You’ll likely already know a Health Savings Account (HSA) lets you deposit untaxed dollars into a savings account that can be used to pay for qualified medical necessities. Employers and financial institutions offer this kind of savings account to eligible individuals. Here are a few things you’ll need to know to help your clients navigate the transition from HSA to Medicare.
An individual may only contribute to an HSA at age 65 or older if they are covered by an HSA qualified health plan, they are not a tax dependent, and they are not enrolled in Medicare. They will not be able to open or make contributions to their HSA after they enroll in any part of Medicare.
The enrollment in Medicare will not disqualify the individual’s HSA eligible spouse from making contributions to their HSA account. They can still make tax-deductible contributions into the HSA, if they remain covered on a family contract.
Importantly, even if the individual is no longer HSA eligible, they still have the right to make income tax-free distribution for qualified medical expenses for as long as there is a balance in their account.
They are still subject to the Medicare Part B and Medicare Part D penalty if they delay enrollment solely for the purposes of maintaining an active HSA account. In addition, they will need to postpone their Social Security retirement benefits because they will automatically be entitled to Medicare Part A. they will not be able to decline Medicare Part A if they are receiving Social Security benefits.
Medicare Part A enrollment is retroactive for six months if your client enrolls after becoming initially eligible (coverage will not start earlier than the month they turned 65). This means that they will need to stop contributing to your HSA at least 6 months before they apply for Medicare Part A to avoid a tax penalty.