Can I Have an HSA With Medicare?

Health Savings Accounts (HSAs) are tax-advantaged savings vehicles for healthcare costs. Medicare is the federal health insurance program primarily for individuals aged 65 or older, and certain younger people with disabilities. Many individuals approaching retirement age or already enrolled in Medicare often wonder how these two interact. Understanding HSA and Medicare rules is important for financial planning and avoiding penalties.

HSA Contribution Eligibility and Medicare Enrollment

Enrolling in any part of Medicare changes an individual’s eligibility to contribute to an HSA. Once enrolled in Medicare Part A, Part B, Part C (Medicare Advantage), or Part D, neither the individual nor their employer can make new contributions to an HSA. This rule applies even if Medicare Part A coverage is premium-free, as it still constitutes “other health insurance” that disqualifies an individual from HSA contributions.

The underlying reason for this restriction is that to contribute to an HSA, an individual must be covered solely by a High-Deductible Health Plan (HDHP) and have no other health insurance coverage. The month Medicare coverage begins, HSA contributions must cease. Continuing to contribute to an HSA after Medicare enrollment can lead to financial penalties.

Contributions made after Medicare enrollment are considered excess contributions by the IRS. These excess contributions are subject to a 6% excise tax, which applies annually for each year the excess funds remain in the account. Any earnings generated on these excess contributions must also be included in taxable income.

Using Your HSA Funds with Medicare

While new contributions to an HSA stop upon Medicare enrollment, existing funds remain accessible and can be used tax-free for qualified medical expenses. Funds accumulated in an HSA prior to Medicare enrollment remain a valuable resource for healthcare costs in retirement. The balance in an HSA rolls over year after year and does not expire.

HSA funds can cover a wide array of qualified medical expenses relevant for Medicare beneficiaries. These include Medicare Part B, Part D (prescription drug plan), and Medicare Advantage (Part C) premiums. Additionally, HSA funds can be used for Medicare deductibles, co-pays, and co-insurance.

It is important to note that HSA funds generally cannot be used to pay premiums for Medicare Supplement Insurance (Medigap) policies without incurring taxes. Beyond premiums, HSAs can cover other out-of-pocket medical expenses not reimbursed by Medicare, such as dental and vision care, and even over-the-counter medications. After age 65, HSA withdrawals for non-qualified expenses are subject to income tax but are not subject to the 20% penalty that applies to non-qualified withdrawals before age 65.

Important Considerations for Medicare-Eligible Individuals with HSAs

Individuals who continue working past age 65 and maintain an HDHP through their employer may choose to delay Medicare enrollment to continue contributing to their HSA. Delaying enrollment in Medicare Part A and/or Part B allows them to maximize their tax-advantaged savings until they retire or decide to enroll in Medicare. This strategy requires careful coordination with Social Security benefits, as claiming Social Security generally triggers automatic enrollment in Medicare Part A.

Medicare Part A has a retroactive enrollment rule. If an individual enrolls in Medicare Part A after age 65, coverage can be backdated up to six months, but not earlier than their 65th birthday. This retroactive period means that any HSA contributions made during those six months, even if the individual was still covered by an HDHP, are considered excess contributions. To avoid penalties, HSA contributions should cease at least six months prior to the planned Medicare enrollment date or the date Social Security benefits begin.

In situations involving married couples, if one spouse is Medicare-eligible and the other is not, the non-Medicare eligible spouse may still contribute to their own HSA. If they are covered under a family HDHP, they can contribute up to the family maximum to their HSA, even if the Medicare-eligible spouse is also covered by that same HDHP.

If inadvertent excess contributions are made to an HSA after Medicare enrollment, address them promptly to avoid penalties. The excess amount, along with any earnings attributable to it, should be withdrawn from the HSA by the tax filing deadline, including extensions, for the year the excess contribution was made. The earnings on the withdrawn excess must be reported as taxable income. Alternatively, some employers or HSA custodians may assist in correcting the error, and in certain cases, excess contributions might be deductible in a later tax year.