As many clients continue to work beyond the traditional retirement age of 65, financial advisers are often confronted with questions about the interaction of employer-provided health insurance, Medicare and health savings accounts.
Health savings accounts (HSAs), when paired with a qualified high-deductible health insurance plan, offer a triple tax-break. Contributions are tax-deductible. Assets grow tax-free. And distributions are tax-free if used for qualified medical expenses. Non-qualified distributions are subject to ordinary income taxes and a 20% penalty if withdrawn before age 65.
Most Americans become eligible for Medicare at 65. Anyone who begins receiving Social Security benefits before age 65 is automatically enrolled in Medicare at age 65. Those who are not yet receiving Social Security benefits must enroll in Medicare at age 65 during their initial seven-month enrollment period unless they have credible health insurance from an existing employer or are covered by their spouse's group health insurance plan.
In the absence of continued employer health insurance coverage, failure to enroll in Medicare during the initial enrollment period can result in a permanent delayed enrollment penalty.
But participation in any type of Medicare — including Parts A, B, C or D — renders you ineligible to contribute to an HSA.
Once you turn 65, you can take penalty-free distributions from an HSA for any reason. But in order for an HSA distribution to be both tax-free and penalty-free, the distribution must be for a qualified medical expense.
At age 65, you can use your HSA to pay for Medicare parts A, B, D and Medicare HMO premiums tax-free and penalty free. For example, if your Medicare premium is automatically deducted from your Social Security check, you can reimburse yourself directly from your HSA using those pre-tax dollars to pay for your Medicare premiums. However, you cannot use your HSA to pay for Medigap supplemental insurance premiums.
To be eligible to contribute to an HSA after age 65, you must not enroll in Medicare. That means if you want to continue contributing to an HSA after age 65, you can't receive Social Security benefits.
If you have already signed up for Social Security and now want to disenroll from Medicare Part A in order to continue contributing to an HSA, you would have to repay all the money you have received in Social Security benefits and repay any money the government spent on your Medicare claims.
Disenrolling may be easier said than done. One InvestmentNews reader, a financial adviser who delayed enrolling in Medicare because he was covered by his employer's health insurance plan, has found himself locked in a months-long battle with the Social Security Administration. He accepted a buyout from his firm at the end of 2016 and enrolled in Medicare effective Jan. 1, 2017. But the agency accidently backdated his Medicare enrollment by six months, making him ineligible for a HSA contribution for the second half of 2016 — contributions he had already made. At last check, he was still trading emails and phone calls with the agency and had planned to enlist his congressman's help in unraveling the bureaucratic mess.
If you want to continue contributing to an HSA after age 65, it means you must continue to work and be covered by an employer's group high-deductible health insurance plan. But if you are self-employed or work for a small business with fewer than 20 employees, you are out of luck. Medicare will become your primary insurer at age 65.
You lose your eligibility to contribute to an HSA on the first day of the month you turn 65 and enroll in Medicare. For example, if you turn 65 in July 2017, you are no longer eligible to contribute to your HSA as of July 1. Your maximum contribution for the year would be 6/12 times the applicable federal limit.
In 2017, the maximum an individual can contribute to an HSA is $3,400 or $6,750 for family coverage. HSA owners 55 and older can contribute an additional $1,000 in catch-up contributions. So if you have an individual HSA and turn 65 in July, you can contribute $2,200 for the first six months of 2017 ($3,400 + $1,000/2).
You have until April 15 of the year following the tax year you lose your HSA eligibility to make your HSA contribution, according to HSAresources.com, a firm that administers health savings accounts. You can do so even if you are no longer eligible for an HSA, as long as you are making contributions for a period when you were eligible. So if you turn 65 in July 2017, you have until April 15, 2019 to make your contributions for the first six months of 2017.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.