Baby boomers close to Medicare age who still work and have a health savings account (HSA) through their workplace often face the question—can I keep my HSA account after joining Medicare?
Medicare financial educators say that you can continue using the money already in the account tax-free for uninsured medical expenses. But the catch here is that you can no longer make any new contributions to your HSA after signing up for Medicare. May of your out-of-pocket medical expenses still qualify for tax-free HSA withdrawals even after you’re on Medicare.
Retirees will occasionally use this money to pay premiums for Medicare Part B, Part D prescription coverage, or all-in-one private Medicare Advantage plans—but this does not go for Medigap premiums. Those with HSAs put their money co-pays and deductibles like medical expenses, out-of-pocket costs for prescription drugs, dental and vision care, and qualified long term care premiums (for those 61 to 70 years of age in 2012 it is $3,500). But the question many pre-retirees have as they enter the age of Medicare is: Are having these HSA accounts worth it?
“It’s a judgment call,” says Paul Fronstin, Medicare specialist with the Employee Benefit Research Institute (EBRI). “A good way to look at having an HSA—or not having one—is that you can pay for your medical problems now or you can pay later. There is no free lunch.”
Should you delay your Medicare enrollment?
Deciding whether you should delay your Medicare enrollment so you can continue your HSA contributions depends on your circumstances. Those working for small employers typically need to take Medicare when they first qualify—even though it means losing their HSA tax advantages. Small employer healthcare coverage pays secondary to Medicare. This means if you fail to enroll in Medicare when you’re first eligible, you may have little or no coverage waiting for you at the end of the retirement road.
Healthcare coverage from large current employers pay primary before Medicare so you may not need to have Medicare in order to pay your health expenses. This means that you are currently working for a large employer and you wish to decline Medicare Part B, you can do so and enroll in Part B later when you lose your current employer coverage. But you cannot decline Medicare Part A. However, if you are not collecting Social Security retirement benefits when you become eligible for Medicare, you must actively enroll yourself during your initial enrollment period. Regardless of whether you’re enrolled in a Part A and Part B automatically or you enroll yourself, you cannot continue to contribute to an HSA once you have Medicare.
Qualifying for Medicare
Retirees need to keep in mind that if they don’t enroll in Medicare when they first qualify, they will ne to take special care if and when they do decide to collect Social Security benefits. Retirees need to be sure to stop all their HSA contributions up to six months before collecting Social Security. Medicare Part A will be retroactive for up to six months as long as the retiree is eligible for Medicare. If, during those six months, you do not stop contributing to your HSA before applying for Social Security, you could get slammed with a tax penalty.
“Remember, never put money into your HSA at the same time you have Medicare benefits,” Fronstin said. “You’ll wind up regretting it in the form of a tax bill.” To avoid this experience—and to get a full list of eligible expenses—see the IRS Publication 502 on Medical and Dental Expenses. Got to www.IRS.gov. or speak to medicare insurance advisor about your options.
This article was written by Phil Cannella, a retirement advocate, professional speaker and author on the topic of retirement investments. He has helped thousands over the last 37 years get the most out of retirement, including good guidance on Medicare insurance.