Working After 65? What Medicare Means for Your HSA

Just because your 65th birthday is approaching doesn’t always mean retirement is.

You may enjoy your work. Maybe you haven’t hit your retirement goal. Or maybe you have great health insurance via your employer. And if you have access to a Health Savings Account (HSA), you might enjoy contributing to it.

But what happens when Medicare enters the picture?

Must you enroll at age 65? What happens to your employer coverage? And can you still contribute to your HSA?

These are important questions as Medicare and HSA contributions are connected.

Working After 65 Doesn’t Always Mean Enrolling in Medicare Right Away

If, when you turn 65, you are still working and have group health coverage either through your current employer or your spouse’s current employer, it may be possible to delay enrolling in Medicare Part B and avoid the late-enrollment penalty.

But simply having employer health insurance doesn’t give you the full answer.

The important nuance is the size of the employer. If your employer has 20 or more employees, then the group health plan typically pays first and Medicare pays second. When an employer has fewer than 20 employees, Medicare generally pays first. Some multi-employer plans have unique rules.

Your employer’s benefits department should be able to help you answer the question: How does our employer health plan coordinate with Medicare when employees turn 65?

The rules are also different if you are on a retiree health plan or COBRA (neither is considered coverage based on current employment).

The HSA Rule That Often Gets Missed

While an HSA can provide a valuable triple tax advantage, there are important eligibility requirements for contributing. One of them is that you cannot be enrolled in Medicare.

Once you enroll in Medicare, the IRS says your HSA contribution limit becomes zero for that month (and for each month you remain enrolled). This rule applies to both employer and employee contributions.

The important distinction is not turning age 65; it is enrolling in Medicare.

That means if you continue working after 65, remain covered by a high-deductible health plan (HDHP) (one that qualifies for HSA contributions) and meet eligibility rules, you may be able to still contribute to your HSA.

But Medicare also applies a retroactive lookback.

Why the Six-Month Lookback Matters

Let’s say you are still working past 65, you delay Medicare because your employer coverage qualifies, and you continue contributing to your HSA.

Many people would think, “Great, I will stop contributing to my HSA when I leave my employer and enroll in Medicare.”

But even if you enroll in premium-free Medicare Part A, Medicare generally backdates your start date by up to six months (although it won’t be backdated earlier than your first month of Medicare eligibility). Applying for Social Security after 65 can also result in Part A coverage beginning automatically.

Here’s where the problem can show up: if you or your employer made contributions during the six-month lookback period. This can result in the IRS imposing a 6% tax on the excess HSA contributions (for each year the excess remains in the account). If you catch the issue in time, IRS rules may allow you to correct the excess contribution (along with any earnings attributable to it) and avoid the 6% tax.

That’s why Medicare advises people who wait six or more months after age 65 to enroll to stop making HSA contributions six months before they plan on applying for Medicare.

Medicare Stops New Contributions – Not Your HSA

The good news is that when you enroll in Medicare, you can still keep your existing HSA.

You can continue to take tax-free withdrawals from your HSA for qualified medical expenses.

After age 65, those qualified medical expenses generally include premiums for Medicare Part B, Part D and Medicare Advantage plans. But unfortunately, premiums for Medicare supplemental policies such as Medigap are not qualified medical expenses.

So, although Medicare ends contributions to your HSA, you can generally continue using your HSA funds for qualified medical expenses during retirement.

A Few Questions to Think About

• Is my current health insurance based on either my or my spouse’s employment, and if yes, how does it coordinate with Medicare?
• When do I plan to sign up for Medicare and how does the Part A lookback rule impact me?
• Have I scheduled both my employee and employer HSA contributions to stop at appropriate times?
• Is my employer’s prescription drug coverage considered creditable if I plan to delay Medicare Part D?

Let’s Have a Conversation:

Have you looked into the connection between your HSA(Health Savings Account) and Medicare after 65? What have you found out that you didn’t know? How has it helped you make better decisions?