How to Preserve Your HSA Eligibility Beyond Age 65

This article, the second in a two-part series on preserving HSA eligibility and maximizing contributions after age 65, is written by Ben Henry-Moreland, senior financial planning nerd at Kitces.com. Part one is here.

Because of the way that the rules for Medicare enrollment, Social Security, and health savings account eligibility collide with one another, there’s really only one path to remaining eligible for HSA contributions starting at age 65:

• Being enrolled in an employer-sponsored high-deductible health plan, or HDHP, either through one’s own or one’s spouse’s employer. Notably, self-employed people or those who otherwise buy health insurance using federal or state healthcare exchanges are required to switch to Medicare at age 65, so this only applies to people working as employees (or to the spouses of employees) of a company that offers employer-sponsored qualifying HDHP insurance;
• Not applying for Medicare at age 65; and
• Not claiming Social Security benefits.

Given these criteria, exploring the nuances of HSAs and Medicare can uncover strategies for advisors to help their clients over age 65 maximize their HSA contributions. There are three specific strategies worth discussing in detail:

1. Withdrawing an existing application for Social Security to restore HSA eligibility for someone for whom Social Security benefits have already begun.
2. Coordinating HDHP and Medicare coverage between spouses to ensure at least one spouse can continue making HSA contributions.
3. Navigating the rules around starting Medicare after age 65 to ensure a smooth transition onto Medicare when an individual does opt to retire.

Withdrawing Social Security Benefits Application to Preserve HSA Eligibility

Let’s say that a person applies for Social Security benefits without realizing that doing so will end their eligibility for making HSA contributions, leading them to regret their choice. If it’s been less than 12 months since they first applied for benefits, they may be able to withdraw the application, disenroll from Medicare, and restore their HSA eligibility. However, this strategy has some significant trade-offs, which make it only really worth considering in certain specific circumstances.

The way the withdrawal of benefits application works is that individuals can fill out and submit Form SSA-521 to withdraw their application for Social Security benefits at any time within 12 months of the application’s initial approval. While this strategy is most often used for the purpose of delaying Social Security benefits until a later age to receive a higher monthly benefit, the form also includes the option to unenroll in Medicare, which would restore a person’s eligibility to make HSA contributions as long as they were otherwise able to do so by being covered by an eligible HDHP.

The main caveat, however, is that withdrawing one’s application for Social Security benefits also requires paying back any benefits actually received, which, over a full 12-month period, could amount to tens of thousands of dollars—some or all of which the payee may not actually have on hand to pay back. The Social Security Administration also requires individuals to pay back any funds that were withheld from Social Security payments for income taxes and Medicare Part B premiums, as well as any Medicare Part A benefits paid—meaning that the amount a person would need to repay in order to withdraw their Social Security application could significantly exceed what they actually received in benefits.

Additionally, withdrawing a Social Security application also doesn’t retroactively qualify someone to make HSA contributions for the period during which they were receiving benefits—they’ll be eligible to contribute starting the month after Medicare coverage is withdrawn, but they won’t be able to contribute for any period during which they were covered by Medicare.

In light of the hurdles presented by the process of withdrawing a Social Security application, doing so usually makes sense only when one plans to continue stashing significant amounts into an HSA for at least several more years. Still, if a time arises when a client says, “Oops, I applied for Social Security and now I can’t contribute to my HSA anymore,” it can be helpful for advisors to know about the application withdrawal process to consider as an emergency “undo” button that can enable them to continue their HSA contributions.

Maintaining Family HDHP Coverage With Medicare-Eligible Spouses to Maximize HSA Contributions

Although the rule that enrolling in Medicaid will render someone ineligible to make HSA contributions is pretty cut-and-dried for single people, there is notably some leeway around Medicare and HSA eligibility when it comes to married couples. Specifically, if a person working past age 65 is covered by an eligible HDHP and isn’t enrolled in Medicare, their spouse can be enrolled in Medicare and/or receive Social Security benefits without affecting the working spouse’s eligibility to make HSA contributions.

Example: Marie is 65 years old, working, and is enrolled in her employer’s HSA-eligible high-deductible health plan that covers only her. Marie’s spouse, Pierre, who is retired, turned 65 last year and enrolled in Medicare.

Even though Pierre is enrolled in Medicare, it doesn’t affect Marie’s eligibility to contribute to her HSA. Because she is enrolled in a self-only plan, she can contribute up to $4,150 to her HSA in 2024, plus an additional $1,000 catch-up contribution since she is age 55 or older.

In the example above, each spouse was covered individually by their own separate coverage—Marie by her employer’s self-only HDHP and Pierre by Medicare. However, even if Marie’s HDHP had covered both her and Pierre, she would have still been able to contribute to her own HSA, even if Pierre was also covered by Medicare.

That’s because when both spouses are covered by the same family HDHP (that is, health insurance that covers both the enrollee and their spouse and/or dependents), one of the spouses can enroll in Medicare and/or file for Social Security benefits without affecting the other spouse’s eligibility to contribute to an HSA. Even though the Medicare-enrolled spouse won’t be able to make an HSA contribution of their own, the other spouse can remain eligible to make HSA contributions as long as they maintain their HDHP coverage and aren’t also enrolled in Medicare.

The upshot to both spouses having family HDHP coverage, despite one spouse also being covered by Medicare, is that it allows the non-Medicare-covered spouse to contribute up to the maximum family contribution to their HSA, rather than being limited to the self-only maximum. Which would allow that spouse to contribute up to $8,300 to their HSA in 2024, as compared with $4,150 using self-only coverage.

Example: Carl is 67 years old and enrolled in an employer-provided family HDHP. The plan covers Carl and his wife, Gerty.

Gerty turned 65 last year and enrolled in Medicare, so she is ineligible to make any HSA contributions. However, Carl’s eligibility to make HSA contributions isn’t affected by Gerty’s Medicare coverage, and because the HDHP includes family coverage, Carl can contribute up to the full family contribution limit of $8,300 to his HSA in 2024, plus his $1,000 additional catch-up contribution.

Notably, there can be no catch-up contribution for Gerty since catch-up contributions must be made by the actual spouse who is eligible for them—and since Gerty can’t contribute to an HSA on her own, she therefore can’t make a catch-up contribution for herself either.

These rules were made clear by the IRS in Notice 2008-59, which presents guidance on a number of HSA-related topics in Q&A format:

Question 16 asks: How do the maximum annual HSA contribution limits apply to an eligible individual with family HDHP coverage for the entire year if the family HDHP covers spouses or dependent children who also have coverage by a non-HDHP, Medicare, or Medicaid? [Emphasis added]

Answer 16: The eligible individual may contribute the § 223(b)(2)(B) statutory maximum for family coverage. [Emphasis added] Other coverage of dependent children or spouses does not affect the individual’s contribution limit, except that if the spouse is not an otherwise eligible individual, no part of the HSA contribution can be allocated to the spouse.

If one spouse of a married couple is working and the other is receiving Social Security and/or enrolled in Medicare, enrolling in a family HDHP can be worth considering to maximize the potential amounts that the working spouse can contribute to their own HSA. Alternatively, the working spouse could themselves be enrolled in Medicare, but if the nonworking spouse were not also enrolled, then they would be able to make the maximum contribution to their own HSA.

Either way, other considerations would factor into the decision, such as the cost of family versus self-only coverage and how Medicare and the employer’s group insurance would coordinate benefits. The key point is that the value of the additional HSA contribution, plus the tax-free growth on the funds if they are invested within the HSA, could make those costs well worth it.

Smoothly Navigating the Six-Month Rule for HSA Eligibility Before Medicare

As shown above, a person can generally maintain their eligibility to contribute to an HSA after age 65 as long as they are employed, enrolled in an HSA-eligible HDHP, and not enrolled in Medicare or other non-HDHP insurance. And as long as they continue to meet those criteria, they can keep making HSA contributions year after year, regardless of their age.

But there will almost always come a time sooner or later when retirement becomes inevitable, at which point it’s time to transition away from employer-sponsored health insurance and onto Medicare. Unfortunately, however, there are special rules around enrolling in Medicare after age 65 that can make the send-off less than pleasant for people contributing to HSAs, requiring careful planning and timing to avoid tax complications.

Generally, when a person over age 65 leaves their job and becomes ineligible for employer-provided health insurance, they have an eight-month window known as the “special enrollment period” in which to sign up for Medicare. If they miss that window, they’ll need to wait until the next open enrollment period (from Jan. 1-March 31 each year) to sign up and potentially be stuck with a higher lifetime Medicare Part B premium. To avoid these penalties (as well as to avoid risking a gap in coverage between when the employer’s insurance ends and Medicare coverage begins), many individuals commonly sign up for Medicare immediately upon retirement.

The caveat for those working and contributing to an HSA after age 65, however, is what’s known as the “six-month rule,” which applies whenever a person signs up for Medicare Part A after turning 65. In these cases, an individual’s Medicare Part A coverage begins the later of 1) the month they turn 65 or 2) six months before the date that they apply for Medicare.

Somewhat confusingly, Medicare Part B coverage usually doesn’t start until the month after applying for coverage, resulting in effectively two different coverage starting dates: One (Part A) starting six months before applying for coverage, and one (Part B) starting the month after applying (or, if applying no later than the first month of the special enrollment period, on the first day of any of the following three months). But because HSA eligibility is lost when someone is covered by either Part A or Part B, the earlier Part A coverage date is usually what matters regardless of when Part B eligibility begins.

For someone working beyond age 65 who plans to switch to Medicare upon retirement, then, their Medicare Part A coverage would actually start six months before their retirement date—and because Medicare Part A is considered non-HDHP coverage for HSA purposes, their eligibility to contribute to an HSA would also end six months before retirement.

Example: Rosalind is 67 years old and plans to retire on Aug. 1. On July 1, she applies for Medicare so her benefits can start on her retirement date.

Because Rosalind applied for Medicare on July 1, her Medicare Part A coverage is considered to have begun six months earlier, on Jan. 1—which means that her eligibility to make HSA contributions ended on the previous day, Dec. 31.

In other words, she isn’t eligible to make any contributions for this year, and any contributions she did make would be considered “excess contributions” that would need to be withdrawn from the HSA before the current year’s tax filing deadline, or else she would owe a 6% annual excise tax on those amounts.

A common myth about the six-month rule is that an individual can’t make any HSA contributions within six months of applying for Medicare benefits. However, as Notice 2008-59 states:

“An individual who ceases to be an eligible individual [e.g., upon being covered by Medicare] may, until the date for filing the return (without extensions) for the year, make HSA contributions with respect to the months of the year when the individual was an eligible individual.”

In other words, an individual who is eligible for HSA contributions for only part of the year is limited to a prorated contribution amount based on the number of months in which they were eligible—however, they can still actually contribute that amount up until that year’s tax filing deadline (that is, April 15 of the following year), no matter when they actually start their Medicare coverage.

The formula that can be used to calculate the maximum HSA contribution in a year of partial eligibility is (the maximum annual contribution) × (the number of months in which the individual was eligible to contribute on the first day of the month) ÷ 12.

Example: Katalin retired on her 70th birthday on Dec. 5, 2023. On Nov. 15, she applied for Medicare benefits to start Dec. 1.

Because of the six-month rule, Katalin’s Medicare Part A benefits are considered to begin six months before she applied for benefits, or May 15, 2023, meaning she is ineligible for HSA contributions after that date. Although she was ineligible for part of May, she was eligible on the first of the month, meaning that there were five months (January, February, March, April, and May) in which she was eligible for HSA contributions.

Assuming she was enrolled in self-only HDHP coverage, Katalin’s maximum contribution for 2023 was $3,850 (the maximum self-only contribution) × 5 (the number of months in which she was eligible) ÷ 12 = $1,604. If she hasn’t already contributed this amount, she can do so up until April 15, 2024.

When a person applies for Medicare benefits within the first six months of the year, the six-month rule can also impact HSA eligibility for multiple tax years:

Example: Trudy is 68 years old and plans to retire on April 1, 2024. She applies for Medicare benefits on March 15 to begin on her retirement date.

Because of the six-month rule, Trudy’s Medicare Part A coverage is considered to start six months before she applied for benefits, or Sept. 15, 2023. This means that she was eligible to make HSA contributions for the first nine months of 2023 (including September, because she was eligible on the first day of the month), but she was ineligible for the final three months of 2023 and for all of 2024.

Assuming Trudy is enrolled in self-only coverage, her maximum contribution for 2023 is $3,850 (the maximum self-only contribution) × 9 (the number of months in which she was eligible) ÷ 12 = $2,888.

Because she’s covered by Medicare and, therefore, not eligible for HSA contributions for any months in 2024, she can’t make any contribution for 2024.

Unfortunately, Trudy didn’t know about the six-month rule and had already contributed $3,850 to her HSA for 2023. This results in an excess contribution of $3,850 – $2,888 = $962, which must be withdrawn from the HSA by the tax filing deadline of April 15, 2024, to avoid a 6% excise tax on the excess amount.

While a soon-to-be retiree doesn’t necessarily need to stop making HSA contributions six months before retirement, they should still plan in advance to determine their maximum HSA contribution and ensure that they don’t exceed this limit.

As noted earlier, when a person delays Medicare while working after age 65, upon leaving their job, they have an eight-month window following the earlier of the date that their group health coverage ends or the date their employment ends to sign up for Medicare during the Special Enrollment Period. If someone misses that enrollment window following their retirement, they’ll need to wait until the next Medicare General Enrollment Period (lasting from January through March each year) and, if the gap between group coverage and Medicare lasts more than 12 months, they’ll pay an extra 10% penalty on their Medicare Part B premiums for the rest of their life.

Extra Layer of HSA Planning

The key point is that while it’s possible to continue contributing to an HSA after age 65, doing so introduces an extra layer of planning to stay within all of the applicable rules and maximize the HSA’s benefits. To maintain eligibility, individuals need to wait to sign up for Medicare and delay filing for Social Security benefits until they decide to either stop working or stop contributing to the HSA.

Spouses can coordinate their coverage so that one spouse will be able to use their own Medicare and Social Security benefits without affecting the other spouse’s eligibility, and enrolling in family coverage (even when one spouse is enrolled in Medicare) allows the spouse who has the HSA to make the highest possible contribution.

When it is time to retire, planning for the end of HSA eligibility while factoring in the six-month rule for Medicare Part A coverage can help avoid an inadvertent excess HSA contribution (and the headaches that come with withdrawing excess contributions and potential penalty taxes).

But for all of the planning hurdles created when contributing to an HSA after age 65, the benefit of a sizable bucket of savings that can be used tax-free to pay for medical expenses in retirement can be more than worth it. And given that these tools will almost always be used for someone who is already planning to continue working after age 65, there’s little reason not to take advantage of the most tax-efficient savings vehicle for as long as possible!

This article first appeared on the Nerd’s Eye View at Kitces.com and has been reprinted here with permission. The views expressed are the author’s.