Can You Use an HSA for Medicare Premiums?

A Health Savings Account (HSA) allows individuals with specific high-deductible health plans to set aside money on a pre-tax basis to cover qualified medical expenses. These accounts offer a triple tax advantage: contributions are tax-deductible, the funds grow tax-free, and withdrawals for eligible costs are also tax-free. Medicare is the federal health insurance program primarily for people aged 65 or older, as well as for some younger individuals with disabilities.

HSA Contribution Rules After Medicare Enrollment

Once an individual enrolls in any part of Medicare, they can no longer contribute to a Health Savings Account. For any month a person is covered by Medicare Part A, B, C, or D, their HSA contribution limit for that month is zero. This rule applies even if the individual remains covered by a qualifying high-deductible health plan through an employer.

Medicare Part A benefits have a retroactive nature. When an individual applies for Medicare Part A after turning 65, the coverage is often backdated by up to six months, though not earlier than their 65th birthday month. To avoid a penalty, individuals must stop making HSA contributions at least six months before they plan to enroll in Medicare or apply for Social Security benefits.

Failing to stop contributions in time results in an excess contribution. These excess amounts are not tax-deductible and are subject to a 6% excise tax for each year they remain in the account. To avoid this penalty, the excess contribution, along with any earnings it generated, must be withdrawn from the HSA before the tax filing deadline for the year the contribution was made.

Permitted Use of HSA Funds for Medicare Premiums

While contributions must stop, the funds already in an HSA remain available for use on qualified medical expenses on a tax-free basis. A significant benefit for retirees is that certain Medicare premiums are considered qualified medical expenses. This allows individuals to use their tax-advantaged HSA dollars to pay for their government-sponsored health coverage.

HSA funds can be used to pay for the following Medicare premiums:

• Medicare Part B (medical insurance) premiums
• Medicare Part D (prescription drug coverage) premiums
• Medicare Advantage Plan (Part C) premiums
• Medicare Part A (hospital insurance) premiums, if an individual does not qualify for them premium-free due to an insufficient work history

Premiums for Medicare Supplement Insurance policies, commonly known as Medigap, are explicitly excluded and cannot be paid for with HSA funds on a tax-free basis. Using HSA money for Medigap premiums would result in the distribution being treated as taxable income and could incur a 20% penalty if the account holder is under age 65.

Tax Reporting for HSA Distributions

When you withdraw money from your HSA, the administrator will report this activity to you and the IRS. By January 31 of the following year, you will receive Form 1099-SA. This form details the gross distribution amount from your account for the prior year but does not specify if the funds were used for qualified medical expenses.

The responsibility falls on the taxpayer to demonstrate that the distributions were used for permissible purposes, such as paying for eligible Medicare premiums. This is done by filing Form 8889 with your annual Form 1040 federal tax return. You must file this form even if your distributions are entirely non-taxable.

On Form 8889, you will report the total withdrawals and then subtract the amount spent on qualified medical expenses. If the funds were used for items like Medicare Part B or D premiums, the distribution is not included in your gross income and is free from taxes and penalties. Accurate record-keeping of your medical spending is necessary for this reporting.