What to Do With Your Health Savings Account Once You're Medicare-Eligible

My wife will be 65 in June 2011 and eligible for Medicare, but I don’t turn 65 until 2012. We currently have a high-deductible health-insurance policy and usually contribute the maximum amount to our health savings account each year. As she is turning 65 at midyear, how much can we contribute to our account for 2011? And what can we use the HSA money for after she’s on Medicare?

The maximum HSA contribution for 2011 is $6,150 for a family plan ($3,050 for single coverage) plus $1,000 in catch-up contributions for each person age 55 or older. But your situation is tricky because her 65th birthday is in the middle of the year.

Once your wife signs up for Medicare, she can no longer contribute to an HSA. So she’ll have to prorate her contribution for the number of months she had an HSA-qualified high-deductible policy before enrolling in Medicare, says Roy Ramthun, president of HSA Consulting Services. Medicare enrollment is effective on the first day of the month you turn age 65 (if your birthday is the first day of the month, however, your enrollment begins on the first day of the prior month).

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Assuming she drops off your family policy when she qualifies for Medicare in June, then she’d be able to contribute 5/12 of the $6,150 for family coverage ($2,562.50) plus 5/12 of her $1,000 catch-up contribution ($416.67). If you switch to self-only coverage for the rest of the year (since you are still 64), then you can then contribute 7/12 of the $3,050 for single coverage plus your full $1,000 catch-up contribution. See the IRS Instructions for Form 8889 for a worksheet to help you calculate your contribution limits.

Even though your wife can’t contribute to an HSA after she signs up for Medicare, she can still use the money tax-free for medical expenses that aren’t covered by insurance -- such as co-payments, deductibles, prescription drugs (including over-the-counter drugs with a prescription), vision and dental care, and a portion of long-term-care premiums based on age ($3,290 for age 61 to 70, for example). She can also use the money from the account tax-free to pay her premiums for Medicare Part B, D or Medicare Advantage (just not medigap premiums). For a list of eligible medical expenses, see IRS Publication 502.

See What to Know About Health Savings Accounts for more information about HSAs. Also see IRS Publication 969 for details about the tax rules.