When Should I Stop My Health Savings Account Contributions?

A health savings account (HSA) is a financial account available for health care costs. Typically, if you have high-deductible health plan, your benefits include an HSA. But if you plan to enroll in Medicare, when should you stop your HSA deposits?

The short answer: Six months before you plan to enroll in Medicare.

Read further for more detail, including advice about how to handle your HSA deposits.

Medicare Coverage & Your Health Savings Account

If you wait to sign up for Medicare after you become eligible, when you eventually enroll, Medicare includes up to six months of retroactive coverage. In other words, Medicare will cover your past health services once your coverage goes into effect.

For example, if you qualify for Medicare now but wait to enroll until October 2021, Medicare will assist with covered health care expenses dating back to April. But because you are retroactively “enrolled” in Medicare for an extra six months, you could be penalized after the fact if you contribute to your HSA during those months. To avoid this, you must stop depositing HSA funds to your account six months in advance.

Once you enroll in Medicare, you can no longer receive new HSA deposits from your employer. However, you can use your existing HSA funds to pay for Medicare costs. As long as you withdraw from your account to cover approved medical expenses, your money is not taxed. This applies to deductibles, copays, coinsurance, and Part B or prescription drug plan premiums.

If You’re Retiring and Enrolling in Medicare

On your employer group coverage, both you and your employer contribute funds to your HSA. You do not pay taxes on HSA deposits. You can withdraw money from this account tax-free, as long as it is used for covered medical expenses. The federal government sets annual limits for HSA deposits.

Keep a close eye on your HSA deposits—especially the nearer you are to your retirement. Both you and your employer must take actions regarding your HSA. Make a clear plan with your employer about when exactly you plan to retire and get off employer health care coverage. Not only will this smoothen your transition to Medicare—it will also help you avoid potential penalties.

When you retire and enroll in Medicare, you can use your existing HSA funds to pay for health care services. While you can’t deposit new funds, you can access all the money in your HSA tax-free, so long as you use it for Medicare-approved expenses.

If You’re Still Working When You Enroll in Medicare

You can sign up for Medicare without retiring from your job. If you are still working and eligible for Medicare, you can forego your employer health coverage. Your employment status does not impact your Medicare eligibility and vice versa.

However, once you plan to enroll in Medicare—even if you are still working—you must stop contributing to your HSA. Stop depositing funds to your HSA six months in advance of your Medicare enrollment.

Decide when you plan to retire and when you plan to sign up for Medicare; those may not be the same date. If you plan to enroll in Medicare within the year, you can pro-rate your HSA deposits to avoid exceeding the limit and receive the maximum value. Your employer must also stop contributing HSA funds once you sign up for Medicare, as well, regardless of how long you plan to continue working.

Questions About Your Health Savings Account?

If you’d like clarification on how to use your health savings account funds in retirement, our advisors are standing by to help. You can email your Medicare questions to advice@retiremediq.com or call 1-866-407-5180.

Already a RetireMEDiQ client? You can reach out to your advisor by emailing client@retiremediq.com or calling 1-877-222-1942.

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