HSA And Medicare

Hello, this is Will Hardy with ManTalk Radio. We are all about breaking down the walls of race and denomination. Your chosen Truth Network Podcast is starting in just a few minutes.

Enjoy it, share it, but most of all, thank you for listening to the Truth Network Podcast. Welcome to Finishing Well. Boy, do we have a brand new topic for you today on Finishing Well. Something we've never talked about, but boy, are we going to talk about today. It's Health Savings Account. That's an HSA. Some of you may be familiar with that.

And Medicare. And so, you know, interestingly, as I was thinking about this, you know, Jesus's famous parable about the parable of the sower has so many ramifications, it's unbelievable. But you might remember that the first of the four soils that Jesus talked about was the seed that fell on the wayside.

In other words, it fell on the road. And back in those days, they had wagons. So wagons, man, they made ruts. And we get in a rut. And I think Jesus is telling us here that, you know, when he's trying to plant seed, you go to your sermon and you listen to it the way you always listen to. If you're in a rut, your soil isn't plowed for that seed in order to be able to take root. Well, unfortunately, if you have an HSA, or you're familiar with that strategy, you know, you can get in a rut.

Well, this is the way I've always done it. Well, when you get to Medicare, the rules change substantially. And so the seed that you were sowing into that HSA now has got a whole different world that you're going to live in, which we're going to explain to you. But similarly, you know, that it was a really good thing that you got that money, and we're going to show you how it can be used, but after the rules are changed.

So Hans? Okay, so a health savings account, or HSA, you know, first came out, the specific, at that acronym with these rules, around the same time the Affordable Care Act was passed. And the whole idea was for you to buy a high deductible health plan, you know, one that is not going to pay until your bill gets above a certain amount. I think the minimum for the high deductible is like four or five grand. But it'll say on there whether it's HSA eligible or not.

When you're looking at any health plan, even within your employer, they'll generally have an HSA option, and then they'll have one that has a lower deductible that's not HSA. And so what that really means is you're able to put money in there, put money aside, either just for you if you're the only one covered under the plan, or you're married and have children or just married, just the two of you, you're able to put a substantial amount of money in there, tax deductible. And by substantial, I mean for a single that's over 55, that's $4,850 a year, and for a married person, $8,750 a year, into the HSA and take a tax deduction for it. Or if it's coming out of your pay, you don't pay taxes just like your IRA contribution, you don't pay, or your 401k contribution, you don't pay any tax on this money going in there. So it's effectively pre-tax money, and then what makes it better than a 401k, if you use it for the right thing on the way out, coming out, it is tax free. So it's like double tax benefit. It's tax deductible going in and tax free coming out if it's spent on medical expenses. So the topic of the show is Medicare, and so what happens to your HSA balance, how do they handle the contributions once you get on Medicare?

And it's pretty simple and the law is pretty darn clear. If you go on any part of Medicare, and that includes part A only, you are no longer eligible to contribute to your HSA ever for the rest of your life. So no contributions once Medicare starts. Then the second thing is, is you are allowed to keep your balance in the HSA and use it for the same types of things for the rest of your life, or use it down to zero.

Do whatever you want with it. Past Medicare, you just can't contribute to it once you're on Medicare. Right, and that can be a sticky wicket because when you choose to go on Medicare, if you hadn't for a while, right? We get all kinds of people who, you know, slept right through Medicare enrollment and they knew that they have group insurance. They knew the group insurance would give them an exception for the penalties, and so they didn't sign up for Medicare. But then they had people telling them, oh, you have to sign up for Medicare A.

You have to get that. And if you don't, you just skip signing up for B, and Medicare part A is free. So they go down there and they sign up, or online, they sign up for A only.

And then they're just marching along. They're not paying any premium. They're still on their group insurance. It's HSA eligible.

They're still making the payments. And then they run into us two years later because now we're getting them signed up for the rest of Medicare and getting the supplemental insurance, doing their retirement planning, Social Security planning. And then all of a sudden, you've contributed to your HSA for the last two years because you're now 67 and you're just retiring, and you've been covered under Medicare part A.

So the moral of that story is if you're going to stay on group insurance, stay on an HSA eligible plan, keep contributing to the HSA. Once you hit 65, don't sign up for any part of Medicare. Don't sign up for A.

Don't sign up for B. And just wait until you actually retire and your group insurance ends. If you're going to stay on an HSA and you're going to keep contributing, don't contribute, okay? Don't keep contributing or don't sign up for Medicare is what it really meant. Or if you do sign up for Medicare, stop contributing.

I mean, it's one or the other. Now, we'll talk in a sec about what we're going to do if you do that. But we have people come to us with all kinds of questions. That's why we're doing this show. I mean, just about they got this HSA, what should they do?

Just like we were talking about. And then people wonder, well, what should they do with it? Well, what I would have liked to hear is that all along you already know what to do with it. Is that whenever you have any medical expenses, something at the doctor, a copayment, your medicines. You can even put some over-the-counter medicines into this stuff. If you're just anything medical-related, they got a whole list. And you can go into our website to see in the show notes the whole list of HSA-eligible expenses. But you should have been sending those all along and you get reimbursed tax-free. So if you're now at Medicare, you've stopped contributing and you've got this balance, we can just wind that balance down over the rest of your life to pay for any medical expense. You can even pay Medicare premiums. Like the Part B expense, the 164.90 a month, you can pay that out of an HSA. The Part D expense, you cannot pay for Medigap or Medicare Supplement.

That's clearly in the rules. They won't allow you to pay for that. But any deductibles, copayments, you can also pay for long-term care insurance out of an HSA.

So there's plenty of things to wind this balance down. And I would encourage you, people that are savers, that have these bigger balances that build up 20, 30, 40,000 and more in an HSA, well, they got there because they never collected anything out of it. And maybe they didn't have many medical expenses. And so then they get to Medicare and they keep right on truck and they don't contribute.

So they listen to us. But then what's it there for is they're not sending in their expenses and that money is going to come to you tax-free. And so I would suggest that you start whittling it down.

And it's a wonderful thing to have it. Just make sure you understand the rules around contributions. You know, when it says any part of Medicare, no more contributions, just understand that's any part of Medicare. That's Part A, Part B, and those two – and the place that people get tripped up is on Part A. And so then now I want to talk about distributions real quick.

And we're going to go over those after the break as well. For the distributions, if you take out money out of the HSA and you're under 65 – and a lot of people did this at COVID. You know, they got $10,000 sitting there. And it's in the HSA, but they got more problems if they lost their job or whatever.

So they went and tapped that money. If you're under 65, you're going to have to pay the tax on the money plus a 20 percent penalty. So if you draw it out for something other than medical expenses.

So not a very good idea. I mean, I understand if people are in a situation where they just desperately need the money, they're going to do it. Now, if you're over 65 and you now draw it out for something other than medical expenses, you just have to pay the tax with no penalty. So that's a possibility, but I think it's a wiser idea to – you're going to have medical expenses every year that are eligible. Just delay the reduction of this thing and wind it down over several years because you get the money tax-free if you follow the rules. And then a distribution for a medical expense, I mean, I wrote that down third. It's just tax-free.

So that's really what you want to do. You want to get the tax deduction for the money going in. You're going to get the tax deferral for the growth inside of the thing while it's sitting there. And then – and it's going on, and then you're going to get tax-free reduction of it. I would limit mine to only qualified medical expenses. And then it just – even if it took me 10 years to wind it down, I'd get the money back from the plan without giving the government any share of it.

All right. Well, we want to remind you that the show is brought to you by Cardinal Guide. That's cardinalguide.com, where you can find the seven worries tabs, which include, of course, today's show, which is Medicare. So when you go to Medicare, you would see that this HSA show is also a video, which will give you all kind of interesting details about what you can and cannot do with these distributions, what you can and cannot do about when you start Medicare. All those regulations are all there in the show notes for this HSA video there, which you can find, again, in those seven worries tab under Medicare at cardinalguide.com.

And there, most importantly, and the reason – part of the reason we do this show is that you can see that, wow, you've got something like this that's a little different, and you need to get some custom advice that that's what Hans is for. You go to cardinalguide.com, and you just contact him under the email tab there, or the contact information, whether you want to email him, call him, it's all right there at cardinalguide.com, as well as his book, The Complete Cardinal Guide to Planning for and Living in Retirement. Again, they are licensed in all 50 states, and Hans would love to help you because I know all these things, you know, they're individual, and your situation may be different than others.

So we'll be right back after the break with more on these HSA and Medicare health savings accounts. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with certified financial planner, Hans Scheil. And today we're talking about health savings account. That's called an HSA. You may have seen it with your high deductible plan and, you know, your group insurance. But once you reach Medicare, the rules have changed. And so we're going to try to, you know, have this show in order to help you see, you know, some of the strategies to do as these rules change to make sure that you don't get caught up in doing what you're not supposed to do with an HSA. And so when we left off during the break, you know, we got a couple of case studies of people that found themselves in these rubs, right, Hans? Well, we do. And I just want to talk about getting money out of here.

I went over before the show. I mean, the ideal way to get money out of here is to distribute it for what it's meant for, which are medical expenses unreimbursed by group insurance. You can pay long term care premiums. You can pay Medicare premiums. And those are substantial enough over a retired person's lifetime that you can even take a big balance and distribute it. Now, so taking it out for what it's intended for is going to be tax free.

Let's talk about if you're under 65 and you just clean it out. You're going to have to pay the tax on the money. It's just going to be a taxable distribution plus a 20 percent penalty of the amount that you took out. So the government clearly doesn't want you to pull this money out of HSA's. Unless it's for medical expenses. Unless it's for medical expenses. They're going to penalize you pretty hard and when you're under 65. But they do give you kind of a freebie here that they're saying if you're over 65 and you want to just take the money. Well, we'll gladly collect the tax and we're not going to hit you with a penalty. So so you could go access that money.

Probably not real smart. I'd rather you leave it there and like a couple of these examples I'm going to show you pull it out for medical expenses over the rest of your retirement. Or as long as it lasts because you can do that tax free. Now, I also want to just talk about what happens when you die and what happens to the money that's left in the HSA. Well, if your spouse is still alive, your spouse can continue to use it as an HSA for them for the rest of their life as well and just take out for medical expenses. If it's other than the spouse. So if you die and you don't have a spouse and you leave this to your children or whoever your beneficiaries are, they have to take it out. They can't continue to use it as an HSA.

And then they have to pay the tax on the whole amount, but they don't have to pay the penalty. Now, I want to talk about a couple of examples that I've run into is this one fellow. He is one of these people. He's a medical doctor and very savvy with his money. And he paid, you know, this past.

Well, actually, it was last year. He paid the, I don't think it was 8750, the family deposit he did in the beginning of January because he wanted earnings and all that money. So he had paid all his money in advance to add it to a pretty big balance. And then he signed up for Medicare and he learned all this from us in the summer or late summer, early fall. And at the very least, he had to pull out of his account these improper distributions because he had paid for the whole year. And he was he was not allowed to contribute for July, August, September, blah, blah, blah, blah. But then Medicare, because he was a late sign up, they signed him up six months backwards. So we had to pull out an extra six months.

And what it really for he and his wife, because they were both they're both about the same age. And so what that meant was that most of the 8500 or so that he had put in there, we had to take out about 6000 of it. We just pulled it out. He paid the taxes on it.

And that was the end of it. Now, this gentleman has, you know, short of 100000, but he's got a substantial balance in his account. And he's got that money invested. So it probably lost a little money last year.

I didn't really track it, but just like everybody else did. It's invested in stocks, but it's recovered some this year already. And his plan is just simply to pay his Medicare premiums.

He's a pretty high Irma guy. So, you know, he's paying like 500 bucks a month. Each of them in Medicare Part B and Part D premiums. And, you know, so that's 1000 a month. That's 12000 a year.

And then they have some expenses for deductible copayments, drug expenses, unreimbursed medical care by Medicare. So he's just going to drain this thing over seven, eight years past 65 and not putting any money in it and get all that money back tax free. The other gentleman that I wanted to talk about, he has in his combined account $185,000 of HSA.

At least he did like a year ago. And so his first move was to buy a high deductible plan G because his thinking was because he couldn't get reimbursed for the Medicare supplement or the Medigap. So he bought the least expensive one with the biggest deductible. And then he's just as he incurs, if he occurs and when he incurs for both he and his wife, that $2700 high deductible G deductible. He'll just get it reimbursed, the medical expenses out of his 185.

Yeah. And also can he pay the premiums for the supplement? Not the premiums for the supplemental, but he can pay the Medicare premium.

Okay. And he's another high Irma guy. So I don't know exactly his Irma numbers, but we appealed it and we got it lowered.

But whatever they are, they're going to come out of there. And then I showed him and he was going to pay for long-term care insurance out of it. But the hybrid that he wanted, which has an indemnity benefit, doesn't count toward, it's not a tax qualified long-term care policy. So he elected to just pay that out of regular money and buy a hybrid long-term care insurance. And so he's just going to wind that money down over his retirement. They planned the two of them of being retired for a long time.

They're in good health. And that money is just sitting there to pay his medical expenses. Unreimbursed medical expenses, tax free for the whole of his retirement. That's pretty impressive when you think about it, that he was able to save that much money in that. But I guess he just kept putting the maximum in every year. Well, he's a CPA.

Right. And he was the chief financial officer of this company. And it wasn't a huge company, but it wasn't small either. And the HR people reported to him. So he had a little bit of knowledge about this stuff, or a lot of knowledge.

And so he'd been planning this for years. And, you know, he's just, I mean, 180 grand, that's one of the bigger ones that I've seen. But I've seen a lot of people come in with 50, 60 grand, just even on one person.

Or I think he's the only one I've ever seen over 100,000. But I've had a lot of clients come in that have been, because a lot of companies want you to take that high deductible plan. And so they'll participate. There's a little confusion there too, because there's another plan. I'm trying to think of what it was called, like an SSA. It's not a HSA, but this one, you have to drain it out every year or you lose it. Right, that's called a flexible spending account. Right, FSA.

FSA. And they got rid of the drain it out every year in the law. That was the law for the longest time. And then they changed that. And if the plans change, which most of them adopted the change, you can roll over a certain amount of it. But then you need to use it up by a certain date. And that money comes out first.

So they softened that a little bit. Well, I probably need to ask you about that, because actually, since I'm still working, I'm on Medicare, and I have an FSA. Is it kosher? I'll need to go offline and make sure that that's okay, okay? I can't even answer that real time, because I've never had anybody ask me. Because they have to be drained every year. But you're on Medicare and you still participate in the FSA. Right. That causes me a little bit of concern, but we'll get back later. Maybe it's okay. I mean, we're going to have to put Tom on that one.

I'm glad, I'm glad. So we're going to get back with a little bit of a cliffhanger on this show. That if you're on an FSA and you're on Medicare, you're going to be like me, like, uh-oh, have I been doing something I shouldn't have been doing?

I don't know that they're going to specifically exclude FSAs. But I don't want to say one way or another until I look it up or I have Tom look it up. Right. So we'll report back on another show. Okay.

We'll look forward to that. But getting back to the HSA, which obviously is what we're talking about. So you have to do it before you go on Medicare.

Right. You can do it with the Affordable Care Act plans, individual plans through the marketplace. You can do it through group insurance plans.

Many employers to encourage you to go for the high deductible plan will participate in the dump into the HSA. And the money going in is tax deductible or it's not taxable to you. So and the money coming out, if it's used for the right thing, is tax free. If it's used for medical expenses, you accumulate money. If you don't use it all up while you're working, once you retire, you then have to stop contributing because assuming you're going to go on Medicare. And once you're on Medicare, you can't make a contribution. Right. Well, again, if you weren't on a high deductible plan, you couldn't have an HSA through most employers.

Correct. So I couldn't sign up for an HSA if I wanted to because I didn't have a high deductible plan. But an FSA, for whatever reason, you could.

So we're going to get back on that one. But the big deal is, obviously, if you keep your high deductible plan, don't go on Medicare Part A. Again, you can see this isn't the most uncomplicated situation, but that's why we got show notes. That's why we got all sorts of information there at cardinalguide.com. There you're going to see Medicare as one of the seven worries.

And this show will be there with the show notes as well as a YouTube video, which goes over all the details of this HSA idea here and Medicare. And so as well as Hans' contact information, which obviously, if you're like me, you're waiting with bated breath, like, oh, I need to get up with Hans. Well, fortunately for me, he's sitting across the table. But for you, you need to go to cardinalguide.com and see how to hook up with Tom, excuse me, with Hans.

But you can also hook up with Tom there. And you can get Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. So once again, wow, great new topic, Hans. Thank you and God bless you. Thanks for listening. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.

Any statements or opinions are subject to change without notice. Investments involve risk and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.

Finishing Whale is designed to provide accurate and authoritative information with regard to the subject covered. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a Registered Investment Advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Whale brought to you by CardinalGuide.com. Visit CardinalGuide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, Long-Term Care, Life Insurance, Investments and Taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement, and The Workbook. Once again, for dozens of free resources, past shows, or to get Hans' book, go to CardinalGuide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Whale radio show on the website and send us a word. Once again, that's CardinalGuide.com. CardinalGuide.com. This is the Truth Network.