HSA or Health Savings Accounts are growing more popular every year. The increase in popularity within this style of the plan is a result of growing insurance and healthcare costs. More than 32 million HSA accounts are currently active in the United States and receiving contributions.

One of the lesser know items is that you can no longer contribute to your HSA if you working past 65 and taking your Medicare. Currently, there is a bill in the House of Representatives that could change that and allow HSA contributions once enrolled in Medicare.

We’ll describe a health savings account and how HSAs work currently with Medicare. Next, we’ll talk about what happens if you contribute to your HSA while enrolled in Medicare. Then, we’ll educate on the changes that are being proposed and answer some common questions. Finally, we‘ll discuss getting help with supplemental Medicare plan options when approaching the Medicare age.

What is a Health Savings Account?

Health savings accounts are special savings accounts that allow you to set money aside on a pre-tax basis. These funds can be used for qualified medical expenses such as deductibles, coinsurance, and copays. These plans can help lower your healthcare costs.

To be allowed to contribute to an HSA, you must be enrolled in a high deductible health plan. Medicare isn‘t considered a high deductible plan which is why you can’t contribute to your HSA once you start Medicare.

Health savings account come with triple tax benefits:

  • Tax-deductible contributions
  • Tax-free earnings
  • Untaxed withdrawals — if used for qualified medical expenses

Current Use of Medicare and Health Savings Accounts

As mentioned above, once an individual starts Medicare, they can no longer put funds in their HSA accounts. They can use the funds they have in the account to pay for their Medicare costs.

Usually, with an HSA, you’re not allowed to use your HSA funds to pay for health insurance premiums. However, the current rules allow Medicare beneficiaries to use their HSA funds to pay their Medicare premiums. Medicare beneficiaries can also withdraw money from their health savings account for non-medical items without penalty.

Common uses that Medicare beneficiaries use their HSAs for include:

  • Medical plan deductibles
  • Copays
  • Coinsurance
  • Dental expenses
  • Vision expenses
  • Insulin and diabetic supplies
  • Over-the-counter drugs
  • Medicare Part B premiums
  • Medicare Part C premiums
  • Medicare Part D premiums

These funds can be used not only by Medicare beneficiaries for their medical but also for the expenses of their spouse.

Consequences of Contributing to Your HSA when on Medicare

If you’re enrolled in Medicare and contribute to an HSA, you’ll be subject to IRS penalties. These penalties can include:

  • Payment of back taxes on both tax-free contributions and interest accrued by the HSA
  • Excess contributions are assessed a 6% excise tax
  • 10% income tax if they enroll in Medicare during the HSA testing period

The HSA testing period is defined by the following:

  • Under IRS rules, if someone is eligible to set up an HSA on the first day of the last month of the tax year, they’ll be considered to have been eligible for the entire year. This would allow them to contribute the maximum amount of funds tax-free

Health Savings Account and Medicare Proposed Changes

The changes being considered would allow Medicare beneficiaries to continue contributions to their Health Savings Accounts once they start Medicare. This change doesn’t come without a few tradeoffs. If these changes are passed and approved, Medicare beneficiaries couldn’t use the funds for Medicare premiums or withdraw the funds tax-free for non-medical expenses.

This could cause a significant impact on Medicare beneficiaries that rely on using their HSA funds to pay their Medicare premiums. Many need to use their HSA funds to cover these costs.

FAQs

What if I have coverage through my spouse’s HSA from work?

The IRS rule applies to employees age 65 or older who have HSAs through their employer. They’re the ones contributing to HSAs from their before-tax earnings at work. Their covered spouses over age 65 aren’t affected since they can use funds for approved medical purposes.

What happens if I went on disability before I was 65 and received my Medicare Part A early?

Your Medicare will begin as soon as you receive your 25th Social Security Disability Income check. You’ll automatically be enrolled in the Medicare system and you’ll not be able to continue contributions to your HSA.

Disability payments will stop if you return to work. However, your Medicare entitlement continues for 93 months from when you applied for disability.

Can I continue to pay money into my HSA while enrolled in Medicare?

Medicare beneficiaries who continue contributing funds to a Health Savings Account may face IRS penalties. These penalties can include payment of back taxes on their tax-free contributions, account interest, excise taxes, and additional income taxes.

I‘ll be eligible for Medicare this year but don‘t plan to start Medicare until I retire. If I stay on my group insurance plan, can I continue contributions to my HSA?

If you’re eligible for Medicare but choose not to enroll, you can continue contributions to your HSA. Once enrolled in any part of Medicare, you’ll no longer be allowed to make contributions to your Health Savings Account.

What defines an HSA?

HSA stands for a health savings account. An HSA is a tax-free savings account that‘s used for qualifying medical expenses. These accounts must be paired with a high deductible health insurance plan.

What are the 2022 contribution limits of an HSA?

In 2022, the allowed annual contributions for an HSA are limited to $3,650 for coverage of individual coverage and $7,300 for coverage for a family.

The deductible has to be a minimum of $1,400 for an individual or $2,800 for the family. The plan’s maximum out-of-pocket must be less than $7,050 for individuals and $14,100 for families.

Can I enroll in Medicare and an HSA?

No. Once you enroll in Medicare, you cannot set up or contribute pre-tax dollars to an HSA. Contribution of pre-tax dollars to a Health Savings Account, you must enroll in a high deductible health insurance plan. Medicare is not considered a qualifying plan.

What should I consider about my HSA as I approach Medicare?

Two things you should keep in mind to avoid any trouble with your HSA at age 65.

You‘re allowed to spend from your HSA, but you‘re not permitted to set up or contribute to an HSA once you enroll in Medicare.

You should halt contributions to your HSA six months before applying for Social Security retirement benefits to avoid penalties or issues.

What do I need to know about Medicare Part A and keeping my HSA active?

Suppose you’re entitled to Medicare because you enrolled for Part A at age 65 or later but haven’t applied for Social Security retirement benefits.

In that case, you can withdraw your application for Part A. Simply contact the Social Security Administration to withdraw. There are no penalties and you’re free to reapply for Part A at any time.

Can my HSA be used to pay for my Medicare Premiums?

HSA funds can be used to pay Medicare Parts B, C, and D premiums. You can use your HSA funds for copays and coinsurance for Medicare and Medicare Advantage plans.

You‘re not allowed to use funds from an HSA to pay the premium of a Medicare Supplement. If this new legislation is passed, you’ll no longer be able to use the HSA funds for premiums.

What happens to my HSA upon turning 65?

If you turn 65 and decide to delay all portions of Medicare, your HSA will continue with no changes.

Should you decide to start Medicare benefits, you won‘t be allowed to continue contributions to your HSA. If you were to do so, you‘ll be subject to a 6% excise tax penalty.

Help with Supplemental Medicare Coverage Upon Retiring

When approaching 65, there are many items you must consider. If you’re on an HSA, there is even more to the equation. We have licensed insurance brokers specializing in Medicare that can help you with education to make the best decision for your needs.

Not only can we help you understand the transition, but we can also assist in checking doctors and prescription drugs. Then we‘ll even make the enrollment process a simple task.

For more information, call us today or fill out our online request form.

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by Lindsay Malzone, Lindsay Malzone is the Medicare expert for Medigap.com. She's been contributing to many well-known publications as an industry expert since 2017. Her passion is educating Medicare beneficiaries on all their supplemental Medicare options so they can make an informed decision on their healthcare coverage.