HSA Best Practices for Employees Over 65

A recent analysis found that more than 3 million baby boomers retired prematurely due to COVID-19 . And while retirement is calling for a significant portion of boomers, many may choose to remain in their roles well past age 65—when most people qualify for Medicare benefits. Employers and benefits providers need to keep in mind the healthcare options available to their employees as they reach this age, and the three major changes that take effect.

Reminder: What is an HSA?

A health savings account (HSA) is a personal bank account with significant tax advantages that can be used by an individual to pay for medical expenses, typically on high-deductible health insurance plans. 

Individuals with HSAs need to be enrolled in a compatible, high-deductible health plan (HDHP) to properly utilize their benefits. They can then use the money from their HSAs for qualified medical expenses, which can be determined by reviewing the HDHP.

HSAs are important because offering flexible, competitive benefit packages is one way to help recruit strong candidates and retain employees.

The Three Main Changes When HSA Owners Turn 65

When HSA owners turn 65 years old, three changes impact the way in which they’re able to contribute to and withdraw from their HSAs:

• Penalty-Free Withdrawals: HSA owners are permitted to withdraw money from their HSA for any reason when they turn 65. 

• Use of HSA Funds as Payment for Health Insurance Premiums: At 65, some insurance premiums may be paid for using HSA funds such as Medicare Parts A, B, D and Medicare HMO premiums

• Loss of HSA Eligibility: At 65, most Americans lose HSA eligibility once they begin Medicare coverage. 

How It Works: Penalty-Free Distributions at Age 65

Once an HSA owner turns 65, they can take distributions from their HSA for any reason. But for these distributions to be considered both tax-free and penalty-free, the withdrawal must be made for a qualified medical expense; distributions made for any other purpose will be subject to income taxes. 

Payment of Health Insurance Premiums

Once an individual turns 65, they’re able to use HSA funds for tax-free and penalty-free payment for Medicare parts A, B, and D—as well as Medicare HMO premiums. Note: HSA funds cannot be used to pay Medigap insurance premiums. 

HSA funds can also be used to pay the employee share of premiums in employer-sponsored healthcare plans. Two things to keep in mind:

1. It can be difficult for many individuals to pay for Medicare with pre-tax dollars, so HSA funds serve as a great way to fill in these potential gaps and maximize their benefits. 
2. Some Medicare premiums may be automatically deducted from an individual’s Social Security check. In these instances, individuals can reimburse themselves using HSA funds.

What About HSA Eligibility Beyond Age 65?

If an individual participates in any type of Medicare (Parts A, B, C, D, and Medigap), they’re unable to continue contributing to their HSA. Most Americans become eligible for Medicare at age 65, including those who begin receiving Social Security benefits prior to age 65. That said, individuals are permitted to continue using HSA funds for qualified medical expenses, given that appropriate funds exist in the account.

Two reminders: 

1. When Does HSA Contribution Eligibility Expire? People lose HSA contribution eligibility on the first day of the month when they turn 65 (when they become enrolled in Medicare). 
2. Contributions in Final Year Are Pro-Rata: HSA contributions can still be made by individuals who have turned 65 and are enrolled in Medicare only if they have not maximized their contributions for the final year of eligibility. These contributions can be made until April 15 of the year following the tax year that HSA contribution eligibility is lost, as long as the individual is contributing for a period while still eligible. 

Making Contributions to an HSA After Age 65

In order for individuals to contribute to an HSA after age 65, they cannot be enrolled in Medicare. Note: There is a distinction between being eligible for Medicare and being enrolled in or entitled to Medicare benefits. 

Please consider the following situations: 

1. Medicare Automatic Approval: Individuals are enrolled in Medicare (Part A) by completing an application or being approved automatically (as in the case of the Social Security Administration, which automatically enrolls individuals when they begin collecting Social Security benefits). 
2. Social Security Payments: If a person is 65 or older and currently collecting Social Security payments, they are almost definitely enrolled in Medicare Part A. 
3. Small Employer Insurance: Employees age 65 and older will have access to Medicare as their primary insurance if they work for smaller employers (less than 20 employees). 
4. HSA Contributions Post-65: Individuals who are not enrolled in Medicare and remain HSA-eligible can still make HSA contributions after age 65, including the $1,000 catch-up.
5. Spouse Under 65: If a person’s spouse is still under age 65, they may continue to make contributions to their own HSA. However, employers cannot contribute into the HSA of an employee’s spouse. 

How to Regain HSA Eligibility by Stopping Medicare

Individuals should contact the Social Security Administration if they are signed up for Medicare Part A and do not want to access these benefits. 

If they’ve yet to receive Social Security payments, their HSA eligibility will be reestablished; if they have already received these payments, they must reimburse the government for the following before regaining HSA eligibility: 

1. Money received from Social Security payments
2. Government expenses from all Medicare medical claims