Medicare and your Health Savings Account (HSA)

Many Americans have tax-advantaged medical savings accounts, known as health savings accounts (HSAs). The funds deposited in these accounts aren’t subject to federal income tax, and the accounts themselves aren’t taxed so long as they’re used to pay for approved medical products and services. An HSA is also a requirement for joining a high-deductible health plan. If you have a health savings account, you might not realize it will be affected once you enroll in Medicare. Read on to understand what Medicare means for your HSA so you can be prepared for the future.

You Can’t Contribute to an HSA With Medicare

According to Internal Revenue Service rules, Americans can’t contribute to an HSA once they enroll in Medicare (both Part A and Part B). HSAs are designed to benefit people with high-deductible health plans. If you’re covered by any other type of health insurance, including Medicare, you don’t qualify for one.

What Happens to Your HSA?

Some Medicare beneficiaries have both an HSA and Medicare. This is especially common among older Americans who continue to work beyond the age of 65, as many employers offer health insurance policies with HSAs. You can continue to have both an HSA and Medicare coverage, but you cannot legally deposit any more money into your HSA after enrolling in Medicare.

You can, however, withdraw the funds in your HSA to pay for any approved medical purchases. These medical purchases might include:

  • Deductibles
  • Premiums
  • Copays
  • Coinsurances

So long as you use the HSA for these medical purchases, it will continue to be tax-free.

What Happens to Your Spouse’s HSA?

If your spouse has an HSA through an employer that covers you as well, you may be wondering whether it will be impacted after you enroll in Medicare. The good news is that it won’t. Since you aren’t the contributing employee, your Medicare status makes no difference to your spouse’s HSA account. You can continue to use the funds as you always have.

What If You Still Want to Make HSA Payments?

The IRS ruling only applies to people with full Medicare enrollment, which means both Part A and Part B coverage. If you want to continue contributing to an HSA, you may be able to delay enrolling in Medicare Part B until you leave the workforce. Late penalties don’t apply to anyone who doesn’t enroll in Medicare Part A or Part B while they’re still employed.

If you’ve already enrolled in Medicare Part A but haven’t applied for Social Security retirement benefits, don’t worry. You can withdraw your application for Part A by visiting your local Social Security office or calling them at 800-772-1213 or 800-325-0778 (TTY service for hearing impaired). There are no penalties for taking this action. You can simply reapply for Medicare Part A once you finish working.

Note that in some cases, you may become automatically enrolled in Medicare. This will occur if:

  • You’re getting Social Security retirement benefits when you become eligible for Medicare.
  • You start drawing retirement benefits (for disability etc.) but aren’t yet enrolled in Medicare.

If you find yourself in either of these circumstances, you’ll automatically become a Medicare beneficiary and need to stop making HSA deposits. You could opt out of Medicare Part A, but you’d need to repay any Social Security payments and anything Medicare has spent on your medical claims. In many cases, this can come at a considerable expense.

If you do decide to opt out of Medicare Part A, you can reapply for Social Security and Medicare at a later date, like when your HSA coverage ends. Make sure you don’t make any HSA deposits within six months of applying for Social Security or Medicare. Medicare Part A is retroactive for up to six months, so you could be penalized for making payments within this time.

Should You Delay Medicare Enrollment and Continue Paying Into Your HSA?

This decision will likely depend on who you work for. The healthcare coverage from small employers pays secondary to Medicare. That means that if you work for a small company and delay getting Medicare, you may have inadequate health care coverage. For Americans working for small firms, it’s typically better to forgo the tax advantages of the HSA and enroll in Medicare.

If you qualify for Medicare because you’re 65 or older, employers with less than 20 employees are regarded as small. If you qualify for Medicare because of a disability, employers with less than 100 employees are considered small.

Share this post with your social networks to let your friends know how enrolling in Medicare will impact their own HSAs.