As I travel the country speaking about health savings accounts (HSAs), I am being asked more in-depth questions from financial services personnel on how consumers can benefit from HSAs. Many of our colleagues immediately discuss the triple tax benefit of HSAs: tax-deferred contributions, tax-exempt distributions for qualified expenses, and penalty-free distributions for nonqualified expenses beginning at age 65. These are key points and should continue to be discussed. But we should also expand the discussion by asking the following question.
“Can individuals still contribute to an HSA after age 65 and receive the same benefits?”
The answer is… yes!
HSA Contributions After Age 65
The rules for contributing to an HSA do not change once an individual turns age 65. Thus, an HSA owner
- must be covered only under a qualified high-deductible health care plan,
- cannot be eligible to be claimed as a dependent on someone else’s tax return,
- is eligible for $1,000 catch-up contribution beginning at age 55, and
- cannot be enrolled in Medicare.
The last bullet causes some confusion, so let’s explore that for a moment.
In our industry, it is common knowledge that someone in the United States is eligible for Medicare once they reach age 65. What most of us do not fully understand, but make certain assumptions about, is how an individual enrolls in Medicare.
There are essentially two ways individuals can enroll in Medicare.
- Automatic enrollment: The Social Security Administration automatically enrolls individuals in Medicare Parts A and B if they draw Social Security (either retirement or disability) benefits or Railroad Retirement benefits before reaching age 65. These individuals are automatically enrolled in the month of their 65th birthday.
- Active enrollment: Individuals must actively enroll in Medicare if they reach age 65 but do not draw their ocial Security benefits, or if they elect to delay Social Security benefits beyond their 65th birthday.
HSA owners can contribute a prorated amount to their HSAs based on their actual month of enrollment (assuming they still meet the other qualifying factors).
All of that seems fairly straight forward, but what if someone is still working after age 65? Can he delay Medicare enrollment, maintain his HDHP, and contribute to the HSA as he had before?
Again, the answer is yes.
Delaying Medicare Enrollment
Individuals who do not automatically enroll in Medicare at age 65 can delay enrollment if they meet certain requirements—including having qualified health insurance through their employers. But individuals who delay enrollment without proving they had qualifying health insurance at age 65 and beyond, may have to pay higher Medicare premiums or a “late-enrollment penalty”. In some cases, this penalty may apply for as long as they’re enrolled in Medicare.
Another issue to be aware of occurs when an individual delays enrollment and is covered under a qualified health plan with her employer, but that employer has less than 20 employees. In this case, the individual is treated as though she does not have qualifying coverage and must enroll in Medicare. If she fails to do this, the late-enrollment penalties will apply. The individual may elect to continue coverage under the employer’s plan if it makes financial sense, but once enrolled in Medicare, she can no longer contribute to an HSA.
These scenarios can also apply in unique ways for married couples where one spouse is enrolled in Medicare and one is not. That, however, is a topic best discussed in a separate article.
Now, let’s review one of the main benefits of having an HSA after age 65.
Paying Medicare Premiums
Before we discuss the benefits of having an HSA after age 65, let’s discuss how individuals pay their share of Medicare premiums. If an individual is drawing Social Security benefits while enrolled in Medicare, the premiums are deducted directly from his monthly payment. If an individual is enrolled in Medicare and not drawing Social Security benefits, he can either
- submit payments (including automatic payments) directly from his bank account,
- pay by check or money order, or
- pay by credit or debit card.
So how does the payment of Medicare premiums relate to HSAs? Medicare premiums for Parts A, B, and D are qualified medical expenses for individuals age 65 and older. Medicare HMO premiums and an employee’s share of premiums for certain employer-sponsored health insurance are also qualified expenses after age 65.
To be clear, while Medicare premiums are qualified distributions and tax-exempt, other insurance policies that cover copays and deductibles against Medicare (sometimes referred to as Medigap policies) are not. Any Medigap premiums paid from an HSA are taxable but not penalized after age 65.
The Take Away
HSAs have a wide variety of benefits that most people simply do not know about or fully understand. It is this type of consumer education that can help people of all generations make better decisions both while saving for retirement and using assets wisely in retirement.