HSA vs Medicare: Key Differences and How They Work Together

Health Savings Accounts (HSAs) and Medicare both help manage healthcare costs but operate differently. HSAs allow individuals to save for medical expenses with tax advantages, while Medicare provides coverage primarily for those 65 and older. Understanding their interaction is essential for those nearing Medicare eligibility to maximize benefits and avoid penalties.

While HSAs offer flexibility in saving and spending on medical expenses, Medicare has rules that affect HSA contributions and withdrawals. Knowing these differences helps inform financial decisions.

Eligibility Requirements

HSAs are available only to those with a high-deductible health plan (HDHP). In 2024, an HDHP must have a minimum deductible of $1,600 for self-only coverage or $3,200 for family coverage. Maximum out-of-pocket expenses cannot exceed $8,050 for an individual or $16,100 for a family.

Medicare eligibility is primarily based on age, with most qualifying at 65. Those under 65 may qualify due to certain disabilities or end-stage renal disease (ESRD). Eligibility depends on work history and tax contributions. Individuals who have paid Medicare taxes for at least 10 years (40 quarters) qualify for premium-free Part A. Those with fewer than 40 quarters must pay a monthly premium, which in 2024 can be as high as $505.

Enrollment Timing

Once enrolled in any part of Medicare, individuals can no longer contribute to an HSA. The Initial Enrollment Period (IEP) for Medicare begins three months before turning 65 and extends three months after. Delaying Medicare Part A or Part B enrollment without qualifying for a Special Enrollment Period (SEP) results in permanent late penalties.

Those working past 65 with employer-sponsored coverage may defer Medicare enrollment without penalty. However, if the employer has fewer than 20 employees, Medicare typically becomes the primary payer, requiring enrollment to avoid coverage gaps. Employees of larger companies can delay Medicare and continue HSA contributions, but once they enroll, contributions must stop. Medicare coverage is also retroactive for up to six months if enrollment occurs after turning 65, requiring HSA contributions to cease during that period.

Contributions and Funding

HSA contribution limits for 2024 are $4,150 for individuals and $8,300 for families. Those 55 and older can contribute an additional $1,000. These limits include both employee and employer contributions.

HSAs can be funded through payroll deductions, direct deposits, or lump-sum contributions. Payroll deductions reduce taxable income immediately, while lump-sum deposits offer flexibility in managing cash flow. Employer contributions remain with the employee even if they change jobs or retire.

Tax Implications

HSAs provide tax advantages: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are untaxed. Non-medical withdrawals before age 65 incur a 20% penalty and ordinary income tax.

Once enrolled in Medicare, individuals can no longer contribute to an HSA, including during the retroactive coverage period. Excess contributions must be withdrawn by the tax filing deadline, typically April 15 of the following year, to avoid a 6% excise tax. If not corrected, the penalty applies annually.

Withdrawal Guidelines

HSA funds can be withdrawn tax-free for qualified medical expenses at any age. After 65, withdrawals for non-medical expenses are taxed as ordinary income but no longer incur a penalty.

HSA funds can pay for Medicare premiums, deductibles, copayments, and coinsurance, including Medicare Part B, Part D, and Medicare Advantage plans, but not Medigap premiums. Long-term care expenses and services not covered by Medicare, such as dental and vision care, can also be paid from an HSA. HSAs have no required minimum distributions, allowing funds to grow tax-free indefinitely.

Coordination with Other Health Plans

Medicare enrollment disqualifies individuals from making new HSA contributions. Some employer-sponsored plans automatically enroll employees in Medicare Part A at 65, ending HSA eligibility without the individual realizing it.

If one spouse remains HSA-eligible, contributions can still be made to their account, allowing households to maintain HSA tax benefits. Those delaying Medicare enrollment due to employer coverage should confirm whether their plan provides creditable prescription drug coverage, as failing to maintain adequate coverage can result in Medicare Part D late enrollment penalties.