What Happens to Your HSA When You Enroll in Medicare?
HSA after 65, HSA and Medicare, HSA after Medicare enrollment, can I contribute to HSA after 65, when to stop HSA contributions before Medicare, HSA Medicare premiums, HSA retirement strategy, HSA reimbursement after retirement, what happens to HSA when you die
If you’re nearing age 65 and wondering what you should do with your HSA when you enroll in Medicare, you’re not alone.
Many individuals approaching retirement have accumulated a considerable amount of money in a Health Savings Account (HSA) through years of participation in an employer-sponsored high-deductible health plan. As Medicare eligibility approaches, however, several important questions arise:
Can I still contribute to my HSA while on Medicare?
When should I stop making HSA contributions?
What can I use my HSA for after age 65?
Can I use my HSA to pay Medicare premiums?
What happens to my HSA when I die?
The most important thing to know is this: Enrolling in Medicare doesn't mean you lose your HSA. Your existing HSA remains yours, but once you're enrolled in Medicare, you can no longer make HSA contributions.
In fact, an HSA can become an extremely valuable retirement planning tool after age 65. You can use it to pay qualified medical expenses tax-free, cover certain Medicare premiums, reimburse yourself for eligible medical expenses incurred in prior years, and even use the account for non-medical retirement expenses without the 20% additional tax that generally applies before age 65.
Here's what you need to know as you transition from an employer-sponsored health plan to Medicare.
What Happens to Your HSA Once You Enroll in Medicare?
One of the most important HSA rules to understand is that once you're enrolled in any part of Medicare, you're no longer eligible to contribute to an HSA.
That includes Medicare Part A.
Your existing HSA doesn't disappear, and you don't have to withdraw the money. You simply lose your eligibility to make new contributions.
If you continue contributing after becoming Medicare-enrolled, those contributions may be considered excess contributions.
Excess HSA contributions can be subject to a 6% excise tax if they're not corrected. Because this tax can potentially apply in subsequent years while an excess contribution remains in the account, correcting an excess contribution promptly is important.
When Should I Stop Contributing to My HSA Before Medicare?
This is where planning can become more complicated.
For certain individuals who enroll in Medicare after age 65, Medicare Part A coverage can be retroactive for up to six months, but not earlier than the first month they were eligible for Medicare.
Because of this retroactive coverage, someone working beyond age 65 and delaying Medicare may need to stop contributing to their HSA up to six months before applying for Medicare or Social Security.
For example, suppose you're 68, still working, covered by an HSA-eligible employer health plan, and have delayed Medicare.
If you retire and apply for Medicare, your Medicare Part A coverage could potentially begin retroactively. Contributions you made to your HSA during those retroactively covered months could therefore become excess contributions.
If you're working beyond age 65 and continuing to fund an HSA, coordinate your final contributions carefully before enrolling in Medicare.
Can I Delay Medicare and Keep Contributing to My HSA After 65?
Whether you can opt to refuse Medicare coverage will depend on:
A) If you, or a spouse, is currently enrolled in an employer sponsored health plan, and
B) If you are currently receiving social security or Rail Road Retirement Board Benefits
This question is more common than you may think. This is because, for many couples, one spouse can be retired while the other is still working and receiving health care benefits through their employer’s group plan for the family. In this situation careful planning around health care coverage is important to avoid penalties, taxes, and the accidental loss of HSA eligibility.
To refuse to enroll in Medicare part A, B, and D after reaching age 65, you must be covered by a qualifying employer-sponsored health plan through either your own employer, or a spouses.
If this does not describe your scenario, then enrollment into Medicare is mandatory and delaying enrollment can result in penalties assessed in the form of lifetime Medicare premium increases.
Medicare Part B Penalty
The penalty: Your monthly premium increases by 10% for each full 12-month period you delay signing up for Medicare Part B past when you were otherwise eligible. This increase will be added to your monthly part B premium for as long as you keep Part B coverage, which is generally for the rest of your life.
Medicare Part D Penalty
The penalty: You pay an extra 1% of the national base beneficiary premium for every full month you went without drug coverage or other creditable coverage past when you were otherwise eligible. This increase will be added to your monthly part D premium for as long as you keep Part D coverage.
This is why having clarity around your plan for Medicare enrollment is important as making a mistake can result in aggressive penalties that will follow you throughout the duration of your retirement.
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Social Security, Railroad Retirement Benefits and Your HSA
As I mentioned, the second determination to whether you can continue contributing to your HSA is whether you are claiming your Social Security or Railroad Retirement Benefits or not.
This is because enrollment in Medicare part A is automatic, and mandatory, for all retirees that are actively receiving their Social Security or RRRB benefit at the age of 65. While you may refuse to enroll in Part B or D, if you are currently covered by a qualifying employer sponsored health plan, part A is unavoidable while claiming Social Security at or past the age of 65.
This is especially important for someone who:
Is over age 65
Continues working
Has an HSA-eligible employer health plan
Wants to continue maximizing HSA contributions
Hasn't yet started Social Security
Starting Social Security could trigger Medicare Part A enrollment and consequently end your eligibility to make HSA contributions.
This is one reason your Medicare, Social Security, retirement date, and HSA strategy should be planned together rather than independently.
What Can I Use My HSA for After Age 65?
Thankfully, your HSA is yours for life.
Medicare enrollment may prevent additional contributions, but it doesn't prevent you from spending the money you've already accumulated.
And qualified medical expenses remain eligible for tax-free HSA withdrawals.
These can include expenses such as:
Doctor and specialist visits
Prescription medications
Hospital care and diagnostic testing
Dental expenses
Vision care, glasses and contact lenses
Hearing care and hearing aids
Certain medical equipment and supplies
Physical therapy
Certain chiropractic and acupuncture expenses
Eligible over-the-counter medications
Certain medical transportation expenses
This is why building a substantial HSA balance before retirement can be so valuable.
Healthcare will likely remain a significant expense throughout retirement, and your HSA gives you a dedicated pool of tax-advantaged assets to help pay those costs.
Can I Use My HSA to Pay Medicare Premiums?
Yes, certain Medicare premiums can be paid from your HSA tax-free once you're eligible.
HSA funds can generally be used for premiums associated with:
Medicare Part B: Medical insurance.
Medicare Part D: Prescription drug coverage.
Medicare Advantage (Part C): Private Medicare Advantage plans.
This can create a valuable retirement tax-planning opportunity.
Rather than withdrawing additional money from a traditional IRA to pay eligible Medicare premiums—and potentially owing ordinary income taxes on that IRA distribution—you could potentially withdraw money from your HSA tax-free.
An Example
Suppose a retired couple incurs $6,480 of HSA-eligible Medicare premiums during the year.
Instead of withdrawing $6,480 from a traditional IRA and potentially paying income taxes on that distribution, they may be able to use existing HSA assets to cover the qualified premiums tax-free.
Over a retirement lasting 20 or 30 years, consistently using tax-free HSA dollars for qualified healthcare expenses can potentially create meaningful lifetime tax savings.
One important exception is Medigap premiums, which generally aren't qualified medical expenses for HSA purposes.
Can You Use an HSA for Long-Term Care Expenses?
An HSA may also play an important role in preparing for long-term care expenses.
Certain qualified long-term care services can qualify for tax-free HSA distributions.
Additionally, qualified long-term care insurance premiums can be eligible HSA expenses, subject to annual age-based limits established by the IRS.
This can make your HSA another resource within a broader long-term care strategy.
Rather than viewing your HSA as simply an account for today's doctor's appointments and prescriptions, consider how the account could help fund potentially much larger healthcare expenses later in retirement.
Can I Use My HSA to Pay My Spouse's Medical Expenses?
Yes.
Your HSA isn't limited exclusively to your own healthcare expenses.
HSA distributions can generally be tax-free when used to pay qualified medical expenses for:
Yourself
Your spouse
Eligible dependents
Your spouse doesn't necessarily need to be covered under your health insurance plan for their qualified expenses to be eligible for reimbursement from your HSA.
For example, if your spouse is enrolled in Medicare, you may be able to use your HSA to pay eligible Medicare premiums and other qualified medical expenses for your spouse.
Rules involving dependents can be more complicated, particularly when paying expenses for an aging parent, so verify that the person qualifies under the applicable tax rules before taking a distribution.
What Happens If I Use My HSA for Non-Medical Expenses After 65?
This is another major advantage of reaching age 65 with a substantial HSA balance.
Before age 65, HSA withdrawals used for non-qualified expenses are generally:
Subject to ordinary income taxes, plus a 20% additional tax.
After you reach age 65, the 20% additional tax no longer applies.
If you withdraw HSA money after 65 for something other than a qualified medical expense, you'll generally owe ordinary income taxes on the distribution—but not the additional 20% tax.
In that respect, your HSA can begin functioning somewhat similarly to a traditional IRA.
There is still an important difference:
Qualified HSA withdrawals remain completely federal income tax-free.
That's why it may make sense to preserve HSA assets for healthcare expenses when possible rather than immediately treating the account as another source of general retirement income.
Can I Reimburse Myself From My HSA Years Later?
Here's one of the most powerful—and often overlooked—HSA planning opportunities.
There is generally no requirement that you reimburse yourself from your HSA in the same year you incur a qualified medical expense.
Suppose you incurred a $5,000 qualified medical expense at age 50.
Instead of withdrawing $5,000 from your HSA, you paid the bill using cash and kept your HSA invested.
Years later, after you've retired, you could potentially reimburse yourself for that original $5,000 expense tax-free, provided:
The expense was incurred after your HSA was established.
You didn't previously reimburse yourself for it.
You didn't deduct the expense elsewhere.
You maintain sufficient documentation to substantiate the expense.
This can allow your HSA investments to potentially grow tax-deferred for many years before you eventually reimburse yourself.
And once you legitimately reimburse yourself, there's no requirement that you spend the reimbursement on healthcare.
You could use the cash for travel, home improvements, a vehicle, living expenses, or anything else.
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How to Reimburse Yourself From an HSA
The exact process depends on your HSA custodian, but it will commonly involve:
Pay the medical expense out of pocket. Rather than immediately using your HSA debit card, pay using another source of funds.
Keep detailed documentation. Save receipts, invoices, explanations of benefits, and other records substantiating the qualified medical expense.
Maintain a reimbursement log. Keeping a spreadsheet or other organized record can help ensure you don't accidentally reimburse yourself twice for the same expense.
Request a distribution when you're ready. Follow your HSA provider's process for transferring money from your HSA to your bank account or otherwise receiving the funds.
Your HSA provider may not be responsible for determining whether every distribution is qualified, so maintaining adequate records is ultimately important for tax purposes.
What Happens to Your HSA When You Die?
An HSA doesn't simply disappear when you die.
However, what happens to the account depends heavily on whom you've named as your beneficiary.
This makes your HSA beneficiary designation an important part of your overall retirement and estate plan.
If Your Spouse Inherits Your HSA
A spouse receives particularly favorable treatment.
If your spouse is your designated beneficiary, the HSA generally becomes your spouse's HSA upon your death.
The account can maintain its HSA status, and your spouse can continue taking tax-free distributions for qualified medical expenses.
This is one reason married HSA owners should carefully review their beneficiary designations.
If a Non-Spouse Inherits Your HSA
The rules are significantly different when the beneficiary isn't your spouse.
If you leave your HSA to a child, sibling, or other non-spouse beneficiary, the account generally stops being an HSA at your death.
The fair market value of the account generally becomes taxable income to the beneficiary for the year in which you die.
There is an important potential adjustment: the taxable amount can generally be reduced by qualified medical expenses you incurred before death that the beneficiary pays within one year after your death.
Large HSA balances can therefore create a substantial income-tax event for non-spouse beneficiaries.
What If Your Estate Is the Beneficiary?
If your estate is the beneficiary, the HSA generally ceases to be an HSA upon your death, and the account's fair market value is generally included as income on your final income tax return.
Because the tax treatment differs significantly between spouses, non-spouse beneficiaries, and estates, don't treat your HSA beneficiary designation as an afterthought.
Should You Spend Down Your HSA in Retirement?
Not necessarily.
Your HSA can be one of the most tax-efficient accounts available to you.
When used for qualified medical expenses, an HSA can potentially provide three federal tax advantages:
Tax-deductible or pre-tax contributions + tax-deferred investment growth + tax-free qualified withdrawals.
Once you're retired, it may therefore make sense to strategically coordinate withdrawals across your:
HSA
Traditional IRA and 401(k)
Roth IRA
Taxable brokerage accounts
Cash reserves
The most tax-efficient withdrawal strategy won't necessarily be the same every year.
For example, you might preserve HSA assets for future healthcare expenses while completing Roth conversions from an IRA during lower-income years. In another year, using HSA funds to cover Medicare premiums and other medical costs could help limit taxable retirement-account withdrawals.
The important thing is to view your HSA as part of your overall retirement income and tax strategy, rather than as an isolated healthcare account.
The Bottom Line: Your HSA Can Remain Valuable Long After Age 65
Turning 65 doesn't mean you need to close your HSA or immediately spend the balance.
Quite the opposite.
A well-funded HSA can become an extremely useful retirement asset.
Once you enroll in Medicare, you'll generally need to stop making HSA contributions. But the money already accumulated can continue to be used for qualified medical expenses, certain Medicare premiums, eligible long-term care expenses, and prior unreimbursed medical expenses.
After age 65, you also gain additional flexibility because non-qualified distributions are no longer subject to the 20% additional tax, although ordinary income taxes generally still apply.
As you approach Medicare eligibility, consider coordinating your HSA contributions, Medicare enrollment, Social Security claiming strategy, healthcare expenses, and retirement-account withdrawals before making any major decisions.
A little planning before age 65 can help you avoid unwanted HSA contribution penalties while allowing you to take full advantage of one of the most tax-efficient accounts available in retirement.
As always have a wonderful day,
a better weekend,
and I look forward to writing to you next Friday!
Written by Ryan Morrissey CFP®, CLU®, CHFC®, CMFC
Founder & Principal Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast
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Frequently Asked Questions
Can I contribute to an HSA after age 65?
Yes, potentially. Turning 65 alone doesn't prevent HSA contributions. You must remain HSA-eligible and cannot be enrolled in Medicare. Someone who continues working after 65 and delays Medicare may therefore remain eligible to contribute.
Can I contribute to an HSA while enrolled in Medicare?
No. Once you're enrolled in Medicare, you're no longer eligible to make HSA contributions.
Should I stop HSA contributions six months before turning 65?
Not necessarily. The six-month issue generally applies when someone enrolls in Medicare after age 65 and Medicare Part A coverage is applied retroactively. Your specific enrollment timing matters.
Can I use my HSA to pay Medicare premiums?
Yes. HSA funds can generally be used tax-free for eligible Medicare Part B, Part D, and Medicare Advantage premiums. Medigap premiums generally don't qualify.
What happens to unused HSA money after age 65?
Nothing automatically happens to it. The money remains in your HSA and can continue to be invested and withdrawn. Qualified medical distributions remain tax-free.
Can I withdraw HSA money for anything after 65?
Yes. After age 65, the 20% additional tax for non-qualified distributions no longer applies. However, non-qualified withdrawals are generally subject to ordinary income tax.
What happens to my HSA when I die?
If your spouse is the designated beneficiary, the account generally becomes their HSA. If a non-spouse inherits it, the account generally ceases to be an HSA and becomes taxable to the beneficiary. Different rules apply if your estate is the beneficiary.