If you’re nearing retirement age, congratulations! As you visualize what days free of a daily commute and office coffee will look like, you’re also likely thinking about how you’re going to pay for retirement expenses – health care being a major one.
With retirement comes many important decisions. One decision is whether or not to enroll in Medicare, and a contributing factor to that decision may be how you view and utilize health savings accounts (HSAs).
First, a quick HSA overview: If you are enrolled in a high-deductible health plan (HDHP), you are eligible to open and contribute an HSA. Your HSA contributions are not taxed, and money taken out is also pre-tax as long as funds are used to pay for qualified medical expenses. (For more info about HSAs, consult our Health Savings Account FAQs.)
That’s the very basics of what an HSA is and what it can do, but there are special rules around how your HSA and Medicare work together. While attending numerous open enrollment fairs, I’ve been asked questions centered around how Medicare works with an HSA – like “Can you have an HSA with Medicare?” and “Can an HSA be used for Medicare Premiums?” being two of the most frequent.
I wanted to share answers to these and several other common HSA + Medicare questions here. Understanding this information should help you make more informed decisions as you transition into this new stage of life.
Q: Can I still use my HSA funds if I have Medicare coverage? / Can I use my HSA to pay for Medicare premiums?
A: You can still use your HSA funds if you have Medicare coverage. You may withdraw funds from your HSA at any time, regardless of whether you are eligible to contribute to your HSA.
Once you reach age 65, you have more options for using your HSA funds. For example, you may use your funds, free of tax and penalty, for qualified medical expenses as well as to pay for Medicare Parts A, B, D premiums and Medicare HMO premiums. However, premiums for a Medicare supplemental policy, such as Medigap, are not eligible expenses.
Reaching 65 years of age also enables you to use your funds for non-qualified medical expenses, including Medicare Supplements, with no penalties. Instead, these funds will be taxed as ordinary income.
Q: Can I contribute to my HSA if I have Medicare coverage?
A: Unfortunately, you may not contribute to an HSA while enrolled in Medicare. You may continue contributing to your HSA by delaying your enrollment in Medicare coverage. Signing up for social security automatically enrolls you in Medicare Part A.
Q: When must I stop my HSA contributions?
A: In most cases, you are ineligible to make HSA contributions the first day of the first month that your Medicare coverage begins. If you sign up during the first three months of your initial enrollment period, coverage begins the first day of the month you turn 65.
If your birthday falls on the first of the month, your Medicare coverage begins the first day of the prior month. If you enroll after the first three months, your coverage beings at different times depending on your birth date. See www.medicare.gov for more details.
Q: Can I contribute to my HSA if I am Medicare eligible, but choose not to enroll in/decline Medicare coverage?
A: By choosing to post-pone enrollment in Medicare, you are still eligible to make contributions to your HSA until the first day of enrollment. Most taxpayers are eligible for an HSA if covered by an HSA-qualified high deductible health plan (HDHP).
However, you are ineligible for an HSA if:
- You are enrolled in Medicare or Medicaid;
- You are a tax dependent;
- You are covered by your own or a spouse’s non-HSA-qualified health plan, General Purpose Flexible Spending Account or Health Reimbursement Arrangement;
- If, in the past three months, you have received healthcare from the Veteran’s Administration
Q: If my spouse is covered by Medicare but I am not, can I contribute to an HSA?
A: If you are under 65 and otherwise eligible to open and contribute to an HSA, you can contribute up to the maximum limits into your separate HSA. Please see the question above for eligibility information.
Q: What if I accidentally contributed to my HSA when I was ineligible due to Medicare coverage?
A: If you have accidently contributed to an HSA while enrolled in a Medicare plan (or for any other reason that would make you ineligible to contribute), there may be tax penalties. You can reverse your excess contributions by completing a form available in your online account. Please consult a tax advisor for tax penalty questions. Note that there may be a fee charged by the bank custodian for excess contribution withdrawals.
The transition into retirement does not have to be a daunting one. We hope the information above puts your mind at ease while entering this new and exciting stage in your life.
As always, before making any financial decisions, consult with a tax advisor, HR representative, and/or financial planner.