FAQ: HSA in retirement and Medicare

Your HSA comes with what we call a triple tax advantage.¹ Contributions, interest, any investment gains, and withdrawals for qualified health care expenses are all federal tax-free.

The following are examples of health care expenses that you can pay for on a tax-free basis using your HSA:

• Premiums for Medicare Parts B, D and Medicare Part C
• Medicare deductibles, co-pays and co-insurance
• Dental and vision expenses
• Hearing aids
• Insulin and diabetic supplies
• Long-term care insurance premiums (eligible amount will vary by age)
• Over-the-counter medical equipment and supplies
• Over-the-counter medicine

For more detail, please see IRS publication 502.

One benefit of the HSA is that after you turn age 65, you can withdraw money from your HSA for any reason without incurring a tax penalty. You are, however, subject to normal income tax on any non-qualified withdrawals. But if you remove money from your HSA before age 65, you are subject to a tax penalty as well as normal income taxes. If you’re worried about contributing too much to your HSA because you think you may need the money to pay for other expenses in retirement, you can always access what you saved in your HSA.

Because an HSA is a tax advantaged account, the government establishes annual limits for contributions. The contribution limit is inclusive of any employer contributions/matches, your payroll contributions and any personal contributions you make to the account each plan year.

You are eligible to make a catch-up contribution of up to $1,000 beginning in the year that you turn 55. There are three ways to make your catch-up contribution:

• Increase your payroll deduction.
• Make a contribution to your account on the member website.
• Mail a contribution form with a check.

You can make a contribution to your current year’s HSA up until Tax Day of the upcoming year.

If you can, consider paying for out-of-pocket expenses now, while you’re working, and preserve your HSA for use during retirement when your income may be lower. If you cannot afford to pay for all costs out of pocket, you may want to consider setting a threshold for what you will pay out of pocket vs. using your HSA. For example, you may decide to pay any expense less than $50 out of your monthly budget and then choose to use your HSA for qualified health care expenses greater than $50. Keep receipts for any expenses that you pay for out of pocket and you can submit them for reimbursement at any point in the future.

Knowing that Medicare will only pay approximately 66%* of your health care costs in retirement, it may be a good idea to set aside money in your HSA for your retirement years. When you take money out of your HSA to pay for qualified medical expenses, you do not pay taxes on the withdrawal—and you will need to pay taxes on any withdrawal from your traditional 401(k) account. That said, it may be a good idea to consult with a financial advisor to see what amount may work best for your situation.

* Medpac, July 2022 Data Book: Health Care Spending and the Medicare Program. Total spending on health care services for noninstitutionalized fee-for-service Medicare beneficiaries.

When retiring early you can continue contributing to an HSA as long as you meet the requirements:

• You are not yet enrolled in Medicare.
• You’re covered on a high-deductible health plan.
• You’re not someone’s tax dependent.

No. You can delay Medicare by contacting their office prior to turning 65. If you have creditable coverage through your employer’s health care plan or your spouse’s employer’s health care plan, you qualify for a special enrollment period and are not subject to penalties for not enrolling at age 65. You can continue to contribute to your HSA as long as you are not enrolled in any part of Medicare, including A, B or D. If you are deferring Medicare, you may want to start working with Medicare three-to-six months before turning 65.

Collecting Social Security will trigger enrollment in Medicare Part A and B if you are age 65 or older. You may opt out of Part B, but not Part A, which would make you ineligible to contribute to an HSA.

It may be a good idea to visit with your financial advisor about the pros and cons of deferring Medicare to continue contributing to your HSA for future health care costs.

No. Once you begin any Medicare coverage you become ineligible to contribute to an HSA.

Once you begin any Medicare coverage, you can no longer contribute to your account. However, you can continue to use your HSA funds to pay for qualified medical expenses on a tax-free basis.

That depends whether you begin Medicare when you turn 65, or if you work beyond your full retirement age and defer Medicare enrollment.

If you enroll in Medicare when you turn age 65, you simply need to prorate your annual HSA contribution for the months you were covered on your high-deductible health care plan. For example, if you retire June 30—you worked six months of the year and are eligible to contribute 50% of the annual limit.

If you work beyond age 65 and defer Medicare, however, you will need to stop contributing to your HSA six months prior to receiving Social Security. Once you begin drawing Social Security after your full retirement age, you are required to have Medicare coverage and can no longer contribute to an HSA. If you file for Social Security six months or more past full retirement age, you can get up to six months in back benefits, and therefore would need to stop contributing to your HSA six months prior to your Medicare start date. You would need to prorate any annual contributions to factor this in. For example, if you retire September 30, you could only contribute 1/12 of the maximum contribution limit to your HSA for each of the months between January – March as you would receive retroactive Social Security benefits and Medicare for April – September.

Your spouse can contribute to an HSA as long as your spouse:

• Has elected an HSA-qualified health plan for the current coverage year.
• Is not covered by another health plan.
• Does not receive any military health care benefits.
• May not be claimed as a tax dependent on another person’s tax return.
• Is not enrolled in Medicare.

Premiums for Medicare Parts B, D and Medicare Part C are eligible expenses once the account holder reaches ages 65. You can also reimburse all of your spouse’s eligible expenses, including Medicare deductibles and coinsurance. Medigap premiums, however, are not a qualified HSA expense.

Yes. Because you are the individual account owner and not on Medicare, you can still contribute to your HSA. In fact, you can contribute up to the annual IRS limit for family coverage, plus any catch-up contribution if eligible.

Every situation is different, so we recommend researching this decision. You may want to consider the follow resources:

• Speak with your financial advisor.
• The Medicare.gov website
• State Health Insurance Assistance Programs (SHIP)

Yes, by naming a beneficiary for your account, you decide who will receive the money. As you consider who to designate as your beneficiary, be aware of the following tax considerations:

• Your spouse: Your HSA transfers to your spouse along with all its tax benefits, meaning your spouse can continue to take tax-free withdrawals from the account to pay for health care expenses.
• Someone other than your spouse: They receive the balance of your account, which is taxable the year you pass away.
• Your estate: The balance of your account is transferred to your estate to be included in your final tax return.
• No beneficiary: The balance of your account transfers to your estate to be included in your final tax return.

You can learn more on our website.

The IRS does not include burial expense as a qualified expense. If, however, you have any final medical bills, your HSA can be used to pay for any qualified expenses after your passing.

You cannot transfer money from a 401(k), 403(b), SEP, SIMPLE or other qualified retirement plan to an HSA. You can, however, make a one-time contribution from a Traditional IRA or Roth IRA. The one-time transaction must be a direct transfer (from the IRA trustee to the HSA trustee) or a rollover (a withdrawal from your IRA deposited into your HSA within 60 days). Please note: The transfer counts toward your annual contribution limit from all sources (i.e., employer contribution, employee contribution, individual contribution).

To facilitate a transfer, please use the HSA Transfer Form found on the member website by selecting Tools & Support and clicking Account Support & Forms.