Federal Employees and Retirees Enrolled in an HSA 

Additional Key Facts Affecting Medicare and HSA Coordination

• HSA contributions are disallowed when Medicare Part A is in place. A federal employee or retiree who owns an HSA associated with a FEHB program HDHP can make withdrawals from HSA funds already in the HSA to pay for qualified medical expenses. But the employee or retiree cannot contribute to their HSA once they enroll in Medicare Part A. In fact, the employee or retiree should stop contributing to their HSA the month before they intend to enroll in Medicare Part A when they become age 65 (during their Initial Enrollment Period).

In addition, there is a six-month “lookback period” for HSA owners who enroll in Medicare after they are age 65. A recommended practice is for federal employees who are enrolling in Medicare after age 65 to stop contributing to their HSA six months before the month they apply for Medicare in order to avoid IRS penalties. Note that the month of application is what is used to calculate the six-month lookback and not the month the Medicare applicant’s Medicare becomes effective. The following two examples illustrate:

Example 1. Jean, a federal employee, plans to work until age 67 in order to reach her Social Security full retirement age (FRA) and start receiving her monthly Social Security retirement benefit. Jean opts to defer Medicare until she retires in order to continue funding her HSA. If Jean waits until July 1 or later of the year she retires to apply for Social Security and Medicare, then she will need to calculate her permitted HSA contribution amount during the calendar year of retirement. The permitted HSA contribution amount is based on Medicare eligibility and stopping her HSA contributions six months before the month she submits her application. If Jean applies during the month of September 2024 for her Social Security and Medicare in order to receive her first Social Security check in October 2024, she is deemed to have enrolled in Medicare Part A six months prior to September, which is March 2024. Using 2024 HSA contribution limits, the maximum Jean can contribute to her HSA during 2024 would be:

[$4,150 + $1,000 (catch-up contributions because Jean is over age 55)] x [2 months (January and February)/12 months] = $5,150 x 2/12, or $858.

Example 2.  Using the facts in Example 1, except that Jean’s retirement date is changed to April 1,2024. Jean applies for Social Security and Medicare in March 2024. Her Medicare enrollment would be deemed to be September 1, 2023. Jean would need to recalculate her HSA contribution amount for 2023, taking into consideration the four months (September through December) of ineligibility during 2023 to contribute to her HSA. If Jean had already filed her 2023 income taxes (including as tax deductible the remaining four months’ worth of excess HSA contributions), then Jean will have to file an amended federal (and state) income tax return in order to account for the loss of the tax deduction taken for ineligible HSA contributions.

1. Upon enrolling in Medicare, funds already in the HSA can still be withdrawn tax-free to pay for qualified medical expenses. These qualified medical expenses include reimbursing the HSA owner for Medicare Part B and Medicare Part D premium payments.
2. If a federal retiree is already collecting Social Security upon reaching age 65, he or she will be automatically enrolled in Medicare and henceforth no longer be able to contribute to his or her HSA. The only way to opt out of this would be to rescind the Social Security election within 12 months of applying for Social Security benefits and pay back all benefits received to date.
3. If a federal employee chooses to delay Medicare enrollment because the employee is still working in federal service and wants to continue contributing to his or her HSA, then the employee must also wait to collect Social Security retirement benefits. This is because most individuals who are collecting Social Security benefits when they become eligible for Medicare are automatically enrolled into Medicare Part A. An individual cannot delay enrolling in Medicare Part A while collecting a Social Security benefit. The takeaway is that a federal employee who owns an HSA should delay the start of a Social Security monthly retirement benefit and decline Medicare Part A enrollment in order to continue contributing funds to the employee’s HSA. As explained above, the employee should make sure to stop contributing to the employee’s HSA at least six months before the month the employee plans to enroll in Medicare. The following example illustrates:

Example 3. Larry, a federal employee is age 69 and enrolled in an HSA. Larry is not enrolled in Medicare and will become age 70 in July 2025. He would like to start receiving his monthly Social Security benefit when he comes age 70. However, Larry was told by his financial advisor that if he applies for his Social Security benefit in July 2025, then he will be automatically enrolled in Medicare Part A, retroactive to January 2025. Larry is therefore advised to delay his Social Security (and Medicare) enrollment in order for Larry to continue contributing to his HSA.

In summary, when federal employees enrolled in an HDHP associated with an HSA opt to work past age 65 and want to continue funding their HSA, they need to be familiar with the Medicare application and enrollment rules. This is necessary in order to avoid either penalties for excess contributions or late enrollment penalties for Medicare Part B and Medicare Part D.