Health Savings Accounts (HSAs) are popular tools for saving money on medical expenses while working, but things can get a little more complicated when you become eligible for Medicare. If you're unsure how your HSA interacts with Medicare, you're not alone. Many people wonder what happens to their account once they turn 65 or enroll in Medicare. Let’s break down how HSAs work with Medicare and what you need to know to maximize your savings.
What Is an HSA?
Before diving into how HSAs interact with Medicare, let’s review what an HSA is. An HSA is a tax-advantaged savings account that allows individuals to set aside money for medical expenses. The contributions to your HSA are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free.
You can only contribute to an HSA if you have a high-deductible health plan (HDHP), but the money in your account is yours to use even if you no longer have a high-deductible plan. This is important to keep in mind when you approach Medicare age. Learn more about HSAs here.
Can You Still Contribute to Your HSA After Enrolling in Medicare?
No, once you enroll in Medicare, you can no longer contribute to your HSA. Medicare is not considered a high-deductible health plan, so you lose eligibility to contribute to your HSA.
What Happens to Your HSA Funds Once You Have Medicare?
Even though you can't contribute to your HSA after enrolling in Medicare, the good news is that you can still use the money in your account. HSA funds remain yours, and you can use them to pay for qualified medical expenses, such as Medicare premiums, copayments, deductibles, and other out-of-pocket healthcare costs.
Additionally, HSA funds can be used to pay for long-term care insurance premiums, dental care, vision services, and certain over-the-counter medications. However, HSA funds cannot be used to pay for Medigap premiums (Medicare Supplement Insurance).
Avoiding Tax Penalties
One crucial detail to remember is the potential for tax penalties if you're not careful with your HSA contributions. Since you can no longer contribute to your HSA once you’re enrolled in Medicare, it’s important to stop contributions in advance of your Medicare start date. This is especially relevant if you are subject to retroactive Medicare coverage. When you enroll in Medicare Part A, coverage can be retroactive for up to six months if you qualify.
To avoid penalties, make sure you stop HSA contributions six months before applying for Medicare. If you contribute to your HSA while enrolled in Medicare, you could face tax penalties and be required to withdraw the excess contributions. Learn how retroactive coverage works.
Should You Delay Medicare to Keep Contributing to Your HSA?
For some people, delaying Medicare enrollment may make sense if they wish to keep contributing to their HSA. If you are still working and your employer provides health insurance, you might want to delay Medicare enrollment. However, it's important to weigh this decision carefully.
Delaying Medicare could make sense if your employer offers a high-deductible health plan and continues contributing to your HSA. However, you need to ensure that you're not inadvertently subjecting yourself to late enrollment penalties or losing out on other benefits of Medicare. Also keep in mind that if you're receiving Social Security benefits, you'll be automatically enrolled in Medicare Part A, which will prevent you from contributing to an HSA.
However, individuals working for employers with fewer than 20 employees may need to enroll in Medicare to have primary insurance, even if it means losing HSA contribution eligibility.
Using Your HSA for Medicare Premiums
You can use HSA funds to pay for some Medicare premiums. Specifically, you can use your HSA to cover premiums for Medicare Part B (which covers doctor visits and outpatient services), Medicare Part D (which covers prescription drugs), and Medicare Advantage plans (Part C). This can be a significant benefit, as it allows you to use pre-tax money saved in your HSA to cover healthcare costs.
However, remember that you cannot use your HSA to pay for Medigap premiums, which cover costs like copayments and deductibles not covered by Medicare.
Using an HSA with Medicare can offer substantial benefits, but it requires careful planning. Once you enroll in Medicare, you lose the ability to contribute to your HSA, but you can still use the funds to cover many healthcare costs, including Medicare premiums. If you're nearing Medicare eligibility, take time to review your HSA strategy, so you can maximize the benefits and avoid potential penalties.
If you're not sure how to navigate your HSA and Medicare options, consider taking a Medicare class through GetSetUp. These classes can help you make informed decisions about your healthcare and savings.
Reviewed By: Keith Gilbert