Many people are attracted to the tax benefits of health savings accounts (HSA’s) when these accounts are linked to a high deductible health insurance plan.
HSA’s offer a triple tax break – contributions are tax-deductible, assets grow tax-free, and qualified distributions are also tax-free. Once an account holder turns 65 the monies in the HSA can be used for any purpose without penalty, but withdrawals for non-medical expenses are subject to income tax.
For most seniors, health care expenses make up a significant part of their budget, and so there are generally many opportunities to spend their HSA dollars tax-free. Qualified medical expenses include prescription drugs, most medical and dental procedures, vision care, long-term care insurance premiums and Medicare premiums. However, supplemental Medigap insurance premiums and over-the-counter drugs do not qualify as qualified expenses.
However, it’s important to be aware of the potential pitfalls with HSA’s as the age of Medicare eligibility approaches.
Once you enroll in Medicare, you are no longer eligible to contribute to an HSA. If you’re collecting Social Security at age 65, you will automatically be enrolled in Medicare. If you contribute to your HSA after your Medicare coverage starts, you will have to pay a penalty.
Once you are older than 65 and apply for Social Security benefits, you must enroll in Medicare Part A, which covers hospitalization. This enrollment is mandatory. And again, once you enroll in Medicare you can no longer contribute to your HSA.
The timing of your Medicare enrollment and your HSA contributions is important. You lose your eligibility to contribute to your HSA on the first day of the month in which you turn 65. So, for example, if you turn 65 on March 17, you cannot contribute to an HSA as of March 1. Your maximum contribution for that year would be 2/12 of the applicable federal contribution limit.
For 2017, an individual can contribute up to $3,400 to an individual HSA or up to $6,750 to a family HSA. Eligible individuals who are 55 or older (but younger than 65) can contribute an additional $1,000 in 2017. So someone who turns 65 on March 17 could contribute $1,291 for the year (2/12 of the allowable amount for a family HSA plus 2/12 of the maximum $1,000 catch-up contribution).
If you enroll in Medicare after age 65, the timing for HSA contributions is a bit more complicated. When you sign up for Medicare, you are enrolled retroactively for up to six months of benefits, or back to your 65th birthday if that took place within the last six months. To avoid the previously-mentioned tax penalty for making HSA contributions after enrolling in Medicare, you should stop contributing to your HSA at least six months before you apply for Medicare.
It may be possible to get around the six month look-back period. You would need to provide the Social Security Administration with very specific instructions that you do not wish to be enrolled in any retroactive benefits. This is likely best done via the phone or in-person, rather than online.
Topic and content courtesy of Mary Beth Franklin