By CD Moriarty
If you’re retired and have a health savings account at work, you may be audited for penalties and fees.
Dear Mrs. MoneyPeace
I am trying to figure out retirement and Medicare this year. At this time, it is fully covered by the company’s plan. I turned 65 last fall and was planning to retire in August or September.
While researching I came across a sentence about not being eligible for Medicare and not having a Health Savings Account (HSA). My company has high deductible insurance, so it offers an HSA. Since I’m on their plan, I have an HSA. Shouldn’t this be the case now that I’m on Medicare?
I have never heard of this. Did I read it wrong? Can you describe it? I love having my HSA and want to keep it.
— Confused by Medicare rules.
I’m confused dear
You are not alone in your confusion.
In the year In 2013, HSAs were designed to work in conjunction with high-deductible health insurance plans (HDHP). Once you qualify for Medicare, you no longer have an HDHP. Health savings account contributions are not allowed when you have other health insurance. You can use the funds in the HSA but not contribute more money to the account. (See 2022 Issue 969 (irs.gov))
Sandy Anderson, a Medicare specialist and consultant at Medicare Northeast, helped shed some light on this little-known problem with retirement planning.
“If you qualify for Medicare Part A, one cannot contribute to an HSA.”
This can be confusing because you are eligible to sign up for Medicare before you turn 65 and coverage starts at the beginning of the month you turn 65. Planning ahead is critical.
Read: When does Medicare coverage begin?
One more ID: If you’re collecting Social Security before you die at age 65, you’ll enroll directly in Medicare Part A: Professional Advice Because there’s already no premium for Part A (you qualify from work experience), retirees and pre-retirees are encouraged to enroll right away; However, to avoid HSA penalties, you cannot have both health plans. Once you are eligible for Medicare, penalties for not contributing can be avoided. If you make this mistake, you’re allowed to withdraw your excess money before you file your taxes for that year–if you know about it, you won’t be overcharged and penalized.
Read: Tricky Medicare rules on HSAs after age 65 — Journal of Accountancy
There are exceptions.
Taxpayers can defer Medicare before age 65 if they work for an employer with 20 or more employees and are enrolled in a group health plan based on that employment. Therefore, if you are still working and have an HDHP (or are covered by a spouse’s insurance) but are not enrolled in Medicare Part A, the maximum contribution to an HSA can be made. (See Section 223–Health Savings Accounts (irs.gov)) For 2023, if you have self-directed HDHP coverage, you can contribute up to $3,850. If you have family HDHP coverage, you can contribute up to $7,750. (See 2022 Issue 969 (irs.gov))
If you have one of the exceptions listed above, you must stop contributing six months before Medicare Part A starts. For HSAs, Section 223(b)(7) of the Internal Revenue Code defines an individual. Failure to contribute to an HSA for months during which the individual is entitled to benefits under Medicare.
This is important to know—as of 2022, there are 30 million active HSAs covering more than 63 million people. These accounts allow tax-deductible contributions until one becomes Medicare eligible.
Read: HSAs gain traction with older and younger Americans, covering more than 63 million people in all 50 states by the end of 2020 — Devenir
Anecdotal reports show that even large HR departments are unaware of this little-known rule. Unless you get professional financial advice, this can fall through the cracks in retirement.
A “fun fact” Sandy Anderson wants readers to know: After age 65, an HSA owner can withdraw the money for any purpose and pay taxes only on the income. So your mortgage, retirement travel or any medical expenses can be covered. There are options and reasons to help finance as much as you can, even if you leave it for medical expenses.
Read: 63-year-old woman suffers heart attack. Her advice could save your life
How does one know?
An IRS tax audit will pick up excess contributions. However, making the wrong HSA contribution doesn’t make it auditable, Anderson said. Instead, if you are about to be audited and are collecting Social Security and Medicare and are over 65, that information will notify the IRS auditor of this audit. The result will cost you money in penalties and interest, so why take that chance?
Although they are afraid, these audits are not common. For most income groups, the probability of an audit is less than 1%. In 2019, that percentage dropped to 0.45%. However, with recent IRS hiring, all aspects of audits and enforcement are expected to increase. According to the IRS, the likelihood of an audit increases with higher income. For example, those with more than $10 million in revenue have a 9% audit rate.
What are the ways around it?
Front load your HSA account. Plan ahead by increasing your monthly HSA contribution to reach the maximum early in your retirement year. You will have less income during those months, but the last six months of work, you will have more than usual in your salary. That way, you can build a strong, well-funded health account for your retirement years.
Most people are unaware of this universal fact. Knowing it and following the rules will make your life easier in the long run.
Don’t fall into this trap.
Sid Moriarty, CFP, is a Vermont-based financial speaker, writer, and coach who wants to create financial peace for others.
– CD Moriarty
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