Considerations for Contributing to an HSA After 65
December 13, 2021
More than 10,000 Americans turn age 65 each day and the majority will enroll in Medicare. Those who are currently contributing to a health savings account (HSA) may unknowingly violate IRS guidelines by contributing to their HSA once covered by Medicare and end up owing fees and penalties.
Employees can easily avoid this scenario, but only if they understand the rules and how to recalculate their HSA contribution limit for the year (and possibly the prior year as well).
The Issue
HSAs allow employees and employers to make tax-free contributions that can be used to pay certain healthcare expenses. But an employee (or employer on behalf of the employee) can only contribute to an HSA if their health insurance plan qualifies as a high deductible health plan (HDHP).
Medicare, which most Americans can enroll in starting at age 65, does not meet the definition of an HDHP and therefore is not considered qualifying coverage. Simply put, once a person is covered by Medicare, they must stop contributing to their HSA or risk paying penalties to the IRS.
More and more Americans are working past age 65 and may desire to continue making HSA contributions. The solution seems obvious — do not apply for Medicare coverage and maintain coverage with the HDHP provided by their employer. However, if they elect to begin receiving Social Security retirement benefits, enrollment in Medicare Part A coverage is automatic and mandatory. Once that coverage begins, the person is no longer permitted to continue HSA contributions.
In addition, when you enroll in Medicare and Social Security and when you are entitled to coverage do not necessarily align. There are different scenarios that can impact the date that coverage takes effect. Let’s look at the contributing factors.
Social Security
The age at which you can receive your full Social Security benefits is currently 66 and 4 months for those who turn 65 in 2021. The earliest you can start receiving Social Security benefits is age 62, but if you take Social Security “early,” your benefit is reduced (e.g., you only receive 75% of your full benefit if you begin at age 62). If you delay taking Social Security beyond the age that you qualify for full benefits, your benefits increase for every year that you wait, until you turn 70 (e.g., waiting to age 70 will increase your Social Security benefits by 25%).
Medicare
Once you start taking Social Security benefits, you will be automatically enrolled in Medicare Part A. This enrollment is mandatory – you cannot opt out. The earliest you can enroll in Medicare is age 65 unless you are disabled or have end-stage renal disease. If you take Social Security before age 65, you will not be automatically enrolled in Medicare Part A until you turn 65. If you take Social Security at age 65, you will be automatically enrolled in Medicare Part A.
Retroactive Medicare Coverage
Likely the most confusing issue that can arise for new Medicare enrollees is when Medicare coverage becomes retroactive. This especially impacts those who delay Medicare or Social Security benefits to postpone HSA ineligibility.
If a person does not enroll in Medicare or Social Security when first eligible, their later enrollment in Medicare Part A will cause their coverage to be effective, retroactively, for six months. In this instance, Medicare Part A coverage will start six months back from when you enroll or when you apply for Social Security benefits, as Medicare coverage can’t start earlier than the month you turn 65.
If a person declines Social Security retirement benefits and Medicare coverage, once they do enroll in Medicare, their coverage for Medicare Part A is effective for the preceding six months, making them HSA-ineligible for those six months. Any contributions to their HSA for those six months would be considered in violation of the IRS rules and be subject to an overcontribution penalty.
Related Rules
Enrollment in any part of Medicare is disqualifying coverage for HSAs. In addition to the link between Social Security and Medicare Part A, there are rules that require the following individuals to enroll in Medicare as their primary coverage when they turn 65:
- Employees of small businesses with less than 20 employees
- Self-employed individuals
- Individuals who are unemployed and/or retired
Since these individuals must enroll in Medicare as their primary coverage when they turn 65, none of them can remain eligible to contribute to an HSA past age 65, regardless of when they take Social Security.
Medicare Parts B and D are voluntary so these individuals can delay enrollment in these parts of Medicare, but they have must have employer group coverage (Part B) and the coverage must be “creditable” (Part D).
The Solution
As long as employees who have deferred signing up for Medicare stop making contributions to their HSA (and inform their employers to do the same) at least six months prior to applying to Medicare, employees will not be in violation unless they apply for Social Security benefits. If they apply to receive Social Security payments, they will automatically enroll in Medicare as soon as they become eligible. Employees who elected to receive Social Security benefits before they aged into Medicare eligibility should stop contributing to their HSA before they become eligible so there is no risk of overlap.
Employers can help by providing clear and concise communication for their employees about when to stop contributing to an HSA. Education and awareness can significantly aid employees in avoiding unexpected fees and taxes.