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Once you sign up for Medicare, you’re no longer eligible to contribute to a health savings account (HSA), so in some cases, it pays to hold off on enrolling.

Can I enroll in Medicare if I have an HSA?

Q. Can I enroll in Medicare if I have a health savings account?

A. Once you sign up for Medicare, you’re no longer eligible to contribute to a health savings account (HSA), so in some cases, it pays to hold off on enrolling.

Health savings accounts offer a great opportunity to sock away funds on a tax-free basis to pay for healthcare costs during your working years and retirement. Often confused with flexible spending accounts, HSAs do not require you to use up your plan balance year after year. In fact, the value of the HSA lies in your ability to invest your contributions and grow them into a larger sum over time. That way, when retirement rolls around, you’ll have savings specifically earmarked for medical expenses.

To be eligible to participate in an HSA, you must be enrolled in a high-deductible health insurance plan, which, for the current year, is defined as $1,350 for individual coverage or $2,700 for family coverage. HSA contribution limits change from year to year. For 2019, they’re $3,500 at the individual level and $7,000 for families. If you’re 55 or older, you can contribute an extra $1,000 on top of the limit you qualify for.

HSA contributions get to grow tax-free once invested, and withdrawals are tax-free provided they’re used for qualified medical expenses. However, if you’re enrolled in Medicare, you’ll no longer be eligible to contribute to an HSA. Therefore, if you’re approaching your 65th birthday and still have access to a group health plan, you may want to hold off on enrolling.

Should you give up your HSA?

If you’re still working at age 65 and are covered by a group health plan at work, or have a spouse whose group health plan you’re covered by, you don’t need to sign up for Medicare (provided your group health plan covers 20 employees or more).

Normally, eligible Medicare enrollees who fail to sign up during the initial seven-month enrollment period leading up to and following their 65th birthday face lifelong Part B premium surcharges for enrolling late. That penalty, however, doesn’t apply if you have group health coverage in place when you turn 65. Rather, you get a special enrollment period for Medicare that begins once you separate from your employer or once your group coverage ends – whichever comes first.

That said, many 65-year-olds who have group health coverage sign up for Medicare Part A only, since there’s generally no premium attached to it. This way, Medicare serves as secondary insurance for hospital care. The main reason not to sign up for Part A when you’re still covered by a group health plan is if you’d like to continue funding an HSA, since you can’t do so once enrolled.

HSAs offer immediate tax savings, since contributions exclude a portion of your income from taxation the year they’re made. And the more money you put into your HSA, the more funds you’ll have available in retirement, when your medical costs start building. Therefore, if you’re eligible for an HSA, it often pays to delay your Medicare enrollment and continue reaping that benefit.

Enrolling in Medicare, however, does not bar you from taking withdrawals from an existing HSA. That money is there to cover qualified healthcare expenses, and you can use those funds to pay for your premiums, deductibles, coinsurance payments, or prescription copays. In some cases, you can even use the money in your HSA to purchase long-term care insurance.

Finally, if you’re participating in an HSA, your contributions can’t continue once your Medicare coverage kicks in. In some cases, you may want to stop contributing six months prior to when you plan to enroll in Medicare. Once you sign up for Part A, you’re entitled to up to six months of retroactive coverage (going back only to your eligibility date), so if you don’t halt your HSA contributions half a year prior to enrolling, you may be subject to tax penalties on the funds you put into your HSA during that time.

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