When to stop HSA contributions before starting Medicare at 65
Have you been trying to figure out when to stop your contributions to an HSA? And why the rules are so hard to figure out? Not to mention, all the different information out there? What is going on? It’s important to realize there is a highly misunderstood HSA-Medicare connection.
The rules are messy and unclear. Even HR folks are baffled by what to tell employees. So let’s clear up the rules and the timing well before you apply for Medicare.
The US Tax Code Sets the Stage
You’ve heard the phrase “double-dipping.” We use it to avoid scooping up dip with our half-eaten potato chips. Or to keep guests from putting their nacho chips back in the salsa. When it comes to the HSA-Medicare connection, the tax code is clear-ish. We can’t have two accounts that provide tax benefits for the same benefit at the same time. In other words, there’s no double-dipping with health insurance benefits.
One example with health insurance is in employee benefit plans. Employees are not allowed to contribute to both a Flexible Spending Account (FSA) and a Health Savings Account (HSA) for the same types of healthcare expenses. You can fund both in the same year as long as they cover different expenses. This is often referred to as a “limited FSA.” That way, you can cover medical expenses at the doctor with your HSA. And separately cover dental with FSA dollars. Confusing, right?
The same concept applies with HSA contributions once you start Medicare. Both types of benefits allow for tax-advantaged savings to pay for healthcare expenses. Albeit in different ways.
Congress decides what benefits would be tax-favored double-dipping. And in the case of the HSA-Medicare connection, those two programs offset each other.
Stopping HSA Contributions 6 Months Before Medicare
Everyone seems to be an authority on when to stop their HSA contributions as they get close to age 65. Some have heard they must stop HSA contributions six months before starting Medicare. Others think they don’t have to stop HSA contributions so long as they keep coverage on an employer’s insurance. Still others think they can do whatever they want.
Well, you can’t do whatever you want. As with every law, the devil is in the details. Sometimes you need to stop contributions six months early. But not always. Sometimes you can continue to contribute until your late 60’s. It all depends on your exact situation.
Let’s look at a few situations where it depends what to do with your HSA contributions.
HSA-Medicare Connection at Age 65—Contributions Are Allowed…
…All the way up to the month before your 65th birthday month. There is no reason to stop HSA contributions at 64 ½.
Many, if not most, people start Medicare Parts A and B the month right at their 65th birthday. For those whose birthday is on the first day of month, their Medicare starts one month prior. That means someone with a December 1st birthday would start Medicare as of November 1st. But someone with a December 2nd birthday begins Medicare as of December 1st.
Yes, I know, a quirky and unnecessary rule. Nevertheless, them’s the rules.
Enrolling During Your IEP
If you are planning to start Medicare right at 65, you will be in your “Initial Enrollment Period” or IEP. Age 65 is each person’s point of entry into Medicare. Assuming you do not have a qualifying disability and are receiving Social Security Disability benefits.
Each individual must reach 65 before they can enter Medicare. There is no “family” or “spouse/partner” coverage once you start Medicare. It’s every person for themselves.
You’ll apply for Medicare on Social Security’s website—yes, another quirky rule—ideally 3 months before your 65th birthday month. The application is easy to fill out online. You just need your “my Social Security” account already set up.
Now for the good news: In this situation, there is no need to stop HSA contributions before your 65th birthday month! Since you aren’t even eligible for Medicare before 65, you won’t be “double dipping”. You should continue your HSA contributions until the month just prior to your Medicare start date.
Examples To Bring This Age-65 HSA-Medicare Connection to Life:
If your birthday is July 20th, apply for Medicare in April, May, or June. Your Medicare Parts A and B will therefore start on July 1st. And you should stop your HSA contributions as of June 30th.
If your birthday is February 1st, your IEP starts earlier. In this case, you would apply for Medicare in October, November, or December of the prior year. That way, your Part A and Part B will start on time for your 65th birthday—on January 1st. You need to stop your HSA contributions as of December 31st of the prior year.
I know…more quirky, slightly insane rules. And this is the easy situation of knowing when to stop your HSA contributions.
When Starting Social Security Early, You’ve Unknowingly Turned on Medicare Part A, Too
Do you know how many retirees start their Social Security before turning 65? That’s 2 years or more before they even reach Full Retirement Age (FRA). FRA, by definition, is the age when Social Security deems you to be retired. Slightly less than half (45%) of current retirees claimed benefits before age 65. Whether they know if or not, they’ve locked themselves into a much smaller retirement benefit. If they claim as early as 62, they lock in a 30% pay cut. And that’s even before retirement starts!
That’s not the only surprise when claiming early. As the commercial says, “But wait, there’s more…” And it may be an unwelcome surprise.
Unbeknownst to those who claim Social Security early, they also automatically enrolled themselves into Medicare Parts A and B. And both parts of Medicare begin the month of their 65th birthday. Surprise!
They don’t have any idea claiming Social Security early also turned on Medicare. And typically, they don’t find out until they receive a fat packet in the mail addressed to them. There is no preparing or advanced notice. The assumption is the early claimer knows this.
The Problem with HSA Contributions for Early Claimers
But really, who would know these rules and how they crisscross and intersect? That’s almost no one.
However, the IRS doesn’t care whether or not you know the rules. You just have to implement them correctly. Or end up in tax trouble.
When claiming Social Security between the ages of 62 and 64 and 9 months, you’ll be on one of two paths.
- If you do not contribute to an HSA, there are no contributions to stop. You’ll just keep your Medicare Part A. And if you need health insurance, you opt to keep Part B.
- However, if you are contributing to an HSA, you must know when to stop those contributions. That would be one month prior to your 65th birthday month. Or two months earlier if your birthday falls on the 1st of any month.
Employers generally won’t know if you or your spouse or partner has claimed Social Security early. The full responsibility falls to the individual. As you can imagine, some folks know to stop HSA contributions the month before turning 65. Some don’t. And another wrinkle crops up if you’re part of a couple.
Married Couples Have a Different HSA-Medicare Connection
When the first spouse starts Medicare, the game changes for married couples. The rules for when to stop HSA contributions depend on two factors. The first is which spouse owns the HAS. The second is which spouse claimed Social Security before 64 and 9 months.
Like IRAs, only one person owns an HSA. It may be that both spouses own IRAs. But typically, one spouse owns the HSA and makes family contributions to cover both. The other spouse may own their own HSA and they use it for catch up contributions.
Only when the owner enrolls in Medicare do HSA contributions stop. That’s because that person cannot double-dip.
An Example to Illustrate Married Couples’ HSA Situation
Let’s say Richard is married to Sally. He’s 63 and is working for a large employer, defined as one with 20 or more employees. His health insurance is a high-deductible health plan (HDHP). He chose family coverage to cover them both.
Sally is older by two years and decided to claim Social Security before 65 when she retired from her job. As you now know, that also means she automatically turned on Medicare. About 3 months before her 65th birthday, she receives her “Welcome to Medicare” packet. Her Part A and Part B will begin the first day of the month containing her 65th birthday.
What does Richard need to do to adjust the HSA contributions he’s been making? In 2024, he planned to make the full $8,300 contribution, plus $1,000 catch up for him. Sally does not have a separate HSA. Is he required to drop down to “individual” coverage now that Sally is entering Medicare?
The Answer Is No
Richard does not have to reduce HSA contributions if he continues to cover Sally on his plan. He’s the owner of the HSA, and he is not yet enrolled in Medicare. Therefore, he can still make family contributions to his HSA.
Sally must keep Medicare Part A, as it comes attached to Social Security. However, she can follow the instructions in her Medicare packet to postpone Part B. That way, she doesn’t have to pay the monthly Part B premium (minimum $174.70 per month in 2024). Instead, she’ll get her medical coverage from Richard’s group plan.
Now Let’s Turn the Tables
Now let’s see what happens if Richard was the one who claimed Social Security early. He can claim early and keep working. There is an earning limit, but it’s possible to do both.
In this case, his Medicare Part A automatically starts the month of his 65th birthday. Like Sally’s situation above, he can delay Part B. And again, he has no choice about Part A. This time, as Richard is the owner of the HSA and has now claimed Social Security early, he must stop contributions.
It’s up to Richard to know exactly when to stop contributions. That would be by the month prior to his 65th birthday month. Furthermore, if his employer made contributions to his HSA, Richard must also notify the employer. Otherwise, they would have no idea. And he could end up with an excess contribution to the HSA. Plus run into tax trouble.
Flexibility in the Law Can Create Complexity
Baby Boomers pushed the edge on working longer. Employment laws changed to remove mandatory retirement age of 65. But benefits didn’t carry forward for older workers until later. Workers wanted more options and flexibility. The result is more complex laws.
In the case of the HSA-Medicare connection, the complexity started with the original Medicare law. Starting back in 1965, Medicare provided tax-advantaged access to hospital care beginning at age 65.
Then, HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act in 2003. The writers of the MMA knew this new benefit overlapped with Medicare. They also knew the no double-dipping rule. Therefore, in the HSA law, it specified any owner of an HSA cannot be on any part of Medicare and still contribute to an HSA.
The bottom line is our laws limit tax-advantaged contributions and benefits. Tax- deferral is an ideal way to save more for retirement. Tax-free is even better.
HSAs are triple tax-free. Even better than 401(k)s and IRAs! But only up to certain dollar limits. And only until you join any part of Medicare. Whether you know it or not.
An important task as you are moving into Medicare: lay out all your healthcare costs. Use a free Medicare cost worksheet in the Estimating Your Medicare Costs post.
