Federal employees who are enrolled in a high-deductible health plan (HDHP) associated with a health savings account (HSA) are able to make both tax-deductible contributions to their HSAs and tax-free withdrawals from their HSA’s. This allows them to pay in a tax-preferential way qualified medical expenses of themselves and their families.
Similar to an IRA, an HSA can be invested and the accrued earnings can grow potentially tax-free. This occurs when the earnings are withdrawn and are used to pay qualified medical, dental and vision expenses. The HSA belongs to the HSA owner forever, to be used when the HSA owner is an employee or a retiree. Unused HSA funds are carried over from one year to the next, growing in value and potentially into a valuable retirement nest egg of money that will be used to pay for medical expenses during retirement. This includes reimbursement of Medicare Part B and Medicare Part D monthly premiums.
The following chart summarizes HSA benefits:
| 1 | 2 | 3 | 4 |
| Contributions reduce adjusted gross income and accrue tax-free earnings | Tax-free withdrawals to help pay qualified medical, dental and vision expenses | Tax-free reimbursements for Medicare Part B and Medicare Part D premiums | Grow tax-free over time, building a great retirement nest-egg |
With all of these great benefits, it is easy to see why a federal employee, working at age 65 and older wants to continue contributing to his or her HSA for as long as possible. However, HSA owners have to be aware that contributions can no longer be made to their HSAs once they enroll in any part of Medicare (Medicare Part A, Medicare Part B, Medicare Advantage and Medicare Part D). This column discusses what happens when an HSA owner approaches age 65 and is eligible to enroll in Medicare.
The HSA and Medicare Enrollment Exception
As mentioned above, HSA withdrawals can be used to pay qualified medical, dental and vision expenses tax-free for the HSA owner and any dependents, even if those dependents are not included on their health, dental or vision insurance policies. Both the employee (the HSA owner) and the employer, who sponsors the group health insurance plan, contribute to the HSA. For federal employees enrolled in an HDHP offered through the Federal Employees Health Benefits (FEHB) program and associated with an HSA, both the employee and the employee’s agency make before-taxed contributions to the employee’s HSA.
Medicare Part A is a form of health insurance and is considered hospital insurance. As mentioned above, the IRS does not allow an employee or the employer to continue contributing to an HSA for any employee who enrolls in any part of Medicare. Those federal employees who are enrolled in an HSA and who want to continue contributing to their HSA after age 65 are advised to not enroll any part of Medicare.
If a federal employee is an HSA owner and wants to contribute to their HSA after age 65, then the employee should not enroll in any part of Medicare including Medicare Part A (Hospital Insurance) in which for almost all employees is free (premiums were pre-paid through the Medicare payroll tax, the Medicare Hospital Insurance Tax or HIT). The employee will continue to be able to make before-taxed contributions to the HSA. The employee will need to postpone applying for Medicare (and Social Security retirement benefits) until the employee gets close to retirement. A federal employee who continues in federal service past age 65 and continues enrollment in the FEHB program will not be subject to a late enrollment penalty by Medicare or Social Security, as long as the employee maintains FEHB program enrollment.
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Potential Consequences of HSA Ownership and Enrollment in Medicare
What are the consequences of an employee who owns an HSA and who already signed for Medicare Part A and Social Security retirement income benefits? The employee needs to stop contributing to the HSA immediately. However, the employee can use the funds already in the HSA to pay for qualified medical expenses until the HSA is exhausted.
The employee should not attempt to cancel Medicare Part A enrollment that is already in force. The cancellation of Medicare Part A enrollment can have dire consequences for the employee’s Social Security income benefits. A Medicare Part A beneficiary who cancels Medicare Part A enrollment will have to pay back all of the monthly retirement benefits the beneficiary already received from the Social Security Administration.
If the Medicare Part A beneficiary has not enrolled to receive his or her Social Security monthly retirement benefit, then the beneficiary can withdraw his or her application for Medicare Part A. Employees should note that after they become age 65, or if after age 65 whenever they decide to apply for their Social Security monthly benefit, it will automatically trigger their enrollment into Medicare Part A, retroactively, for either six months or until an employee’s 65th birthday, whichever is the fewer number of months.
Applying for Medicare After Turning Age 65
If an individual applies for Medicare Part A after he or she becomes age 65, then Medicare Part A will become retroactive for up to six months. Therefore, a federal employee who owns an HSA want to apply for Medicare Part A after becoming age 65 should stop contributing to his or her HSA up to six months before signing up for Medicare Part A. If the employee does not stop contributing, then the employee could end up facing IRS penalties. However, if an employee plans on enrolling in Medicare before his or her 65th birthday, then the employee can continue to contribute to his or her HSA until the day before Medicare is effective. This is because Medicare Part A does not be retroactive to the month an individual becomes age 65. if an individual applies for Medicare prior to reaching age 65. The following examples illustrate.
Example 1. George applies for Medicare at age 67 in July 2025. In July 2025, his Medicare Part A will be retroactive six months to January 1, 2025. Therefore, George should stop his HSA contributions prior to January 1, 2025.
Example 2. Carol becomes age 65 in December 2025. She intends to apply for Medicare in March 2026. Her Medicare enrollment is retroactive to December 1, not the full six months. Therefore, Carol should stop her HSA contributions no later than November 30, 2025.
Example 3. William becomes age 65 in April 2026. He plans to enroll in Medicare in February 2026 during the second month of his initial enrollment period. When William applies for Medicare in February 2026, his Medicare becomes effective on April 1, 2026. William should stop contributing to his HSA as of March 31, 2026.
IRS Penalty for Contributing to an HSA While Enrolled in Medicare
The IRS will usually impose a penalty upon the HSA owner enrolled in Medicare and who contributes to the HSA in the event the HSA owner is audited. The penalty amount will depend entirely on the HSA owner’s circumstances. The HSA owner will pay taxes on the HSA funds contributed and that were deducted and penalties will be imposed. The contributions may also be considered excess contributions by the IRS, and then the contributions will be subject to an additional six percent tax (excess contribution penalty) when the funds are withdrawn.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert
A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.
He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.