Health Savings Accounts (HSAs) are powerful tools for employees to save pre-tax dollars for medical expenses. However, things get complex when employees transition to Medicare. Whether you're an employer managing retiring staff or an individual nearing retirement, understanding how Medicare enrollment impacts HSA contributions is critical. Improper management can result in tax penalties, so careful planning is essential.
This guide breaks down the essential information and provides actionable steps to ensure a smooth transition for employees and individuals alike.
What happens to HSAs when you enroll in Medicare?
Once someone enrolls in any part of Medicare—whether Part A, B, or D—they can no longer contribute to their HSA. While this rule may seem straightforward, the details can get tricky.
Key points to understand:
- No New HSA Contributions – Medicare enrollment marks the end of your ability to contribute to your HSA, even if you're still covered by a high-deductible health plan (HDHP).
- Using HSA Funds – Individuals can still use HSA funds to pay for qualified medical expenses, including Medicare premiums (except for Medigap plans). These withdrawals remain tax-free if used for eligible expenses.
For companies with employees nearing retirement, communicating this information clearly is vital to avoiding misunderstandings or costly mistakes.
The impact of mid-year retirement on HSA contributions
Many people retire and enroll in Medicare partway through the year, which introduces timing complications for HSA contributions.
How pro-rated HSA contribution limits work
HSA contribution limits are calculated based on the number of months an individual is eligible to contribute. If an employee retires and enrolls in Medicare mid-year, their contribution limit is reduced accordingly.
Example scenario:
- The annual contribution limit for self-only coverage in 2026 is $4400.
- If an individual was eligible for an HSA for 6 months (January–June) before enrolling in Medicare in July, their contribution limit would be 50% of the annual limit ($2,200).
Companies should help employees understand how this rule applies, especially if their payroll systems automate HSA contributions.
Medicare Part A retroactive coverage and its consequences
Another critical—and often overlooked—consideration is Medicare Part A's retroactive coverage rule. For those who apply for Medicare after 65, Part A coverage can retroactively begin up to six months before the enrollment date.
Why this matters:
- Retroactive coverage impacts HSA eligibility. If Part A coverage begins retroactively, contributions made during the retroactive period are considered excess contributions. This applies even if individuals were unaware of the coverage's effective start date.
- Excess contributions can lead to tax penalties unless addressed promptly.
Example scenario:
- An employee retires on July 1 at age 66 and applies for Medicare.
- Medicare Part A is retroactively effective from January 1.
- The individual is considered ineligible for HSA contributions for the entire calendar year, even though they didn't enroll until July. Any contributions made during the year would be considered excess.
For employers, sharing this information proactively can save retiring employees from costly mistakes.
Tax penalties for excess contributions
Improperly managing HSA contributions after Medicare enrollment can result in significant financial repercussions. Contributions made after Medicare coverage begins are deemed excess contributions. These funds must be withdrawn before the tax filing deadline (typically April 15 of the following year).
If excess contributions are not withdrawn:
- 6% Excise Tax – There's a 6% annual tax on excess contributions for every year they remain in the account.
- Tax on Earnings – Any earnings generated on excess contributions are also subject to tax.
Educating employees about these risks is a vital step for companies supporting staff through the retirement process.
Best practices for managing HSA contributions during transition
If you are an individual planning your own retirement, below are practical steps to avoid missteps with HSAs during the transition to Medicare.
1. Know your Medicare start date
Employees nearing retirement should confirm their exact Medicare start date, including if retroactive coverage applies. This will provide a clear timeline for determining HSA contribution eligibility.
2. Calculate pro-rated contribution limits
Determine how many months you were eligible to contribute before enrolling in Medicare. Contribute only the appropriate fraction of the annual limit. For instance:
- 5 months of HSA eligibility = 5/12ths of the annual contribution limit.
3. Stop contributions before Medicare begins
If you know the Medicare start date, ensure all HSA contributions—whether from payroll deductions, direct contributions, or catch-up contributions—cease beforehand.
4. Withdraw excess contributions promptly
If you discover that you’ve made excess contributions, withdraw the funds before the tax filing deadline to avoid penalties. Work with your HSA provider to request the withdrawal, which may also include any earnings on the excess amount.
Additional considerations for employers
Employers can play a key role in helping employees make informed decisions about their retirement benefits. Here are some tips to assist your team effectively.
1. Automatic enrollment in Medicare Part A
If you are automatically enrolled in Part A, this will immediately end your HSA eligibility. Who is automatically enrolled?
- Social Security or RRB beneficiaries: If you are already receiving benefits from Social Security or the Railroad Retirement Board at least four months before your 65th birthday, you will be automatically enrolled in Medicare Part A and Part B.
- Individuals receiving SSDI benefits: If you've been entitled to Social Security Disability benefits for 24 months, you are automatically eligible for Medicare Part A at no cost.
2. COBRA & Medicare
If you have Cobra prior to being eligible for Medicare, your Cobra will terminate once you become Medicare eligible. If you are Medicare eligible prior to Cobra, Cobra will act as a secondary payer and Medicare will pay first. To avoid late enrollment penalties and potential gaps in coverage, you should enroll in Medicare Part B right away when you become eligible, rather than delaying and relying on COBRA. You can no longer contribute to an HSA once enrolled in any part of Medicare.
3. Provide educational resources
Many employees are unaware of the specifics around Medicare and HSAs. Offering resources, webinars, or one-on-one counseling can help bridge this gap and protect employees from potential financial pitfalls.
Closing thoughts
Navigating the intersection of Medicare and HSAs doesn’t have to be overwhelming. By understanding key rules—such as pro-rated HSA contribution limits, the retroactive impact of Medicare Part A, and the penalties for excess contributions—employers and employees can take proactive steps to manage this transition effectively.
For organizations, fostering clear communication about these points helps ensure retiring employees can transition smoothly without unnecessary financial stress. For individuals, careful planning and adherence to contribution limits are crucial to maximizing HSA benefits while avoiding costly mistakes.
With the right approach, both employers and employees can confidently manage the transition from HSA eligibility to Medicare enrollment. For further information on Medicare guidelines, please contact a Risk Strategies Medicare representative.
About the author
Brenda Shearer – National Director, EB Select & Medicare
Brenda Shearer was part of the Risk Strategies acquisition of Benefits Network Insurance in December 2018. She served as the Director of Wholesale, dedicated to providing day-to-day employee benefit account management for customers and brokers, as well as the management of the staff.
Brenda has extensive training and knowledge of all major carriers in the marketplace, including individual, senior, small and large group products. She has also worked closely with large accounts and PEO’s.
