Future Healthy: Turning 65 but not ready to retire? A quick look at HSAs and Medicare

If you're enrolled in an HSA-qualified high deductible health plan (HDHP), you're allowed to contribute to an HSA. But what if you're turning 65, are eligible for Medicare coverage, and not quite ready to retire? What happens then? Let's find out.

First, let's define some Medicare terms

• Medicare Part A (commonly known as "Original Medicare") provides benefits and coverage for inpatient hospital care, nursing facilities, hospice and home health services.

• Medicare Part B is also medical coverage (and part of the "Original Medicare" umbrella) that provides benefits and coverage for doctor and clinical lab services, outpatient and preventive care, home health care, screenings, surgical fees and supplies and more.
• Medicare Part C, also known as Medicare Advantage, combines both A and B to offer hospital insurance and medical insurance in one plan. It can also be combined with...

• Medicare Part D, which is prescription drug coverage that can be a stand-alone plan, or part of more comprehensive Part C coverage.

How does it work?

Most Americans become eligible for Medicare Part A and B when they turn 65. But an increasing number of people are still working at age 65, and continue to do so for a few more years.

If your employer provides your health insurance, you'll likely be able to have coverage under both Medicare and your employer's health plan in the years between turning 65 and retiring from your job.

But if you're enrolled in an HDHP and contributing to an HSA, your contributions have to stop once you're enrolled in Medicare. The month that your Medicare enrollment takes effect, your HSA contribution limit has to be $0.

We should note, you can still make a prorated HSA contribution for that year, based on the number of months before you were eligible for Medicare. So you don't risk losing any potential tax-free savings — just be sure to stop when Medicare takes over.

What happens if you keep contributing to your HSA?

When you continue to work and maintain coverage under the same HDHP you had before enrolling in Medicare, it's easy to see how you (or your employer) could inadvertently continue to contribute to your HSA.

But don't do it! You'll eventually have to pay taxes on the excess contributions you made to your HSA, plus a 6% excise tax that will continue to apply until you remove the excess contributions from your account.

Your HSA contributions have to stop once you're actually enrolled in Medicare. But being eligible for Medicare without enrolling doesn't affect your ability to contribute to an HSA. So it's possible to be 65+ and continue to only have coverage under your HDHP. But there are some things to keep in mind if you go this route:

• You can't delay Medicare Part A without also delaying your Social Security benefits. So if you've already started receiving Social Security benefits, you'll be automatically enrolled in Medicare, and you can't reject it without giving up your Social Security benefits. This includes having to return any Social Security benefits you've received prior to turning 65.
• If your employer has fewer than 20 employees, they can require you to enroll in Medicare once you're eligible, with Medicare serving as primary coverage and the employer's plan as secondary coverage. Larger companies don't have this requirement, since Medicare provides secondary coverage.