Can I combine Medicare with a Health Savings Account (HSA)?
How does Medicare affect my ability to contribute to or use a Health Savings Account (HSA)?
If you have a Health Savings Account (HSA) and are approaching Medicare eligibility, it’s important to understand how enrolling in Medicare affects your ability to contribute to and use your HSA. Here’s what you need to know:
1. Medicare and HSA Contributions:
Once you enroll in Medicare, you can no longer contribute to your Health Savings Account (HSA). This is because HSA contributions are only allowed if you are covered by a high-deductible health plan (HDHP), and Medicare is not considered an HDHP.
When to Stop Contributions:
If you enroll in Medicare Part A (hospital insurance) or Part B (medical insurance), you must stop making contributions to your HSA.
You should stop contributing to your HSA at least 6 months before enrolling in Medicare, because Medicare Part A is retroactively applied up to 6 months from your enrollment date (but no earlier than your 65th birthday). If you continue contributing during this period, you could face tax penalties for excess contributions.
If you’re delaying Medicare and continue to work past 65 while enrolled in an HDHP through your employer, you can continue making contributions until you sign up for Medicare.
2. Using HSA Funds After Enrolling in Medicare:
Although you can’t contribute to your HSA after enrolling in Medicare, you can still use the funds in your account to pay for qualified medical expenses. HSA funds can be used to cover a wide range of healthcare costs, including some that Medicare doesn’t cover.
Qualified Expenses for HSA Funds:
Medicare premiums: You can use HSA funds to pay for Medicare Part B and Part D premiums, as well as Medicare Advantage (Part C) premiums.
Medigap (Medicare Supplement) premiums: HSA funds generally cannot be used to pay Medigap premiums.
Out-of-pocket medical expenses: You can use HSA funds to pay for deductibles, copayments, and coinsurance under Medicare.
Prescription drugs: HSA funds can be used to cover the cost of prescription medications not fully covered by Medicare Part D.
Dental and vision care: Medicare does not cover most routine dental or vision services, but you can use HSA funds to pay for these expenses.
Hearing aids: You can use HSA funds for hearing aids, which are not covered by Original Medicare.
Non-Medical Expenses:
If you use HSA funds for non-medical expenses before age 65, you’ll face a 20% penalty in addition to ordinary income taxes. However, once you turn 65, you can use your HSA for non-medical expenses without the 20% penalty, though the amount will still be subject to income tax.
3. If You Delay Medicare Enrollment:
If you continue to work past age 65 and are covered by an employer-sponsored high-deductible health plan (HDHP), you may choose to delay Medicare enrollment and continue making contributions to your HSA. You can only do this if your employer-provided insurance is not tied to Medicare.
Once you leave your employer or lose your employer coverage, you will need to enroll in Medicare. Remember to stop HSA contributions at least 6 months before your enrollment to avoid tax penalties.
4. What Happens If You Contribute to an HSA After Enrolling in Medicare?
If you contribute to an HSA after your Medicare enrollment, you’ll need to remove the excess contributions to avoid tax penalties. The IRS may impose a 6% excise tax on the excess contributions if they are not withdrawn.
To correct the situation, you should:
Withdraw the excess contributions.
Include any interest earned on the excess in your taxable income.
5. Transitioning from HSA to Medicare:
When planning your transition from HSA contributions to Medicare coverage, it’s important to review your healthcare costs and savings strategy. You can continue using your HSA funds to cover qualified medical expenses for the rest of your life, even after you stop contributing.
Key Takeaways:
Once you enroll in Medicare, you can no longer contribute to your HSA.
Stop HSA contributions 6 months before enrolling in Medicare to avoid tax penalties.
You can still use HSA funds to pay for qualified medical expenses, including Medicare premiums, out-of-pocket costs, and services not covered by Medicare, like dental, vision, and hearing aids.
If you delay Medicare while working and covered by an HDHP, you can continue contributing to your HSA until you enroll in Medicare.
For personalized guidance on transitioning from HSA contributions to Medicare, schedule an appointment with a Tsunami Advisor here: Schedule an Appointment.
