Ask the Expert: HSA contributions and signing up for Medicare

I’ll be 65 in a few months. I work full time, have a high-deductible health plan through my employer and contribute to a Health Savings Account (HSA). I recently learned you can’t continue contributing to an HSA if you have Medicare Part A, and there’s a tax penalty for HSA contributions made within the six months prior to Medicare enrollment. If this is correct, what’s the penalty? Other than waiting to sign up for Medicare, what are my options?

Your information is correct. You can’t contribute to an HSA after enrolling in Medicare. High-deductible plan coverage is an HSA eligibility requirement, and Medicare isn’t a high-deductible plan.

If your employer’s plan covers fewer than 20 workers, you must sign up for Medicare at age 65. But if it covers 20 or more workers, you can postpone Medicare enrollment and continue making HSA contributions.

The HSA offers a triple tax break: Contributions are tax-deductible, the account grows tax-free and distributions used for qualified medical expenses are tax-free. Non-qualified distributions are taxable as ordinary income. If taken before age 65, they’re also subject to a 6% penalty.

HSA contributions made in the six months before enrollment in Medicare Part A are also taxable and subject to a 6% penalty. But you can avoid the penalty by withdrawing those contributions, and their earnings, by the due date (including extensions) of your tax return for the year the contributions were made. If you made prohibited 2023 contributions, for example, you’d have until Oct. 15, 2024, to withdraw them without penalty.

The bottom line

Stop making HSA contributions six months before enrolling in Medicare.

More information

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