Can Retirees Use HSAs?

Wednesday, March 25, 2015

Yes – and no.  A Health Savings Account (HSA) is like an IRA but for the payment of medical expenses instead of retirement income. HSA contributions are not taxed, and like IRA accounts, they belong to the employee. No matter how many times an employee changes jobs, the money in the HSA goes with the employee. Ideally, HSA contributions are invested rather than spent for immediate needs.  Over time, these investments can increase and after retirement will be available for the payment of eligible medical expenses.

In order to qualify for an HSA offered by an employer, the employee must also be covered under a High Deductible Health Plan (HDHP). The employee cannot also be covered under another health plan that provides coverage for any benefit that is covered under the HDHP.  For this reason, employees cannot participate in a Health Flexible Spending Accounts (Health FSAs) or Health Reimbursement Arrangements (HRAs) while they are contributing to an HSA, unless the Health FSA or HRA does not provide coverage included in the HDHP. These plans are called limited purpose FSAs/HRAs.

So what are the rules for retirees?  First, anyone entitled to Medicare cannot at the same time make contributions to an HSA.  Entitlement to Medicare is different from eligibility. Persons 65 or older are eligible for Medicare, but unless an individual actually enrolls in Medicare, the prohibition against maintaining a separate HSA does not apply.  Be careful!  Any person 65 or older who enrolls in Social Security is automatically enrolled in Medicare with an effective date that is retroactive for the six months preceding the Social Security enrollment.  As a result, in order to continue contributing to an HSA, an individual must not only decline Medicare but also defer Social Security.
Next, even though a Medicare-entitled individual cannot open or contribute to an HSA, funds in an existing HSA can still be used on a tax free basis to pay eligible medical expenses so long as the expense is covered by insurance or another arrangement. Finally, because an HSA can be used to pay the qualified medical expenses of a spouse or tax dependent, an employed spouse can pay the eligible medical expenses of the retired spouse.

In sum, although retirees can’t open or contribute to an HSA, there is enough flexibility in the rules to enable retirees to take advantage of the funds that have been set aside in these non-taxable accounts.