Ask Penny: What Happens to My HSA If I Turn 65 and Am Still Actively Employed?

May 30, 2019

When you reach age 65, there are a number of financial decisions you will face, including what to do with funds accumulated in your Health Savings Account (HSA). The entire HSA landscape changes once you hit 65. Keep these things in mind, especially if you're still working:

Use HSA money for non-qualified expenses

Prior to age 65, you can only use HSA funds for eligible medical expenses. If you break this rule, you'll potentially incur a hefty 20% penalty, plus any income taxes on the amount used on non-eligible expenses. However, once you turn 65 you're allowed to withdraw HSA money and use it on anything; you just need to pay the income taxes.

Enjoy tax-free spending

If you want to continue using the money tax-free once you reach 65, spend your HSA dollars on:

Qualified medical expenses - These include prescription drugs, medical, dental, vision care and certain preventative care expenses. The key is to know what's eligible, as this can change from year to year. Find a list of HSA-eligible products here.
Medicare Part A - You can use HSA funds to pay your Medicare Part A (inpatient services) annual deductible.
Medicare Part B and Part D - You can use HSA money to pay monthly premiums on Medicare Part B, which covers outpatient services including medical supplies, medical equipment and most doctor's visits. HSA funds can also be used to pay Medicare Part D premiums (Medicare prescription drug coverage). If premiums are currently deducted from your Social Security benefits, you can disburse funds from your HSA to reimburse yourself.
Medicare Advantage (Part C) - Medicare Advantage (also known as Medicare Part C) typically has the same coverage – if not additional coverage – as traditional Medicare, but is administered by a private insurer that is contracted with Medicare. [KD2] If your Medicare premium is paid through your Social Security benefits, you can disburse funds out of your HSA to reimburse yourself.

Limitations once you receive Social Security benefits

Here's the catch: Once you start collecting Social Security benefits, you won't be able to contribute any money to your HSA. That's because once you receiveSocial Security benefits, you're automatically enrolled in Medicare Part A. To contribute pre-tax dollars to an HSA, you cannot have any health insurance other than a High Deductible Health Plan (HDHP). The month your Medicare begins, your account overseer should switch your HSA contributions to zero dollars per month. You may continue to withdraw money from your HSA after you enroll in Medicare to help pay for qualified medical expenses.

Deciding when to enroll in Medicare

Whether you should delay enrollment in Medicare so you can continue contributing to your HSA depends on your circumstances. If you work for an employer with fewer than 20 employees, and decide to enroll in Medicare, Medicare will be considered your primary insurance coverage. Healthcare coverage from employers with fewer than 20 employees pays secondary to Medicare. If you work at this kind of employer, you should check with your benefits representative and your current insurance coverage to see if they have a mandatory Medicare enrollment clause when employees turn 65. Laws that prohibit forced Medicare enrollment do not apply to employers with less than 20 employees. As a result, if your employer has a mandatory Medicare enrollment policy when you turn 65 and you fail to enroll in Medicare, you may have little or no health coverage because your health plan does not have to pay until Medicare determines coverage first.

According to AARP, if the employer does require you to enroll in Medicare, then Medicare automatically becomes primary and the employer plan provides secondary coverage. Medicare settles your medical bills first, and the employer plan only covers services that it covers but Medicare doesn’t. Therefore, if you fail to sign up for Medicare when required, you will essentially be left with no coverage.

Alternatively, healthcare coverage from an employer with 20 or more employees pays primary while your Medicare coverage pays secondary. So you may decide to choose to delay Medicare enrollment if you work at this kind of employer and continue putting funds into your HSA. Note: In either case, you have access to the Part B Special Enrollment Period (SEP) when you lose coverage or retire.

According to Centers for Medicare Services, You will not pay a penalty for delaying Medicare as long as you enroll within eight months of losing your coverage or stopping work (whichever happens first). You'll want to plan ahead and enroll in Part B at least a month before you stop working or your employer coverage ends so you don't have a gap in coverage.

If you decide to enroll in Medicare Part A & B and choose to remain enrolled in your employer’s health plan (if 20 of more employees), your employer’s health plan is always primary. Consequently, it is extremely important to check how your plan coordinates benefits with Medicare. Typically, Medicare only covers medically necessary items that your primary plan does not. As a result, unless your employer’s plan doesn’t offer decent coverage, you may be paying additional premiums (for both plans) and gaining little to no value. Additionally, if you enroll in Part B while you are still enrolled in employer coverage, according to AARP you could be forfeiting your right to buy Medicare supplemental insurance (known as Medigap) with full federal protections after this employment ends. Those protections prohibit insurance companies from refusing to sell you a Medigap policy or charge higher premiums based on your health or preexisting medical conditions — providing that you buy a policy within six months of enrolling in Part B. (Outside of that six-month window, except in very limited circumstances, they can do both.)

Delaying Social Security benefits

If you choose to delay Medicare enrollment because you are still working (actively employed) and want to continue contributing to your HSA, you must also wait to collect Social Security retirement benefits. You cannot decline Medicare Part A while collecting Social Security benefits. You must delay Social Security benefits and decline Medicare Part A if you wish to continue contributing funds to your HSA.

If you decide to delay enrolling in Medicare, make sure to stop contributing to your HSA at least six months before you do plan to enroll in Medicare. When you enroll in Medicare Part A, you receive up to six months of retroactive coverage, not going back farther than your initial month of eligibility. If you do not stop HSA contributions at least six months before Medicare enrollment, you may incur a tax penalty on the funds you contributed to your HSA while you were enrolled in both Medicare and your employer- sponsored High Deductible Health Plan (HDHP).

If you require counseling around HSAs, please consult a tax professional.