What Happens if I Contribute to My HSA After Age 65?

Health Savings Accounts (HSAs) offer a tax-advantaged way to save and pay for medical expenses. They provide triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. As individuals approach or pass age 65, questions often arise about HSA contribution eligibility, especially concerning Medicare enrollment. Understanding these rules is important to avoid potential tax implications.

HSA Contribution Eligibility

To contribute to an HSA, an individual must be covered by a high-deductible health plan (HDHP) and have no other health coverage. This includes not being enrolled in Medicare Part A or Part B. An HDHP must meet specific annual deductible and out-of-pocket maximum thresholds set by the IRS. For example, in 2025, a self-only HDHP must have a deductible of at least $1,650 and an out-of-pocket maximum of $8,300.

Enrollment in any part of Medicare, including premium-free Part A, disqualifies an individual from making new HSA contributions. This is because Medicare is not considered an HDHP. If an individual enrolls in Social Security benefits, they are automatically enrolled in Medicare Part A, which then ceases their eligibility to contribute to an HSA.

Medicare Part A coverage can be retroactive for up to six months before enrollment. This means if you plan to enroll in Medicare, it is advisable to stop HSA contributions at least six months prior to enrollment to avoid potential penalties. Even if an individual continues to work past age 65 and has employer-sponsored HDHP coverage, Medicare enrollment ends HSA contribution eligibility.

Consequences of Ineligible HSA Contributions

Making contributions to an HSA when not eligible, such as after enrolling in Medicare, results in excess contributions. These ineligible contributions are not tax-deductible. They are also subject to a 6% excise tax on the excess amount. This 6% excise tax applies to the total amount over the contribution limit and is assessed each year the excess remains in the account.

Any excess contributions made by an employer are considered part of the employee’s gross income. The individual will owe income tax on these amounts. These tax implications highlight the financial repercussions of not adhering to HSA contribution rules, making prompt rectification important.

Rectifying Ineligible HSA Contributions

Correcting ineligible or excess HSA contributions is possible and can help avoid or minimize penalties. The most common method involves withdrawing the excess funds from the HSA. To avoid the 6% excise tax for a given year, the excess contributions, along with any income earned on those contributions, should be removed by the tax filing deadline for that year, including extensions.

When removing excess contributions, any earnings attributable to the excess amount must also be withdrawn and reported as taxable income. Your HSA administrator can assist in calculating these earnings. For tax reporting, individuals need to file IRS Form 5329 to report excess contributions, even if corrected. Form 8889 is also used to report HSA contributions and distributions.

If the excess contributions are not removed by the tax deadline, the 6% excise tax will apply for that year. However, if a future year’s contributions are less than the maximum allowable limit, the excess amount subject to the excise tax can be reduced by the difference. It is advisable to contact your HSA custodian for specific forms and procedures, as they often have a “Return of Mistaken HSA Contribution” or “Distribution of Excess HSA Contribution” form.

Using HSA Funds in Retirement

Once an individual reaches age 65, the rules for using HSA funds become more flexible, regardless of their current contribution eligibility. Funds can continue to be withdrawn tax-free for qualified medical expenses at any age. Qualified medical expenses are broadly defined by the IRS and include a wide range of healthcare services, equipment, and medications, such as doctor’s fees, dental care, vision care, and prescription drugs.

After age 65, HSA funds can also be used to pay for certain insurance premiums, including Medicare Parts A, B, C (Medicare Advantage), and D prescription drug coverage. However, Medicare supplemental policies, often known as Medigap, are generally not considered qualified medical expenses for HSA withdrawals.

A significant advantage of HSAs after age 65 is the ability to withdraw funds for any purpose without incurring the 20% penalty that applies to non-qualified withdrawals before age 65. While these withdrawals for non-medical expenses will be subject to ordinary income tax, similar to withdrawals from a traditional IRA, the absence of the penalty provides greater financial flexibility in retirement. This flexibility allows HSAs to function as a supplemental retirement savings vehicle, especially for covering healthcare costs which tend to increase with age.