A Health Savings Account (HSA) is a special account that can be paired with a High Deductible Health Plan (HDHP). It enables you to contribute on a pre-tax basis to an account to help pay for future healthcare expenses (i.e. medical, prescription drug, dental, vision, etc). But how does it interact with Medicare?
Let’s first clear up a common misconception.
Most people believe that you must cease HSA contributions the moment you turn 65. This is simply not true. You must cease HSA contributions IF you enroll in any portion of Medicare. This means you can continue contributing to your HSA account (up to the individual or family HSA limits, based on whether you have individual or family health coverage), as long as the HSA account owner doesn’t have any portion of Medicare just yet.
Continuing to contribute to an HSA account beyond age 65 can be a great strategy for someone working beyond age 65 and staying in a group health plan. This is only a good strategy IF the group health plan has “creditable” prescription drug benefits, the Medicare-eligible employee is not receiving Social Security retirement benefits, and is in a large employer plan. That’s because in this situation, no Medicare enrollment of any kind would be required. Reference our Misconception #2 in our Medicare Misconceptions blog post for more information on “creditable” prescription drug benefits.
When you do NOT have “creditable” prescription drug coverage through an employer, we see some Medicare-eligible folks knowingly accumulate a Part D late enrollment penalty in order to load up their HSA accounts while they can. This really should be a short-term solution because the longer you do this, the larger the Part D late enrollment penalty will become — when you do enroll in a Part D prescription drug plan. Typically, beneficiaries utilize this strategy when they know they will retire and/or lose group health coverage in a few years, usually 2 years or less. Otherwise, the penalty gets larger, and the strategy might not make sense.
If you contribute to an HSA during the year your Medicare starts, be careful to not over-contribute, as there can be tax consequences. The amount you can contribute is on a prorated basis.
For example, if your Medicare starts June 1st, that means you weren’t on Medicare 5 months out of the year. So you can contribute 5/12 of the HSA maximum contribution for the tax year, based on whether you have individual or family health insurance coverage.
If you over-contribute, there could be tax consequences…a 6% tax on the excess. And those contributions will NOT be pre-tax, rather they will be considered after-tax. Reference IRS Publication 969 for more details.
Contact a tax professional for confirmation of tax rules associated with excess HSA contributions, as tax law changes can occur often.
While on Medicare, you can use your HSA for any qualified medical expenses approved by the IRS*, including:
– Premiums paid to Medicare (i.e. Part B)
– Premiums paid to an insurance carrier for Stand-Alone Part D Prescription Drug Plans and Medicare Advantage Plans
– Medical copays, coinsurance, deductibles
– Prescription drug copays
Keep in mind, your HSA can’t be used for every medical expense you incur. For example, you CAN’T use your HSA to pay your Medicare Supplement (Medigap) premiums to an insurance carrier.
No matter if you’re currently on Medicare or are planning ahead, contact us to put your HSA to its best use.
* Note: HSA account balances can be used for qualified medical expenses. Reference IRS Publication 502 for the list of approved medical expenses.
Neither Medicare Mindset LLC nor its agents are connected with the Federal Medicare program.