By Andrew L Hibbard
Originally Posted: 01 MAY 2023
Updated & Revised:
If you are nearing age 65, currently actively employed, and contributing to a Health Savings Account, or H.S.A., it is important you understand the strict rules and regulations around signing up and starting Medicare will affect your H.S.A.
The first major mistake is not understanding which type of Employer Group Health plans are qualified to contribute to an H.S.A.
You must be enrolled in a high-deductible health plan, or HDHP, which means you a responsible to pay a large deductible that must be met before receiving coverage from your health insurance company.
For most people, in most cases, covered beneficiaries on the plan will pay the full costs for most health care services until they reach their deductible for the year.
Afterward your deductible is met, the HDHP covers all the member’s costs for the remainder of the year.
For folks who have the option to use an H.S.A., the funds contributed to the account are not taxed when put into, or when taken out, as long as they are used to pay for qualified medical expenses.
Your employer may oversee your HSA, or you may have an individual HSA that is overseen by a bank, credit union, or insurance company.
Here’s the rub…
When you sign up and start Medicare Part A, or Medicare Part A and Part B at the same time, you are no longer eligible to contribute pre-tax dollars to your HSA.
Remember, in order to get the tax benefits of H.S.A. contribution you must be enrolled in a High Deductible Health Plan, which Medicare is not.
The month your Medicare Health Insurance benefits begin, your Benefits Administrator who manages your EGHP coverage should change your payroll contribution to your HSA to zero dollars per month.
Here’s some good news…
Even if you do enroll in Medicare and lose the pre-tax contribution of new funds into your H.S.A., you can continue to withdraw money from your account until the balance is zero.
Your withdrawals can be used to help pay for medical expenses, such as deductibles, premiums, copayments, and coinsurances. If you use the account for qualified medical expenses, its funds will continue to be tax-free.
The million-dollar question…
CAN YOU USE YOUR H.S.A. WITH MEDICARE LIVING IN WNY?
Or, rather, can you, or should you, suspend signing up and starting Medicare at 65, and wait until later in life to keep the pre-tax benefits of H.S.A. contributions?
If you work for an employer with less than 20 active employees, your EGHP is considered secondary insurance and without Medicare, you don’t have a primary payer --- so all medical bills fall on you to cover the bulk of the costs.
You may need to sign up and start Medicare at 65, even you you’ll remain actively employed in order to have primary insurance (and unfortunately, you’ll lose the tax advantages of your H.S.A. but at least you won’t be refinancing your house over big medical bills.
If you work for an employer with more than 20+ active employees, your EGHP is considered primary insurance, so you have a choice about what to do with Medicare.
If you are relatively healthy, and are not draining your H.S.A. every year to cover medical costs, and the pre-tax benefit of contributing to an H.S.A. is meaningful and significant, it may make sense to keep on keeping on without making any changes.
However, if what you contribute to your H.S.A. is basically being pulled out dollar for dollar to cover frequent or expensive copays or costs, it may make more sense to mover to Medicare and free yourself from the frustration of a HDHP and enjoy lower copays and better coverage through a Medicare Advantage plan, even though you lose the pre-tax benefit of an H.S.A.
**DISCLAIMER** If you do decide to delay signing up and starting Medicare after age 65, make sure to stop contributing to your HSA at least six months before you want your Medicare benefits to begin.
Let me explain…
The Federal Government has an odd rule, of course it’s complicated, for when you enroll in Medicare Part A specifically older than 65, they retroactive start your coverage up to 6 months back, but not farther than your initial month of eligibility.
So, a word of warning…
If you do not stop any and all of your H.S.A. contributions at least six months before your Medicare benefits begin, you may incur a tax penalty. So, you need to consider your choices carefully.
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