Can You Have an HSA With Medicaid? Eligibility and Rules Explained
Understand how Medicaid affects HSA eligibility, contributions, and tax implications to make informed decisions about your healthcare savings.
Health Savings Accounts (HSAs) offer tax advantages for those with high-deductible health plans, allowing them to save for medical expenses. Medicaid, on the other hand, provides government-funded healthcare assistance based on income and eligibility factors. Understanding how these two interact is important for those looking to maximize healthcare benefits.
HSAs require specific insurance coverage, while Medicaid operates under different rules that can affect eligibility. This article explains how Medicaid impacts HSA contributions, what happens to an existing HSA, and the potential tax implications.
HSA Eligibility Basics
To qualify for an HSA, an individual must be enrolled in a High-Deductible Health Plan (HDHP) that meets IRS requirements. For 2024, an HDHP must have a minimum deductible of $1,600 for self-only coverage or $3,200 for family coverage. The maximum out-of-pocket expenses are capped at $8,050 for individuals and $16,100 for families.
Individuals cannot be covered by another health plan that provides first-dollar coverage for medical expenses, except for limited exceptions like dental, vision, and preventive care. Those enrolled in Medicare are also ineligible to contribute, as Medicare does not qualify as an HDHP.
Medicaid and HSA Overlap
Medicaid is not classified as a High-Deductible Health Plan, meaning individuals enrolled in Medicaid cannot contribute to an HSA. Medicaid typically covers a broad range of services with little to no out-of-pocket costs, conflicting with the HSA requirement of significant cost-sharing.
If an individual already has an HSA before enrolling in Medicaid, the account remains intact, and funds can still be used for qualified medical expenses. However, no new contributions can be made while Medicaid coverage is active. This is especially relevant for those who transition to Medicaid due to income changes or disability. Medicaid does not allow individuals to opt out of coverage elements that would permit continued HSA contributions.
For those moving between Medicaid and an HDHP within the same year, contribution limits must be tracked carefully. The IRS applies a prorated contribution rule, allowing contributions only for the months covered by an HDHP. Exceeding the allowed amount can result in tax penalties.
Contribution and Distribution Rules
Once funds are in an HSA, they remain available for qualified medical expenses regardless of changes in insurance coverage. Withdrawals for eligible healthcare costs, such as prescriptions, doctor visits, and procedures, are tax-free.
If HSA funds are used for non-medical expenses before age 65, the IRS imposes both income tax and a 20% penalty. After age 65, the penalty is waived, but non-medical withdrawals are still subject to income tax. This makes HSAs function similarly to traditional retirement accounts in later years while maintaining tax advantages for healthcare expenses.
If the account holder names a spouse as the beneficiary, the HSA retains its tax-advantaged status. A non-spouse beneficiary, however, must include the full account balance as taxable income in the year of inheritance. Proper estate planning can help minimize tax burdens.
Tax Consequences
The tax treatment of an HSA changes when an account holder becomes ineligible to contribute, such as after enrolling in Medicaid. While no new contributions are allowed, earnings on existing balances continue to grow tax-free if used for qualified medical expenses. However, improper contributions made while ineligible can trigger a 6% excise tax, applied annually until excess amounts are withdrawn.
If an individual mistakenly contributes while covered by Medicaid, corrective action is required to avoid penalties. The IRS allows excess contributions and any earnings to be withdrawn by the tax filing deadline (including extensions). These withdrawn amounts must be reported as income, and any earnings may be subject to additional tax. Failure to remove excess contributions can lead to compounding penalties.
State taxation may also impact HSA holders, as not all states follow federal tax rules. While most states align with IRS guidelines, California and New Jersey do not provide tax exemptions for HSA contributions or growth, making withdrawals taxable at the state level even if used for medical expenses.