Age 65: Medicare, HSA and Retirement Cash-Flow Coordination

What are the parts of Medicare and what do they cover?

Medicare is the federal health insurance program primarily for people age 65 and older. It has four distinct parts, each covering different services and carrying different cost structures.

• Part A (Hospital Insurance): Covers inpatient hospital care, skilled nursing facility care following a qualifying hospital stay, hospice, and some home health care. Most people do not pay a premium for Part A if they or their spouse worked and paid Medicare taxes for at least 10 years (40 quarters). Deductibles and coinsurance apply to hospital stays.
• Part B (Medical Insurance): Covers outpatient care, doctor visits, preventive services, durable medical equipment, and some home health services. Part B has a standard monthly premium ($185.00 in 2026 for most enrollees) plus an annual deductible and 20% coinsurance after the deductible. Higher-income individuals pay more through IRMAA surcharges.
• Part C (Medicare Advantage): Allows enrollment through a private insurer approved by Medicare. Plans must cover at least everything Parts A and B cover and typically add prescription drug coverage and extras such as dental, vision, and hearing. Premiums, networks, and out-of-pocket limits vary by plan and geography.
• Part D (Prescription Drug Coverage): A standalone drug plan for those in Original Medicare (Parts A and B), sold through private insurers. Each plan has its own formulary and cost structure. Like Part B, Part D has late enrollment penalties for delayed enrollment without creditable drug coverage.

Original Medicare (Parts A and B) does not cover most dental, vision, hearing aids, or long-term custodial care. Supplemental (Medigap) policies sold by private insurers can cover Part A and Part B cost-sharing gaps such as deductibles and coinsurance.

What is the late enrollment penalty and how do I avoid it?

The late enrollment penalty is a permanent increase in the Part B monthly premium assessed when someone does not enroll during their Initial Enrollment Period and does not have a qualifying exemption. The penalty adds 10% to the standard Part B premium for each full 12-month period the person was eligible but did not enroll. Because the penalty is permanent and compounds with future premium increases, a 3-year delay adds 30% to the premium for life.

A similar penalty applies to Part D: 1% of the national base beneficiary premium per month of delayed enrollment without creditable drug coverage. Both penalties stay in effect for as long as the person has Medicare.

How to avoid the penalty:

1. Enroll during the Initial Enrollment Period. This 7-month window surrounds the 65th birthday month. Missing it without a qualifying exception triggers the penalty.
2. Maintain creditable coverage through current employment. If you or your spouse is actively employed and covered by an employer group health plan based on that current employment, you can defer Part B without penalty. COBRA and retiree health plans do not count as employer coverage for this purpose.
3. Use the Special Enrollment Period correctly. When active employment or employer group coverage ends, you have an 8-month Special Enrollment Period to enroll in Part B without penalty. Waiting past those 8 months triggers the penalty.

The rules around creditable coverage, special enrollment periods, and penalty calculations are administered by the Social Security Administration and the Centers for Medicare and Medicaid Services. Individual circumstances such as union retiree coverage, TRICARE, and VA benefits interact with these rules in specific ways that may differ from the general framework.

How does Medicare enrollment affect HSA contributions?

A Health Savings Account (HSA) can be funded only if the account owner is enrolled in a qualifying High-Deductible Health Plan (HDHP) and is not covered by Medicare or any other disqualifying coverage. The moment you enroll in any part of Medicare (including Part A), your eligibility to make new HSA contributions ends.

Key coordination points:

• Part A enrollment is retroactive up to 6 months for those who apply after age 65 and are not yet enrolled. If you sign up for Social Security benefits at or after age 65, Medicare Part A enrollment is automatic and may be backdated up to 6 months. This retroactive coverage means contributions made in those backdated months are disqualifying and subject to tax and a 6% excise penalty.
• Stop contributions before Medicare start. To avoid the excise penalty, stop HSA contributions at least 6 months before your expected Medicare enrollment date (or before you apply for Social Security if doing so near age 65).
• Existing HSA funds are unaffected. The prohibition is on new contributions only. Funds already in the account can be used tax-free for any qualified medical expense, including Medicare Part B premiums, Part D premiums, Medicare Advantage premiums, dental, vision, hearing aids, and long-term care insurance premiums up to IRS limits. There is no deadline by which HSA funds must be spent.
• After age 65, HSA funds used for non-medical expenses are taxable but not penalized. Before age 65, withdrawing HSA funds for non-qualified expenses triggers both income tax and a 20% penalty. At and after age 65, only ordinary income tax applies, no penalty. This makes the HSA function like a traditional IRA for non-medical spending once you reach that age.

Frequently Asked Questions