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Medicare Series: Part 1 – What you need to know about Medicare and HSAs?

How HSAs and Medicare interact

This is a two part series regarding Medicare. This post will focus on the impacts of HSAs and Medicare. Watch for Part 2 as we address Medicare and COBRA.

Basics of HSA Eligibility

Health Savings Accounts (or HSAs) are sometimes confusing. Let’s be honest, what benefits program or tax-program isn’t a little confusing? And HSAs are both! Let’s start at the beginning.

What makes you eligible to contribute to an HSA?

First, you need to be enrolled in a high deductible health plan. Often referred to as an HSA-compatible plan. The IRS sets the minimum deductible amounts, maximum out-of-pocket limits and other conditions that make a plan compatible with an HSA. Don’t be fooled. Not every “high deductible” is HSA-compatible.

Second, you cannot be claimed as a dependent on another person’s taxes. This is most common with child dependents but can also be a factor for adult dependents.

Lastly, you cannot be enrolled in a health plan that is not an HSA-compatible plan. This includes Medicare!

At this point, you might be thinking, “If I can’t contribute to an HSA while on Medicare, why are we having a discussion on HSAs and Medicare?” It comes down to two main lessons.

Lesson 1: Making the transition from an HSA to Medicare

As you near age 65, you will face a number of decisions. If you are still employed, you may want to keep your existing benefits and delay Medicare coverage. Additionally, you may choose to enroll in Medicare Part A but not Part B right away. The decisions you make (and the timing of those decisions) will affect an existing HSA. So, let’s go through a few scenarios.

If you have started to collect social security benefits, you will automatically be enrolled in Medicare Part A

Enrolling in Medicare at Age 65

You have decided to enroll in Medicare at age 65. (This includes Medicare Part A and/or Part B). You are no longer eligible to contribute to an HSA as of the month you enroll in Medicare. Your Initial Enrollment Period is seven months long. This includes 3 months prior to your 65th birthday, your birth month and three months after turning age 65.  Let’s say you turn 65 in July of 2019 and enroll in Medicare in July. Since you turn 65 in the middle of a tax-year, you have the opportunity to contribute to your HSA on a prorated basis for the year. This means you need to look at your eligibility for each month of the year and adjust it for the months you are not eligible.

Prorated Contribution Sample
Individual Limit Family Limit
Annual Contribution Limit 2019 $3,500 $7,000
Catch-up contribution $1,000 $1,000
Total potential contribution if eligible all year $4,500 $8,000
Monthly contribution limit $375 $666.67
No. of months eligible 6 6
Prorated annual contribution $2,250 $4,000

 

Delaying enrollment in Medicare

If you decide to delay enrollment in Medicare and maintain HSA-compatible health plan coverage, you can continue to contribute to an HSA (including the catch-up contribution). Keep in mind, you will need to delay coverage for both Medicare Part A and Part B. If you have started to collect social security benefits, you will automatically be enrolled in Medicare Part A (and therefore become ineligible to contribute to an HSA).

However, some foresight is required when you decide to enroll in Medicare.

  1. First, make sure you enroll within the required time period. You will NOT pay a penalty for delaying Medicare, as long as you enroll within 8 months of losing your coverage or stopping work (whichever happens first).
  2. Second, when you enroll in Medicare, your coverage will go back (retroactively) up to 6 months from when you sign up. So, you should stop making contributions to your HSA 6 months before you enroll in Part A and Part B. As we saw above, you need to pro-rate your contributions based on the number of months you are covered by Medicare. If you have already contributed more than the prorated amount, you may need to remove an excess contribution.

Lesson 2: Using your HSA while covered by Medicare

While the decision to enroll in Medicare is difficult at times, using your HSA while covered by Medicare doesn’t need to be. Simply use your HSA for all your out-of-pocket medical expenses during retirement. This includes co-pays, co-insurance, prescriptions, dental, vision and other medical expenses. See Publication 969 for additional details.

As an added bonus, you can use your HSA to pay for long-term care premiums and Medicare Part A or Part B premiums. (Note: You cannot use your HSA for Medicare Supplemental Policies, often referred to as Medigap plans).

Not sure what your next step is regarding Medicare and HSAs? Check out this Medicare Decision guide from CMS.gov.


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