In this detailed and most informative article:
www.myfederalretirement.com/hsa-medicare by Edward A. Zurndorfer, a Certified Financial Planner, Zurndorfer discusses the pitfalls of Health Savings Accounts (HSAs) and Medicare for federal employees over 60 years old who own HSAs. Zurndorfer explains how HSAs work and how they can be used to pay for qualified medical expenses in a tax-beneficial way. HSAs offer triple tax savings, including contributions made with before-taxed dollars, earnings that accrue over time and are tax-free when used to pay for qualified medical expenses, and tax-free withdrawals that can be made before and throughout retirement to pay for qualified medical expenses. Qualified medical expenses during retirement include medical and dental care expenses not paid by insurance, long-term care insurance premiums, hearing aids, custodial care nursing services not covered by insurance, and the reimbursement for Medicare Part B and Part D monthly premiums. However, there are important rules that an HSA owner in their early 60s needs to heed in order to avoid being subject to an IRS penalty when the HSA owner enrolls in Medicare. The article discusses when an HSA owner must stop contributing to an HSA and how an HSA owner can continue to use HSA dollars to pay qualified medical expenses after the HSA owner enrolls in Medicare. Upon reaching age 65, an HSA owner can also make penalty-free withdrawals to pay for any nonqualified medical expense such as home repairs or personal expenses.
HSAs and Medicare have eligibility rules that prohibit HSA owners from contributing to their HSA or receiving contributions from their employer when enrolled in any part of Medicare. If contributions are made to the HSA after enrollment in Medicare, the HSA owner will be subject to an IRS excise tax penalty. For instance, if an individual is currently contributing to an HSA and plans to enroll in Medicare the month before they become 65, they must ensure all HSA contributions cease before the month they become 65. An HSA owner whose 65th birthday is on the first day of any month should stop their HSA contributions by the beginning of the month before they become 65. Federal retirees enrolled in an HDHP associated with an HSA should change their FEHB program enrollment to a non-HDHP plan if they know they will become 65 in the coming year.
If you are enrolled in any part of Medicare, you cannot contribute to your HSA or receive contributions from your employer. If you make contributions to your HSA after enrolling in Medicare, you will be subject to an IRS excise tax penalty. To avoid the penalty, you should stop contributing to your HSA at least six months before applying for Medicare Part A or both Medicare Part A and Medicare Part B or starting your Social Security retirement benefits. The “6-month lookback” rule starts when an HSA owner over age 65 enrolls in Medicare or starts to receive their Social Security retirement benefits. However, to avoid the IRS excise tax penalty, the HSA owner should withdraw those HSA contributions by the end of the tax year. This HSA restriction leads some HSA owners working past age 65 to defer enrolling in Medicare and maintaining their current employer-based health insurance coverage so that they can continue contributing to their HSA until they retire.