If you have a health savings account and are nearing retirement age, be aware that some of the rules are different for the older crowd.
HSAs, which can only used in conjunction with so-called high-deductible health plans, offer a “triple tax” benefit: Contributions are made pre-tax, any earnings are tax-free and qualified withdrawals also are untaxed.
While HSAs are similar to flexible spending accounts — which also let you set aside pre-tax money for health-care expenses — they come with particular rules that can be confusing, but are important for older Americans to know as they plan for retirement or partial retirement.
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“It’s useful to know for planning purposes, but also to make the most of the tax advantages of HSAs,” said Stephen Durso, associate director of client services at WTW, an employee benefits consulting firm.
The standard HSA contribution limits for next year are $3,850 for self-only coverage (up from $3,650 in 2022) and $7,750 for family coverage (up from $7,300 this year).
The definition of an HSA eligible, high-deductible health plan for 2023 depends on whether you have single or family coverage. A solo plan would need to have a deductible of at least $1,500 and a maximum limit of $7,500 on out-of-pocket expenses. For family coverage, the deductible is at least $3,000, with a $15,000 maximum on what members pay out of pocket.
Here are some key things to know about HSAs as you near retirement.
1. You’re allowed a ‘catchup’ contribution at age 55
You can put an extra $1,000 in your HSA once you reach age 55. If you and your spouse have separate HSAs but are subject to family coverage contribution limits, you each may be able to make that $1,000 “catchup” contribution once eligible based on age, according to the IRS.
“As long as they’re both covered, they could each have their own HSA — and would need to have their own to contribute the $1,000 catchup amount,” Durso said.
For both regular and catchup contributions, you get until the tax-filing deadline of the next year to make your HSA contributions. So for the 2022 tax year, the deadline would be April 18, 2023.
2. Medicare and HSAs don’t mix
You become eligible for Medicare at age 65. For people who are still working, it’s common to continue using their employer’s health plan alongside Medicare Part A (hospital coverage) and, perhaps, Part B (outpatient care).
However, once you sign up for Medicare — even if only for Part A — you can no longer contribute to an HSA, even if you still are using your employer-based high-deductible plan. Medicare beneficiaries are permitted to use their HSA funds to pay for medical expenses, but cannot set up a new HSA or contribute to one.
Additionally, there can be snags that come with HSAs if you are still contributing to one and you delay signing up for both Medicare (beyond age 65) and Social Security (beyond your full retirement age, as defined by the government).
“The bottom line is if you get enrolled in Medicare, you are ineligible to contribute to an HSA,” Durso said. “A lot of older people don’t realize this.”
3. Tax penalty for non-qualified expenses disappears
The rule governing withdrawals changes when you reach age 65.
Before then, withdrawals are tax-free and penalty-free as long as they are used for qualified health expenses. If not, the money is taxed as regular income and there’s a 20% tax penalty on top.
Once you reach that age, though, you won’t be penalized for using HSA funds for things unrelated to health care.
However, you will pay taxes on non-qualified health expenses.
“You can use it on any expense in the world,” Durso said. “If you use it on qualified health care expenses, there’s no tax at all. But if you use it on a big-screen TV, you’d be subject to tax.”