Can You Have an HSA While on Medicare?

Health Savings Accounts (HSAs) offer a tax-advantaged way to save and pay for healthcare expenses, operating in conjunction with high-deductible health plans (HDHPs). As individuals approach age 65, a common question arises regarding the compatibility of an HSA with Medicare. Understanding how these two healthcare components interact is important for managing healthcare finances effectively.

Eligibility for HSA Contributions with Medicare

Enrolling in Medicare significantly impacts an individual’s ability to contribute to a Health Savings Account. The fundamental rule is that once an individual is enrolled in any part of Medicare, including Part A (Hospital Insurance), Part B (Medical Insurance), Part C (Medicare Advantage), or Part D (Prescription Drug Coverage), they are no longer eligible to make new contributions to an HSA. This restriction exists because HSA eligibility requires an individual to be covered solely by an HDHP and have no other disqualifying health coverage, which Medicare is considered.

An individual can be Medicare-eligible (typically at age 65) but still contribute to an HSA if they have not yet enrolled in any Medicare part and remain covered by a qualifying HDHP. However, receiving Social Security benefits often triggers automatic enrollment in Medicare Part A, even if an individual continues to work. This automatic enrollment prevents further HSA contributions. Even if Medicare Part A is premium-free, its enrollment still prevents new HSA contributions. The inability to decline Part A while collecting Social Security benefits makes careful planning necessary.

Using Your Existing HSA Funds with Medicare

While new contributions to an HSA cease upon Medicare enrollment, individuals can continue to use their existing HSA funds. These funds can be withdrawn tax-free to pay for qualified medical expenses, even after an individual is enrolled in Medicare. Qualified medical expenses are broadly defined.

Existing HSA balances can cover various Medicare-related costs, including premiums for Medicare Part B, Part C (Medicare Advantage plans), and Part D (prescription drug coverage). Deductibles, copayments, and coinsurance associated with Medicare plans are also eligible expenses. However, premiums for Medicare supplemental policies, such as Medigap plans, are generally not considered qualified medical expenses for HSA withdrawals.

HSA funds can also be used for other qualified medical expenses not covered by Medicare, such as dental and vision care, hearing aids, and certain over-the-counter medications. There is no time limit for using accumulated HSA funds; they can grow tax-deferred and be withdrawn tax-free for qualified medical expenses.

Coordinating HSA Contributions and Medicare Enrollment

The transition from an HDHP with an HSA to Medicare requires careful timing to avoid potential tax penalties. The “six-month lookback rule” relates to Medicare Part A enrollment. If an individual enrolls in Medicare Part A after age 65, their coverage can be retroactively effective for up to six months prior to their enrollment date, but not earlier than their 65th birthday.

This retroactive coverage means that any HSA contributions made during that six-month lookback period are considered excess contributions. Such excess contributions can incur a 6% excise tax, in addition to income tax. To prevent these penalties, individuals should stop making HSA contributions at least six months before they plan to enroll in Medicare, or six months before they begin receiving Social Security benefits, which automatically triggers Medicare Part A enrollment.

For those who enroll in Medicare mid-year, HSA contributions for that year must be prorated based on the number of months they were eligible to contribute before their Medicare coverage became effective. If excess contributions are made due to retroactive Medicare coverage, they should be withdrawn by the tax filing deadline for that year, including extensions, to avoid the excise tax. Careful planning is important for managing HSA contributions during the transition to Medicare.