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What Should I Do with My HSA Money When I Go on Medicare?

HSA and Medicare

What is a Health Savings Account (HSA)?

A health savings account, also known as an HSA, is a tax-free savings account that you can contribute to and withdraw money from for certain medical expenses, such as out-of-pocket medical, dental, and vision. HSAs must be paired with a high-deductible health plan (HDHP), which is usually offered by an employer, and both the employee and employer can contribute to the tax-free health savings account.

An advantage of having an HSA is that the funds collected are not subject to federal income tax, and that HSA funds “roll over” and continue to accumulate if it is not spent. It is not a “use it or lose it” type of account. In addition, you can also use your HSA to pay for qualified medical expenses without a tax penalty for your spouse or dependent.

One drawback of having an HSA may be the mandatory high deductible health plan that it comes with. With high deductible health insurance, there is a low premium and a high deductible (minimum of $1,300 for an individual and $2,600 for a family in 2017). You cannot use your HSA to reach your HDHP insurance premium. You must pay your health care expenses out-of-pocket until you reach your premium, at which point the HDHP will start covering your health expenses.

Many consumers use HSAs as part of their retirement plan. Enrollees can withdraw money from their HSA without penalty for non-medical expenses once they turn 65. (There is a tax penalty for withdrawing money from the HSA on non-qualified expenses before the age of 65.)

HSAs & Medicare

Special rules come into effect once consumers turn 65 and become eligible for Medicare coverage. It is important to be aware of these rules so that you can plan ahead.

Typically, Americans enroll in Medicare on the month of their 65th birthday. Once you enroll in Medicare Part A and/or B, you will no longer be eligible to contribute to your HSA. By law, you cannot have any health coverage other than a HDHP with an HSA. However, you can continue to withdraw from your HSA to use it for qualified medical expenses, such as your Medicare deductibles and premiums, tax-free.

For example, you can use your HSA distrubutions to pay for Medicare Part B premiums, Medicare copayments, Medicare deductibles, prescription drug plans and long-term care insurance.

HSA account holders should plan carefully if they want to continue to contribute to their HSA. You can choose to delay enrollment in Medicare in order to keep your HSA tax advantages. Here are a few different options you can consider depending on your circumstances:

  • If have already applied for or are currently receiving Social Security benefits, then you have lost your HSA tax benefits and can no longer contribute to it.
  • If you work for an employer that has less than 20 employees, you most likely will have to enroll in Medicare as soon as you are eligible at the age of 65. This means you will no longer be able to contribute to your HSA.
  • If you have signed up for Medicare Part A when you turned 65 and have not applied for Social Security benefits yet, you can withdraw your application for Part A. You can call the Social Security Administration at 1-800-772-1213 to do this. As long as you are not accepting Social Security benefits, you can preserve your HSA tax advantages.
  • If you work for an employer with more than 20 employees, your employer is the primary insurance payer so you may not need to enroll in Medicare for health care coverage. Thus, if you currently work for a large employer, you can choose to decline Medicare coverage so that you can maintain your HSA. (Please note that you cannot receive Social Security benefits if you want to keep your HSA.)

If you would like to keep your HSA and continue contributing to it, please evaluate all of your options and speak with a financial professional to avoid any penalties or mistakes. Becoming an informed consumer will help you make the most beneficial decisions for you and your family.

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