Americans approaching Medicare eligibility face a critical and often misunderstood decision: when to stop contributing to a health savings account (HSA).
The issue has taken on greater urgency as more workers delay retirement, keep employer coverage past age 65 and rely on HSAs as a key tax-advantaged savings tool. Missteps can trigger excess contributions, tax headaches, and missed opportunities for long-term growth.
At the center of the confusion are competing timelines, including Medicare enrollment rules and HSA eligibility requirements.
In a recent episode of “Focus on Finance Forum,” Jeffrey Levine, chief planning officer at Focus Partners Wealth, discussed what older adults need to know about HSAs and Medicare.
Robert Powell: Many of my readers who are approaching age 65 and thinking about enrolling in Medicare also have a health savings account, or HSA, and are wondering when they should stop contributing. They hear things like the “three-month rule,” or that they can wait until they turn 65 and enroll before stopping contributions. There’s a lot of confusion.
Jeffrey Levine: That confusion is understandable. The three-month rule typically refers to applying for Medicare. You generally want to apply three months before turning 65 if you want coverage to begin at 65. But people often confuse that with a six-month rule that applies when you enroll in Medicare retroactively.
The key issue is this: Once you are enrolled in nonqualifying coverage, such as Medicare, you can no longer contribute to an HSA. Simply put, being on Medicare makes you ineligible to contribute to your HSA.
Why timing and effective dates matter
Robert Powell: Do people need to worry about the effective date? And if they get it wrong, is it a major penalty?
Jeffrey Levine: It’s fixable, but it can be a hassle. The effective date matters because HSA contributions are calculated on a monthly basis. If you are only eligible for part of the year, your contribution limit may be prorated.
The bigger issue is timing. If you enroll in Medicare at age 65, there’s no retroactive coverage before that age, so there’s no six-month lookback to worry about. But if you enroll later, say at age 70, Medicare Part A is typically applied retroactively for up to six months.
That means if you plan to enroll at 70, you should stop contributing to your HSA around age 69½. Otherwise, you risk making excess contributions.
Working past 65 and HSA contributions
Robert Powell: Many people are still working at age 65, have employer coverage, and are contributing to an HSA. They often see no reason to enroll in Medicare Part A if it means giving up HSA contributions.
Jeffrey Levine: That can be a reasonable approach if you prefer your current coverage. An HSA-eligible plan allows you to continue contributing and benefit from the HSA’s tax advantages.
But you need to understand the rules. You can delay enrolling in Medicare without penalty only if you work for a large employer, generally one with 20 or more employees. If you work for a smaller employer, you may be required to enroll at 65.
The key point is this: You can have both Medicare and an HSA-eligible plan, but you cannot contribute to an HSA once you are enrolled in Medicare.
Seek professional guidance
Robert Powell: People shouldn’t rely solely on their employer’s benefits department for answers, correct?
Jeffrey Levine: That’s right. Benefits departments are helpful, but they are not providing personalized financial advice. These are complex decisions with long-term consequences. It’s wise to consult a qualified professional, especially around key milestones like age 65.
Investing your HSA for long-term growth
Robert Powell: Another issue is how people invest their HSA. Many keep it in cash rather than investing for long-term growth.
Jeffrey Levine: That’s a missed opportunity. Some estimates suggest about 90% of HSA assets are held in cash, which limits the benefits of the account.
HSAs offer powerful tax advantages: Contributions are tax-deductible, growth is tax-deferred, and withdrawals are tax-free for qualified medical expenses. If contributions come through payroll, you may also avoid payroll taxes.
To maximize these benefits, it often makes sense to invest HSA funds for growth and pay current medical expenses out of pocket. You can reimburse yourself later for those expenses.
For example, if you have $20,000 in your HSA and incur $30,000 in medical expenses over several years, you could pay those expenses out of pocket while allowing the HSA to grow. If the account grows to $40,000, you could later reimburse yourself and still have funds remaining.
Contribution sequencing and “free money”
Robert Powell: What about prioritizing contributions among HSAs, 401(k)s, and other accounts?
Jeffrey Levine: Most people agree on one principle: Take advantage of employer matches first. If your employer offers a match, whether in a 401(k) or HSA, that’s typically the best place to start.
For many workers, the 401(k) match comes first. After capturing that, they may fund an HSA, then return to the 401(k) for additional contributions.
It often comes down to overall savings capacity and priorities. If you can’t max everything out, you need to decide where each dollar is most effective.
What happens to your HSA at death
Robert Powell: What happens to an HSA when the account holder dies?
Jeffrey Levine: It depends on the beneficiary. If the beneficiary is a spouse, the HSA becomes the spouse’s HSA.
If the beneficiary is not a spouse, the account is no longer an HSA upon death. The full balance is generally distributed and taxed in the year of death.
Alternatively, you can name your estate as the beneficiary. In that case, the HSA is included on your final tax return and then distributed through the estate.
A complex but valuable tool
Robert Powell: There’s clearly a lot to know.
Jeffrey Levine: Absolutely. HSAs are powerful, but they come with complexity. Understanding the rules can help people make better decisions and avoid costly mistakes.
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