HSA With Medicare

A Health Savings Account (HSA) is a powerful tax-advantaged devise. An HSA, however, can have devastating effect if you do not understand how an HSA works with Medicare.

What Is An HSA?

A Health Savings Account (HSA) is a type of personal savings account introduced in 2003. It is designed to work with employer health plans, especially high deductible plans. HSA are not part of Medicare, though HSA can work with Medicare.

You and your employer can put money into your HSA account. The money contributed is an above-the-line deduction on your income tax and is excluded from gross income. Many HSA accounts have various investment options for the money. Earning from the invested funds grow tax-free inside the HSA account. There is no tax consequence when you used to pay a qualified medical expense. Qualifed medical expenses are deductibles, copayments, coinsurance for a health insurance plan.

You can continue to hold the HSA even when you are no longer employed. You can use it for medical expenses while at a different job or even during retirement. HSAs can work with your Medicare, but there are specific rules.

HSAs Are Coupled with an HDHP

You are eligible to contribute to an HSA when specific high-deductible health plans cover you (HDHPs) with a deductible of at least $1,400 for yourself only or $2,800 for family coverage. With HDHPs, the monthly premium is usually significantly lower. You pay more health care costs upfront before your insurance company starts to pay its share.

You can only contribute to an HSA if your plan has a deductible that requires you to cover initial costs. The plan cannot have what is called “first dollar coverage.”

Many employers now offer HDHP plans paired with an HSA account. Non-employer HSA-eligible plans are available through the Health Insurance Marketplace®, Small Business Health Options Program (SHOP), or outside of the Marketplace. HSA-eligible plans are also available in most states that use HealthCare.gov.

Banks, insurance companies, and other financial institutions offer HSAs. The money you contribute to the account is not taxed as long as it is spent on qualified expenses.

Qualified Medical Expenses for an HSA?

Qualified medical expenses include but are not limited to:

Sometimes, you can spend your HSA money on similar medical costs for your spouse or dependents.

How Do HSAs Work?

The money in your HSA rolls over year-to-year if you don’t spend it. The money may also be put into an interest bearing bank and brokerage accounts. You can move the funds among the difference investments without triggering a taxable event.  

Health Savings Account (HSA) contribution limits for 2023 are increasing significantly in response to the recent inflation surge. The IRS announced the change on April 29, giving employers that sponsor High-Deductible Health Plans (HDHPs) plenty of time to prepare for open enrollment season later this year.

The annual inflation-adjusted limit on HSA contributions for self-only coverage will be $3,850, up from $3,650 in 2022. The HSA contribution limit for family coverage will be $7,750, up from $7,300. The adjustments represent approximately a 5.5 percent increase over 2022 contribution limits. Last year’s limits rose only by about 1.4 percent between 2021 and 2022.

For 2023, the maximum out-of-pocket (MOOP) limit for self-only coverage is $7,500 or $15,000 for family coverage. According to the IRS, only deductibles and expenses for services within the health plan’s network should be used to determine if the plan meets or exceeds the MOOP limits.

HSA and Medicare Rules

Before the introduction of Health Savings Accounts (HSA), the standard practice was to at least enroll in Medicare Part A even if you continued to work past 65 and remained on employer health cover. It was a generally accepted best practice for any worker who was not already collecting Social Security at the age of 65 to go ahead and sign up for Medicare Part A, regardless of other coverage.

Part A did not interfere with employer health coverage and did not usually cost anything. Part A then reminded the person to enroll in Part B and D when he eventually lost employer health coverage.
This rule of thumb still applies, for the most part, The crucial exception arises for anyone who works past age 65 and wishes to continue contributing to an HSA while on Medicare.

The Number of HSAs Has Exploded

Many people who joined an HDHP with an HSA ten and twenty years ago are now turning 65. In the past, I rarely spoke about HSAs, even five years ago. The subject comes up much more frequently now. I am careful to ask everyone I talk with about HSAs. Many have old HSAs, many are currently in HDHPs with HSAs, and many plan to work past 65.

Among those working past 65, some are going on Medicare when eligible. Others are deferring Medicare until full Social Security retirement benefits. Some need to stay with their plan because of a spouse or child who needs health insurance. Regardless of the reasons, discussing their HSA, if they have one, and Medicare is critical.

HSA and Medicare Part A

It is important to note once you enroll in Medicare, even if you only enroll in Medicare Part A, you can no longer contribute to an employer’s Health Savings Account (HSA). If you or your employer contribute any amount to your HSA after you enroll in Medicare Part A and/or Part B, you will pay a sizeable tax penalty when you withdraw the money from your account, as well as the unpaid taxes.

Does Medicare Part A Disqualify HSA Contributions?

Do NOT enroll in either Medicare Part A or Part B IF you wish to continue contributing to an employer HSA.

You must also make sure you and your employer stop contributing to your HSA at least six months before your Medicare takes effect if you enroll in Medicare after age 65. Medicare Part A is always backdated six months or to your 65th month of birth, whichever is shorter. 

If you turn 65 and enroll in Medicare during the year, you and your employer must stop contributions the month you turn 65.  Any contributions you or your employer make before your 65th birthday must be pro-rated for the year only to include the months before you turn 65.   

How Does Social Security Benefits Affect an HSA?

Suppose you are already collecting Social Security upon turning age 65. In that case, you will be automatically enrolled in Medicare. You can stop your Part B to avoid paying the monthly premium, but you do NOT have the option to cancel Part A if you continue to receive Social Security benefits. Consequently, you will be penalized if anyone contributes to your HSA past 65 in this circumstance.

The only way to opt-out of this would be to rescind your Social Security election within 12 months and pay back all benefits received.

Social Security will also automatically enroll you in Part A if you start your Social Security benefits when you reach full retirement age. Again, you can no longer make HSA contributions once Part A is activated without penalty.

Can You Use HSA Funds For Medicare-Related Expenses?

Funds already in your HSA account can still be used for qualified medical expenses upon enrollment in Medicare. You could pay your Part A premiums with HSA money if you or your spouse did not work long enough to be eligible for premium-free Part A coverage.

If your Part B premiums are paid directly from your Social Security check, you can withdraw money tax-free from your HSA to reimburse yourself for those expenses. Just remember to keep records of the costs.

Part D prescription drug costs and Medicare Advantage copays are also eligible expenses.

You cannot use HSA funds to cover Medicare supplemental insurance, also called Medigap.

HSAs and Long-Term Care

What Is the Penalty for HSA Contributions While on Medicare?

You will no longer have the HSA deduction during the period you were on Medicare and contributed to an HSA. You must add your pre-tax HSA contribution back into your income for the year you took the deduction. You will then be responsible for paying those past taxes with any interest due.
The IRS accesses an additional 6% as a penalty on the amount contributed.

HSA Testing Period & Penalty

HSAs also have what is described as a testing period. Contributors may make lump sum contributions, which are averaged out over the testing period. If the person’s Medicare is active at any time during the HSA testing period, an additional 10% IRS penalty is added along with the taxes.

Working Past 65 and Funding an HSA?

Note that a taxpayer must be enrolled in an employer-based group health plan to defer Medicare past age 65 without penalty. An HSA-eligible plan through the private Marketplace, COBRA, or a health care exchange does NOT qualify. In that case, you must cease contributions to the HSA upon reaching age 65 and enroll in Medicare to avoid lifetime late-enrollment penalties.

Once you are 65 or older and no longer have coverage through an employer-based group health plan, you have eight months to enroll in Medicare Part B to avoid a penalty. If you miss that deadline, there is a risk of a lifetime penalty for late enrollment.

Conclusion