Health savings accounts can become increasingly valuable over the years, but reaching Medicare eligibility at age 65 introduces important rules that HSA holders need to understand. Once an individual enrolls in Medicare, contributions to an HSA must stop, including contributions made by an employer. Continuing to contribute can result in tax consequences.
Medicare enrollment does not prevent people from using money already saved in their HSA. HSA funds can generally be used tax-free for qualified medical expenses, including Medicare Part A, Part B, Part C and Part D premiums, as well as deductibles, copayments and coinsurance. However, HSA funds cannot be used tax-free to pay premiums for Medicare Supplement, or Medigap, policies.
An HSA can also continue to provide financial benefits after Medicare enrollment. Existing funds remain available and, depending on the provider, some accounts can be invested in assets such as mutual funds or exchange-traded funds. Although new contributions are no longer permitted after Medicare enrollment, the account can continue to grow on a tax-deferred basis, while withdrawals for qualified medical, dental and vision expenses can remain tax-free.
Turning 65 also changes how withdrawals for nonmedical expenses are treated. After age 65, HSA funds can be withdrawn for nonqualified expenses without the additional 20% federal penalty, although the amount withdrawn is generally subject to income tax. This can allow retirees to use HSA savings for other expenses, but people planning to enroll in Medicare should pay close attention to the timing of their final HSA contributions.
The timing becomes especially important for people who delay Medicare enrollment while continuing to work. Individuals should generally stop HSA contributions before Medicare coverage begins and account for the potential six-month retroactive effective date of Medicare Part A for people who enroll after 65 or begin receiving Social Security benefits. Contributions made during Medicare enrollment can be treated as excess contributions and subject to a 6% excise tax, although withdrawing the excess contributions and associated earnings by the applicable tax-filing deadline can help avoid the penalty.
