(upbeat music) - Hi, this is Janae with AARP. I lead workshops in my community to help older adults stay connected and age successfully. In this Advanced Learning we'll talk about Health Savings Accounts or HSAs and how they work with Medicare. If you'll be enrolling in Medicare or Social Security and you have an HSA, there are some important rules you should know. Please consult your financial tax advisor for advice regarding your personal situation. If you're not familiar with HSAs, these are savings accounts for people who have job-based health insurance with a high deductible. You contribute money to an HSA on a pre-tax basis and use those savings to pay for qualified medical expenses until you reach that high deductible and your insurance starts paying your medical bills. Your employer or a bank or credit union typically oversees your HSA account. Health Savings Accounts are becoming popular among employers because they have lower premiums for both employers and employees, and there isn't a use it or lose it feature. So if you don't spend the money you contribute during one year, it rolls over for you to use in the future. You're not taxed on HSA money you use to pay for your out-of-pocket medical expenses at any age such as your health insurance deductibles, co-payments and cost for prescription drugs as well as over-the-counter medications. You can also take tax free withdrawals for dental and vision care, hearing aids, and other eligible expenses that aren't covered by insurance and you can withdraw money tax free to pay eligible long-term care insurance premiums and HSAs have an extra perk for retirees. After you turn 65, you can also withdraw money tax-free from an existing HSA and pay Medicare Part B, Medicare Part D and Medicare Advantage premiums for you and your spouse. You cannot use HSA funds to pay for premiums for Medicare supplemental insurance, also called Medigap plans. The IRS has rules about who's allowed to participate in an HSA. You have to be covered under a high-deductible health plan. You cannot have any other health coverage. You cannot be claimed as a dependent on someone else's tax returns, and most importantly you cannot make new contributions to an HSA after you enroll in Medicare. Laura Cruz from the State Health Insurance Assistance Program or SHIP is here to explain a really crucial detail about HSAs and Medicare. - Typically, as a SHIP representative I counsel individuals who have questions about enrolling in Medicare, and I often say to people who have a high deductible health plan and HSA, you should understand two very, very important things. The first is that you cannot make contributions to an HSA if you're enrolled in Medicare. You'll get penalties if you do and the second is that you can be retroactively enrolled in Medicare Part A when you start to collect your Social Security benefits. Now, usually this retroactive enrollment isn't a big deal because there's no monthly premium for Part A but it can be tricky if you have an HSA. You see, if you claim Social Security benefits after the age 65, it triggers a Medicare part A enrollment and that Medicare part A coverage goes into effect of up to six months before you enroll in Social Security. This process happens automatically and you cannot opt out of it. It is really important to keep this retroactive coverage date in mind when you're calculating how much you can contribute to an HSA in that period of time before you enroll in Social Security. To avoid these IRS tax penalties, here's what you can do. Go to your human resources department and request that your contributions to your HSA stop anywhere between one to seven months prior to enrolling in Medicare Part A or collecting Social Security benefits. It is a good idea to do this because if you get penalties, you cannot appeal them. This can be confusing. So let's take a look at two different examples. Let's call our first example John. He works and participates in his employer's high-deductible health plan and is making contributions to an HSA. He plans to claim his Social Security benefits when he turns 68 and will continue working for a couple more years after that. Since he'll be claiming his Social Security benefits after age 65, he will be automatically enrolled in Medicare Part A retroactively. Here's the important part. He needs to stop his HSA contributions well before enrolling in Social Security. In fact, he needs to stop HSA contributions six months before he enrolls in Social Security. So if he plans to enroll in Social Security in May he should contact his HR office in October of the previous year. If he doesn't inform his HR department in October that he's going to take Social Security the following May, he'll face IRS tax penalty. Why? Because he's still going to be contributing to his HSA right up into May, but his part A coverage is going to begin retroactively in November. Now, let's take a look at another example. So let's call her Martha, and she's also has a group high-deductible health plan and an HSA. Let's say she plans to retire in December to celebrate her 69th birthday. When she retires, she'll leave her employer's health plan and enroll in Medicare. Sounds easy, right? Well, it's a little more complicated with her HSA. Here's what she'd need to do to avoid IRS penalties on that HSA. She should contact her HR office six months before December to stop her HSA contributions. So that would be June. Why June? Because it's when the six month automatic retroactive Part A coverage period starts. - Wow, these rules about automatic retroactive Part A coverage sure sound complicated. So here are the key points to remember about HSAs and Medicare. Plan ahead. You really should know that HSA rules and policies before you enroll in Medicare or collect Social Security. If you join Medicare and still make contributions to an HSA you will face IRS tax penalties. You cannot appeal these penalties even if you are enrolled retroactively in Medicare. Remember that collecting Social Security benefits after age 65 will automatically trigger that retroactive party enrollment. It also helps to remember that help is available if you have more questions about Medicare and HSAs. In addition to AARP's many Medicare resources you can also contact SHIPhelp.org, the Center for Medicare Advocacy, the National Council on Aging, the IRS or talk to your tax professional to find out more. Thanks for watching. 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Health Savings Accounts

HSAs

Medicare

high deductible health insurance

qualified medical expenses