals; nor are we a part of the IRS or any governmental entity. The reader should consult with an attorney, accountant, or an appropriate government agency for answers based or their professional knowledge and the reader’s particular situation.