Working Past 65? Remember, Medicare and HSAs Don't Mix

Deferring Medicare

Individuals who continue to work past 65 can opt to defer enrollment in Medicare without incurring penalties if they are enrolled in a group health plan that is sponsored by an employer with at least 20 employees. Private health plans that are available through the Affordable Care Act health insurance marketplace and COBRA plans do not qualify.

Once the individual is no longer covered by the employer-sponsored plan, they have an eight-month window to enroll in Medicare Part B. Failure to enroll during that window will result in late enrollment penalties, which last for the individual’s lifetime.

If the individual misses the eight-month deadline, they have a limited special enrollment period in which to apply (that period is Jan. 1 to March 31). However, coverage then doesn’t begin until July 1. Even if the individual enrolls during the special enrollment period, late enrollment penalties will increase their cost of coverage for life.

Assuming the individual does not defer Medicare, after 65, an individual can continue to participate in an HSA-eligible health insurance plan to provide coverage in addition to Medicare. However, even if a Medicare-enrolled individual continues to participate in the HSA-eligible plan, they cannot continue to contribute to the HSA because they also have Medicare coverage.

They can, however, continue to use funds that they have already accumulated in HSAs. Those funds continue to be available tax-free so long as they are used to pay for qualifying medical expenses (including traditional Medicare premiums for Parts A, B, C and D, but excluding premiums for supplemental Medicare programs).

Taxpayers can use HSA funds to reimburse themselves for Medicare premiums that are withdrawn directly from their Social Security benefits (but it’s important to keep records to substantiate the HSA withdrawals).

Key Reminders

HSAs provide a powerful tax-preferred savings vehicle to cover the ever-increasing costs of medical expenses during retirement. That said, it’s important for clients to understand the complex rules that apply once the taxpayer becomes eligible for Medicare coverage to avoid penalties and surprise taxes.

While there is proposed legislation that would change the rule, under current law, individuals are no longer eligible to contribute to an HSA once they enroll in Medicare.

(Pictured: Robert Bloink and William H. Byrnes)

Learn more with Tax Facts, the go-to resource that answers critical tax questions with the latest tax developments. Online subscribers get access to exclusive e-newsletters.
Discover more resources on finance and taxes on the NU Resource Center.
Follow Tax Facts on LinkedIn and join the conversation on financial planning and targeted tax topics.
Get 10% off any Tax Facts product just for being a ThinkAdvisor reader! Complete the free trial form or call 859-692-2205 to learn more or get started today.