Life Changes and HSAs: How to Advise Employees Turning 65

With every age comes new milestones and turning 65 is no different.

Many of your team members might start thinking about retirement at this age, and even if an employee is still actively working at 65, if they have a health savings account (HSA), there are several new rules and regulations they should be aware of, as they have implications for their accounts.

This handy guide outlines information that employers should provide their 65 and older employees, so they know how to effectively manage their HSA.

How Medicare affects HSAs

At age 65, employees become eligible for Medicare, but once they enroll in Medicare, they’ll be unable to contribute to an HSA without a tax penalty. That is because to contribute to an HSA, an employee must have only qualified high-deductible health plan (HDHP) coverage, which Medicare isn’t.

If an employee is turning 65 and plans to continue working, they may want to consider deferring Medicare enrollment as well as Social Security benefits—which automatically enrolls a person in Medicare—and maintain their employer-sponsored HDHP and HSA. Employees can postpone applying for Social Security and Medicare until retirement without a penalty as long as they maintain their current health coverage.

One important Medicare enrollment rule to know: If an employee opts to delay joining Medicare months or years after turning 65, when they do choose to enroll, they’re entitled to six months of retroactive benefits. Thus, they should plan to stop contributing to their HSA six months before they enroll in Medicare or risk incurring a tax penalty.

Read more about how Medicare impacts HSAs in our Learning Center.

how to pay for medicare with an hsa

Paying for Medicare with an HSA

If an employee does opt to enroll in Medicare at 65, they won’t be able to contribute to their HSA (remember, they also need to stop contributions 6 months prior to enrollment if they have delayed enrollment), but they can still use the account to pay for eligible expenses. This includes Medicare expenses like premiums, deductibles, copays and coinsurance. If the Medicare is deducted from an employee’s Social Security check, this amount can still be reimbursed as long as the Social Security Statement showing the deduction is saved to show the amount each month.

An HSA also covers some eligible expenses that Medicare doesn’t, like proactive health screenings, long-term care and nursing home fees. Here is a full list of eligible HSA expenses.

Change to withdrawal rules

Employees should be aware of a significant withdrawal rule change at 65: Plan members can now take money out for any reason – even non-medical – without a penalty fee. (Prior to age 65, ineligible expenses incur a 20% penalty.)

However, withdrawals made for a purpose other than an eligible medical expense will be taxed as income. Qualified medical expenses remain both penalty and tax-free.

people with hsas should know the withdrawal rules
planning for retirement with an hsa

Planning for retirement

Employers should also encourage active employees who are 65 and older to save for retirement, including future medical bills. An HSA can be a key part of that retirement strategy, and unlike an IRA or 401(k), HSAs allow employees to make withdrawals tax-free — as long as it’s for a qualified medical expense. Also, there is no deadline to use HSA funds for a tax-free reimbursement. Thus, for example, a medical expense incurred three years prior can still be reimbursed using HSA funds, as long as there is documentation, like a receipt.

In 2021, the IRS has set maximum HSA contributions for an individual at $3,600 and $7,200 for a family. Those age 55 and up can also contribute an extra $1,000 each year as a catch-up contribution until one enrolls in Medicare.

Maxing out HSA contributions in the lead up to retirement can be a great way for employees to put their best foot forward as they enter this next phase of their life. Read more about using an HSA to save for retirement in our Learning Center.

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