Mar 01, 2020
By Todd Helle, EA Tax Director and Partner at Terry Lockridge & Dunn
Medicare is not a high deductible health plan. After you are on Medicare, you are not eligible to contribute to an HSA. You can keep your existing HSA or withdraw from it for medical expenses including Medicare Part B, C and D premiums (but not for supplemental Medigap premiums). You just cannot put more money into it. In fact, you should stop all contributions to your HSA up to six months before you collect Medicare.
This scenario can come into play if you continue to be enrolled in your current employer’s qualified employer group health plan (retiree health plans do not qualify), or your spouse’s qualified employer group health plan, past age 65. Group health insurance plans must cover 20 or more workers to qualify for this exception. If you choose to delay Medicare enrollment because you are still working and want to continue contributing to your HSA, you must also wait to collect Social Security retirement benefits. This is because individuals who are receiving Social Security are automatically enrolled in Medicare Part A and B upon turning 65. When you are ready to enroll in Medicare, you should stop contributing to your HSA up to six months prior to enrolling. This is because when you enroll in Medicare Part A, you receive up to six months of retroactive coverage, not going back farther than your initial month of eligibility. If you do not stop your HSA contributions, you could incur tax penalties.
The Center for Medicare Advocacy offers this example: If you turn 65 in March 2020 and plan to retire in June 2020, stop contributing to your HSA in February 2020, the last month before Medicare eligibility begins. If you turned 65 in March 2019, and plan to retire in July 2020, you should have stopped contributing to your HSA in December 2019, six months before your employer provided insurance ends and retroactive Medicare eligibility begins.
What if you are too late? An individual may withdraw any contributions made while ineligible for an HSA without penalty if they withdraw the contributions by the due date of the tax return for the year the contributions were made and withdraw any income earned on the withdrawn contributions, and include the earnings on their tax return.
Please reach out to Todd at firstname.lastname@example.org, or your accountant at Terry Lockridge & Dunn, to discuss your specific situation. They can be reached at 319-364-2945 in Cedar Rapids, or 319-339-4884 in Iowa City.