Many employers offer their employees a health savings account (HSA) as part of their health benefits. But did you know that employees can also use HSA funds to pay for Medicare expenses when they enroll?

For your employees nearing Medicare eligibility, here’s what they should know regarding their HSA funds.

Health Savings Account Contributions

An HSA is a financial account made available by employers, allowing employees to contribute nontaxable funds to pay for qualified medical expenses. If your organization currently offers HSAs, notify employees who may be considering Medicare of the regulations.

By law, anyone with an HSA cannot contribute to their account once they have enrolled in Medicare Parts A or B.

Whether they’re retiring or continuing to work, employees age 65 and older who have deferred both Part A and Part B coverage must stop contributing to their HSA six months prior to applying for Medicare Part A and/or Part B. Otherwise, they will be subject to a tax penalty. This rule does not apply to those who start Medicare when first eligible, upon their 65^th birthday month.

Health Savings Account Withdrawals

When an employee enrolls in Medicare, they can withdraw from their existing HSA balance to pay for qualified medical costs. Examples of qualified Medicare expenses include deductibles, premiums, copays, and coinsurance associated with their Medicare plan. The HSA funds are theirs to use, not lose—even after they decide to switch from an employer group plan to Medicare. However, Medicare Supplement (Medigap) plan premiums are not eligible to be paid with HSA funds—they are the exception.

Delaying Medicare Enrollment

As an employer, if you have 20 or more employees, those who choose to work past age 65 can defer Medicare enrollment. Depending on their individual circumstances, it may make more sense for some individuals to remain on their employer group plan while contributing to an HSA with pre-tax dollars, rather than enroll in Medicare at 65.

Though typically, we often see people on an HSA group plan benefit more by switching to Medicare versus deferring Medicare and staying on their group plan.

Delaying Social Security

If an employee defers Medicare when they are first eligible and continues on employer coverage, it does not impact their ability to collect Social Security in the future.

However, once an employee begins collecting Social Security, it does impact their ability to contribute funds to an HSA. This is because anyone receiving Social Security benefits is automatically enrolled in Medicare Part A and Part B when they turn 65, and Part A cannot be declined while collecting Social Security benefits. An employee can choose to keep or decline Part B to remain on your employer coverage if that is an option for them.

Medicare Part A provides six months of retroactive coverage after an individual applies for Social Security benefits, assuming they were eligible for Medicare during those months. Any contributions made to their HSA will likely be subjected to a penalty. You cannot deposit to an HSA after you have applied for Medicare. As stated above, employees ages 65 and older must stop all HSA contributions six months before signing up for Medicare Part A.

Employers, We’re Here to Help

If you have questions about how your employees can use health savings account funds in retirement, consider us a resource to you and your team. Email your questions to [email protected] or give our advisors a call at 1-866-407-5180.