Medicare and HSA – Health Savings Accounts (HSA) are a great benefit to have when it comes to healthcare expenses. They are funded with pre-tax dollars and can be used to pay for qualified medical expenses. However, when you enroll in Medicare, you are no longer eligible to make contributions to an HSA account. If you do, you will pay a penalty.
How do HSAs work?
To be eligible for an Health Savings Accounts, you must be enrolled in a high-deductible health insurance plan. Your employer may offer an Health Savings Accounts, but if they don’t, you will be able to open an account with any HSA administrator you choose.
Once your account is open, you can begin funding it with whatever source of income you have. Your contributions are made pre-tax, which helps lower your income tax amount. Once they’re in the HSA, you can choose to leave them as cash, so they’re easily accessible, or you can choose to invest the money. The investment options you have will depend on where you open the account. Investments grow tax-free and can be spent tax-free, as long as they’re used for qualified expenses.
The list of “qualified” expenses is quite lengthy. It includes common things like doctor’s visits, surgeries, diagnostic tests and images, prescription medications, dental, vision, and hearing care, ambulance transportation, etc. In addition, it includes everyday items like sunscreen, over-the-counter medications, first aid kits, air purifiers, insect repellent, and batteries for medical devices.
You’ll be issued a debit card that is linked to your HSA account. You can use the card to pay for medical expenses, or you can pay by other means and reimburse yourself later. Save all receipts for year-end tax purposes and in case you get audited. If you need to reimburse yourself, you’ll have access to an online portal where you can transfer funds from your HSA to a personal account.
Once you turn 65, you are allowed to use your Health Savings Accounts for purchases other than qualified medical expenses. You will pay ordinary income tax if you do so. Prior to age 65, you will be penalized if you use the funds for non-qualified expenses.
Medicare and Health Savings Accounts
We mentioned that you are not allowed to contribute to an Health Savings Accounts once you are on Medicare. That is true no matter which part of Medicare you’re enrolled in, even if it’s only Part A. If you delay Medicare enrollment and continue your high-deductible health plan, you can continue to contribute to your HSA past the age of 65. (Make sure your health plan is credible so that you do not pay a late enrollment penalty when you enroll in Medicare later!)
If you are enrolling in Medicare at age 65, you can contribute to your HSA up to the first day of the month that Medicare is effective. For example, if you turn 65 on July 15 and you applied for Medicare before your birthday, you can contribute up to July 1.
It’s simple to know when to stop your Health Savings Accounts if you are starting Medicare during your Initial Enrollment Period (IEP). It can be more difficult if you delay Medicare enrollment.
If you delay Part A enrollment past age 65, you will have retroactive coverage. That means that Part A will start up to six months before you actually enroll. If you didn’t plan ahead and stopped contributing to your HSA, you could be penalized.
The penalty is not usually very big, but if you can avoid it, you’ll be saving some money. If you don’t, you’ll pay a 6% excise tax on all excess contributions. If you recognize that you have over-contributed, you can withdraw the excess funds and avoid the excise penalty.
So, how do you know how much you can contribute? Each year, the IRS sets the maximum amounts you can put into an HSA for the year. Individuals and families have two different maximums. In 2022, individuals can contribute up to $3,650. If you are 55 and older, you can make a catch-up contribution of $1,000.
Let’s go through an example and say that your Medicare Part A is going to start on August 1. That means you can fund your Health Savings Accounts for seven months. Since you’re turning 65, you’re old enough to qualify for the catch-up contribution of $1,000, so your maximum that year would be $4,650. But since you’re going onto Medicare, you need to prorate that amount.
To calculate your prorated amount, divide your maximum by 12 months, then multiple it by the number of months you won’t be on Medicare. That number is how much you are allowed to contribute. In our example, your prorated contribution is $2,712.50.
Can my HSA pay my Medicare premiums?
You may not be able to contribute to your Health Savings Accounts once you’re on Medicare, but you’ll be able to use the funds you saved to pay for many Medicare expenses, including some premiums. Having access to a sizable HSA account is a huge benefit during retirement when it’s typical for our healthcare expenses to start increasing.
We’ve reviewed the common qualified medical expenses, but one question we often get is if you can use your HSA to pay for Medicare premiums. The answer is (mostly) yes!
You can use your Health Savings Accounts to pay for Part A and B premiums. Most people get premium-free Part A, but nearly everyone pays a premium for Part B. In 2022, the standard premium for Part B is $170.10. Your HSA can pay for your Part C (Medicare Advantage) premiums, and you can also use it to pay for your Part D prescription drug plan.
The only premiums not eligible for HSA payments are your Medicare supplement (Medigap) premiums. However, you are still allowed to use it for any deductibles, copayments, and coinsurance costs associated with any Medicare plan.