What happens to the money in an HSA after the accountholder turns 65?

After an individual turns 65, the HSA funds can still be withdrawn tax-free for out-of-pocket qualified health expenses, regardless of whether or not they enroll in Medicare. If the funds are spent for any reason other than for qualified medical expenses, the funds withdrawn will be taxable as income but will not be subject to any other penalties. (Normal income taxes will apply if the distribution is not used for unreimbursed medical expenses (expenses not covered by the medical plan). Although the purchase of health insurance is generally not a qualified medical expense that can be paid or reimbursed by an HSA, the Internal Revenue Code provides an exception for employer-sponsored retiree coverage and Medicare premiums once an account beneficiary reaches age 65.

• If retiree health benefits are provided through a former employer, the account can also be used to pay for the retiree medical insurance premiums, whether insured or self-insured. Such a distribution will be tax-free.
• When an accountholder enrolls in Medicare, the funds can be used to pay Medicare premiums, deductibles, co-pays and coinsurance under any part of Medicare.

Premiums for Medicare are usually automatically deducted from Social Security benefit payments. Individuals can use HSA funds to reimburse themselves in an amount equal to the Medicare premium deduction.

Note: Medicare supplemental insurance or “Medigap” policies are not considered qualified expenses.