Many 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 the discussion should be expanded upon by asking, “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 don’t 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 point often causes some confusion, so let’s explore that for a moment.
In the retirement industry, it’s common knowledge that someone in the United States is eligible for Medicare once they reach age 65.
What most don’t fully understand—but make certain assumptions about—is how an individual enrolls in Medicare. There are essentially two ways individuals can do this.
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 don’t draw their Social 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 straightforward, but what if someone is still working after age 65? Can they delay Medicare enrollment, maintain HDHP, and contribute to the HSA as before?
Again, the answer is yes.
Delaying Medicare enrollment
Individuals who don’t 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 their employer, but the employer has less than 20 employees. In this case, the individual is treated as though they don’t have qualifying coverage and must enroll in Medicare.
If they fail 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, can no longer contribute to an HSA.
Let’s review one of the main benefits of having an HSA after age 65.
Paying 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) aren’t. Any Medigap premiums paid from an HSA are taxable but not penalized after age 65.
HSAs have a wide variety of benefits that many simply don’t know about or fully understand.
It’s 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.
Steve Christenson is Executive Vice President of Ascensus.