HSA Planning After 55: What Your Clients Might Not Know

While most employees are familiar with the account's tax benefits, issues specific to older workers are often ignored.

To say that employees who are approaching retirement have a lot on their minds is a dramatic understatement.

In the years immediately before retirement, employees who are planning smartly should be thinking about their financial security more than ever. Their concerns, however, are likely different from employees who are decades away from leaving the workforce. Health savings accounts are one type of planning vehicle that’s often overlooked during the pre-retirement planning process. 

While most employees are familiar with the triple-tax benefits of the HSA option, the issues that are specific to older employees are often ignored. A full understanding can help pre-retirees feel more confident as retirement nears — and can also help them avoid expensive mistakes when it comes time to enroll in Medicare.

Catching Up With HSAs

Clients probably know that they’re entitled to make higher contributions to their retirement accounts once they reach age 50. They might not know that they can make an additional $1,000-per-year contribution to their HSAs once they hit age 55. This is above and beyond the $4,150 or $8,300 annual contribution limits that apply in 2024.

Of course, clients should also be reminded that there’s no need to spend down their HSA balances each year and that there’s no need to drain their HSA before they retire or enroll in Medicare. 

HSA balances accumulate year after year, and as long as the owners have qualified medical expenses, they can withdraw the funds tax-free in a future year. Medicare premiums count as medical expenses for purposes of the tax-free benefit. 

Once they reach age 65, they can withdraw HSA funds for non-medical expenses without penalty. Any amounts withdrawn for non-medical reasons, however, are subject to ordinary income taxes. 

HSAs and Medicare: Getting It Right

Medicare and HSA contributions don’t mix. Once people enroll in Medicare coverage, they’re no longer entitled to contribute to their HSA.

Employees may not realize that Medicare backdates coverage once an individual enrolls in Medicare Part A. A six-month look-back period applies, meaning that individuals should stop making contributions to their HSAs six months before they enroll in Medicare or begin receiving Social Security benefits to avoid penalties. If clients make contributions within that six-month window, however, they can withdraw them before the end of the year of contribution without penalty.

It’s also important to remember that once clients claim Social Security after reaching full retirement age, they are automatically enrolled in Medicare Part A. Individuals who begin claiming benefits before reaching age 65 are also automatically enrolled upon reaching 65. That means they can no longer make HSA contributions even though they did not actively apply for Medicare coverage.

Employees who decide to delay Medicare enrollment past age 65 should also be advised to stop making HSA contributions at least six months before the date they intend to enroll.

Assuming they do not defer Medicare, after age 65, individuals can continue to participate in an HSA-eligible health insurance plan to provide coverage in addition to Medicare. However, even if  Medicare-enrolled individuals continue to participate in the HSA-eligible plan, they cannot continue to contribute to the HSA because they also have Medicare coverage.

A prorated contribution for the year may be allowed if the individual enrolls in Medicare later in the year (clients should remember the six-month retroactive window when calculating their HSA contribution limit for the partial year).

Conclusion

Individuals can be faced with significant uncertainty when approaching retirement. Even when someone has diligently saved and planned, deciding to retire is a huge moment. HSAs can provide a powerful tool for retirees to address medical costs during retirement.

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