Medicare and HSAs after Age 65

/ Planning Within Reach, LLC/

What is an HSA?

Health savings accounts (HSAs) are vehicles that allow you to use tax-free money to pay for qualified medical expenses. The money you use to fund the account is not subject to federal income tax (or state income tax in most states) and employer contributions are not taxable to the employee. Unlike a flex savings account (FSA), the money contributed to an HSA can be rolled over from year to year - there is no "use it or lose it" feature. For 2022, the max that can be contributed to an HSA is $3,650 for one person or $7,300 per family.

Who can use an HSA?

In order to contribute to an HSA, you are required to be enrolled in a high-deductible health plan (HDHP). You cannot contribute to an HSA if you are on Medicare Part A, but if you had an existing HSA account, you can use the funds to pay for qualified medical expenses while you are on Medicare. Considering Medicare doesn't pay for all medical expenses in retirement, and that this money is tax-free, there is a planning opportunity to over-fund an HSA during your working years to use tax-free in retirement.

Be careful if you plan to work close to or past 65 and you are saving to an HSA.

Even though you are eligible for Medicare at age 65, you may choose to continue using your employer’s health insurance and saving to an HSA. While nearly everyone assumes that the minute you switch to Medicare is when you should stop contributing to the HSA - it doesn’t work that way. There is a 6-month lookback period when you enroll in Medicare at age 65 or later (not to precede the month of your 65th birthday). Therefore, if you plan on enrolling in Medicare, you have to stop contributing to the HSA 6 months prior or you may have to remove excess contributions, pay a penalty, or amend your tax return.

The rule has good intentions.

The lookback came about because there was a desire to make sure that people transitioning from private coverage to Medicare did not have a gap in coverage, thus the look-back. But by mandating the 6 months of coverage prior to enrollment, it invalidated people’s HSA contributions without them realizing it. The 6-month lookback could become voluntary at some point, but for now it is mandatory.

With more people utilizing HSAs and working longer, this nuance is catching people off guard.

Even if you are a good planner, you may get laid off. Life happens! What do you do if you get caught in this unintended trap? If you make an overcontribution to your HSA:

  • Notify your HSA bank immediately and have them reverse the contributions.

  • Check your W-2 for the year of the over-contribution carefully. You may need to request an amended W-2 to account for the fact that you removed the excess contributions.

  • If you realize the error after you already filed your taxes, contact your tax preparer to amend your return and help you calculate the penalty.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.