In our practice, we see individuals who are eligible for Medicare and still working make decisions that they later regret due to bad information, lack of information, or because they made a hasty decision.  If you have a health savings account (HSA) and will soon be eligible for Medicare, it is important to understand how enrolling in Medicare will affect your HSA.  Thus, the question is should you or should you not delay Medicare and how will that affect your HSA?

Once you sign up for Medicare, you’re no longer allowed to contribute pre-tax dollars to your health savings account. This is because you must have a high-deductible health plan (HDHP) to contribute funds to an HSA, and Medicare is not considered a HDHP. It is imperative to note that if you choose to delay Medicare for this reason, you should stop making contributions to your HSA six months before you plan to enroll in Medicare otherwise you may incur a tax penalty.  This is because once you enroll in Medicare Part A, you receive up to six months of retroactive coverage not going back further than the month you were initially eligible for coverage.   For most people, that is the month you turn 65 years old.

Delaying Medicare to keep contributing to your HSA also means that you must delay collecting Social Security.  This is because you cannot decline Medicare Part A and collect Social Security benefits.  Both are coinciding concepts.  If you want to collect Social Security, you must also be enrolled into Medicare Part A; therefore, you are no longer eligible to contribute to your HSA.

If you decide to enroll into Medicare, you are no longer allowed to contribute to your HSA, but you can utilize your HSA funds to help pay for Medicare Part A, Part B, Part D (Prescription Drug Plan), Medicare Advantage Plan, and Long-term Care (LTC) premiums.  The amount of money you can withdraw tax-free to cover LTC will depend on your age. The 2022 amounts are as follows:  up to $1,690 if you’re age 51 to 60, up to $4,510 if you’re 61 to 70, and as much as $5,640 if you’re older than 70. The only premium in Medicare that is not eligible to be funded by your HSA is a Medicare Supplement or Medigap premium.  If you did use your HSA monies for Medicare Supplement premiums, you would pay current income tax on that amount since Supplement premiums are considered a non-qualified expense.  However, the additional 20% penalty is no longer applied since you are over 65.  Besides premiums, you can also use the tax-free money for a wide range of medical bills including deductibles, co-pays, co-insurance, and other medical expenses that aren’t covered by insurance, such as vision and dental care.

Knowledge is power, so we provide free* consultations to all those that are thinking of retiring or wondering if they should enroll in Medicare Part A and/or B even though they are still working. If you would like to know more about HSA plans, take a look at our blog Financial Foundations: FSA vs HSA.

If you are a Medicare Agent and would like more information on how to guide your clients through this tricky subject, register for our in-person and virtual event Health Savings Accounts & Medicare or click the “follow” button at the top right of the invite to get notified of future events.  Licensed agents only please. We make Medicare simple!

*This agent may be compensated by the health plan based on your decision to enroll.