Medicare and Social Security Collide with Health Savings Accounts at Age 65

A person near retirement age but still working and who has a Health Savings Account (HSA) must understand and plan for a significant change in the rules when they turn 65. Once individuals are enrolled in Medicare Part A or B, they cannot contribute to their HSA.

 

A Health Savings Account is a tax-advantaged account that is available for an employee who is covered by a qualifying high-deductible health plan (HDHP) with no other non-HDHP coverage. HSAs have three significant tax benefits. Employer contributions are not included in the employee’s taxable income and employee contributions are tax-deductible (up to $4,150 for a self-only plan or $8,300 for family coverage in 2024). Interest and investment income earned on an HSA are not taxable. Distributions are not taxable if the funds are used for qualified medical expenses, such as copayments, out-of-pocket drug expenses, long-term care services, and reimbursement of health insurance premiums (but not Medigap).

 

Medicare is the primary health insurance program for people aged 65 and over who have worked a sufficient amount of time in jobs covered by Medicare. Medicare is also the primary insurer for individuals who receive Social Security Disability Insurance or Railroad Retirement Disability Benefits (after a two-year waiting period).

 

Most people enroll in Medicare when they turn 65 even when still working either because coverage will be better than their employer-based plan or because they want to avoid the lifetime penalty for failing to enroll in Medicare Part B in time. Individuals already receiving Social Security when they turn 65 or who have reached their full retirement age are automatically enrolled in Medicare Part A.

 

Therefore, because Medicare is not considered qualifying HDHP coverage, Medicare recipients will no longer be eligible to contribute to their HSA. Contributions that violate this rule are subject to a 6% excise tax. Workers can, however, have and use the HSA to pay qualified medical expenses even though they’re no longer able to contribute to it. Also, an HSA-eligible worker aged 65 or older whose spouse is enrolled in Medicare can still contribute to their HSA even if they have family coverage, meaning that the worker spouse can contribute up to $8,300 to their HSA even if their spouse is enrolled in Medicare.

 

Workers not collecting Social Security may choose to defer enrolling in Medicare so that they can continue contributing to their HSA. The person must be enrolled in an employer-based group health plan—COBRA and private marketplace insurance do not count.

 

When individuals who have deferred applying for Social Security and Medicare decide to retire, they will need to navigate the Medicare and HSA rules to avoid gaps in coverage, penalties for late Medicare enrollment, and penalties for contributing to their HSA. They must enroll in Medicare Part B within eight months. For people retiring after age 65 who contribute to an HSA, Medicare coverage is considered to begin six months before applying. So, as a rule of thumb, the retiree should consider ceasing HSA contributions six months before the month they apply for Medicare.

 

Someone age 65 or older who has already begun receiving Social Security can file an application to withdraw from Social Security within 12 months of approval and disenroll from Medicare. However, this requires paying back any benefits received, including amounts withheld for income taxes and Medicare Part B premiums and Part A benefits paid.

 

To summarize, the only way to continue contributing to an HSA after age 65 is to be enrolled in an employer-sponsored high-deductible health plan, not claim Social Security benefits, and not enroll in Medicare at age 65.