Five Things Employees Need to Know About Their HSAs Before They Retire

Many employees look forward to retirement.

From starting a new hobby to traveling, employees may begin making plans for their retirement years long before the day actually comes. But when it comes to their benefits and financial plans, employees may not know how they can leverage their Health Savings Accounts (HSA) after they retire. As employees begin to exit the workforce, there are five things they need to know about their HSAs before retirement:

1. Select the right benefits

Some employees may plan to stay on their employer’s health insurance through COBRA once they retire. What employees may not know is that the health care plan they will be offered through COBRA is exactly the health plan that they are currently on. If an employee plans to use an HSA during retirement, they will need to select a High Deductible Health Plan (HDHP), with an HSA, during open enrollment in order to be offered that plan through COBRA.

Employees can also purchase health insurance through the open market. If they plan to continue any contributions to an existing HSA, they still will need to select an HDHP in order to qualify for the HSA.

2. Update Beneficiaries

As employees enter retirement, they should review the beneficiaries they have named on all of their financial accounts, including their HSA. Beneficiaries do not have to be people. In fact, an employee can elect a trust to be the beneficiary. However, if the beneficiary is not a spouse, then the inheritance is taxable to the beneficiary.

3. Prepare for Medicare

Once employees turn 65 and meet federal residential requirements — or earlier if they retire due to disability — they qualify for Medicare and can continue to use their HSAs to pay for health care related expenses, just like before their 65th birthdays. However, when HSA account holders enroll in Medicare, they can no longer contribute to their HSA without a tax penalty.

Anyone can delay enrolling in Medicare (that is, a person doesn’t have to enroll at age 65; it can be done years later). However, when someone defers Medicare benefits to a later age, they’re entitled to six months of retroactive Medicare benefits. Regardless of when someone enrolls in Medicare, they would need to stop contributing to their HSA six months before they enroll in Medicare or risk incurring a tax penalty.

Planning for this scenario is vital. One option is to open a flexible spending account (FSA) six months before signing up for Medicare, while ceasing contributions to an HSA. Doing this allows an individual to continue to set aside dollars for health care expenses on a tax-free basis.

prepare for medicare before you get there

4. Pay for care

Retired employees can continue to use their HSA to pay for eligible medical expenses, even if they are no longer on an HDHP. Once employees reach 65 years old, they can also use the money in their HSA for non-medical expenses and avoid paying a penalty fee. The dollars used for non-medical expenses would still be taxed as income. Prior to the age of 65 years old, any HSA funds used on non-medical expenses are subject to a 20% penalty and must be reported as taxable income.

5. Evaluate your HSA investment

Once anyone’s HSA base balance exceeds $1,000, employees have the option to begin investing their HSA dollars. If retired employees intend to draw out funds from their HSA, they will need to update their investment strategies. Invested funds will need to be moved back to an HSA in order to be leveraged. HSA dollars that are invested cannot be cashed out in another form of payment.

Retirement is filled with new adventures. With these five tips, employees can take the guess work out of their HSA benefits and enjoy for their next adventure with confidence.

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