In today's economy, it's common for clients to work well past age 65. Although those clients become eligible for Medicare once they hit 65, there are potential complications that must be addressed to prevent unpleasant surprises.
One of those complications arises when a client continues funding their health savings account to reap tax benefits after becoming eligible for Medicare. The rules governing the post-65 interaction between Medicare and HSAs can be complicated.
It's important for clients to understand these rules before signing up for Medicare or claiming Social Security, so that they know the potential implications with respect to their tax-preferred HSAs in retirement.
Medicare and HSAs: The Basics
As most clients are aware of, an individual must be enrolled in a high-deductible health plan to contribute to their HSA. HSA contributions are not allowed if the individual is enrolled in any other type of health plan.
Importantly, individuals who continue to work past 65 cannot contribute to their HSA if they are enrolled in Medicare. They also cannot accept employer contributions to HSAs.
Medicare backdates coverage when an individual enrolls in Medicare Part A. A six-month lookback period applies, meaning that clients should stop contributing to their HSAs six months before they enroll in Medicare or begin receiving Social Security benefits to avoid penalties.
If the client makes contributions within that six-month window, however, they can withdraw the contributions before the end of the year of contribution without penalty.
It's also important to remember that once someone claims Social Security after reaching full retirement age, they are automatically enrolled in Medicare Part A. Individuals who claim benefits before reaching 65 are also automatically enrolled upon reaching that age.
That means they can no longer make HSA contributions even though they did not actively apply for Medicare coverage.
Individuals who enroll in Medicare later in the year may be entitled to make HSA contributions for months when they are not enrolled in Medicare coverage. In other words, a prorated contribution for the year may be allowed (but clients should remember the six-month retroactive window when calculating their HSA contribution limit for the partial year).
