Medicare and HSA: Do’s and Don’ts

So, you’ve been planning for retirement and as part of that process you have a high deductible health insurance plan, otherwise known as a health savings account (HSA) qualified insurance plan.  You either have it through your employer group insurance or you have purchased the insurance on your own, direct from the insurance company.

Let’s say your financial advisor indicated that this would be a wise way to save earned money tax-free and then be able to use that money to pay for IRS qualified medical expenses in the future - a good strategy!  Some of you may have built up a large amount in that HSA over the years and would like to continue contributing to it, to avoid paying taxes on that income.

Can you contribute to an HSA (Health Savings Account) if you do not have an HSA qualified insurance plan?  According to the government, you cannot.

Can you use the money in the HSA to pay for medical expenses even if you do not have an HSA qualified insurance plan?  Yes, you can!  Once the money has been deposited into your HSA account, either by you, your employer or someone else, the money is yours to spend on qualified expenses. (See IRS Publication 502)

Now, let’s talk about Medicare insurance and how it affects the contributions you can make to an HSA.   According to the IRS, once you become eligible for Medicare Part A and/or Part B, you can no longer contribute to the HSA account tax-free and may be penalized if you do contribute. 

Since most people take Medicare at age 65 or are automatically enrolled in Medicare at age 65 if they are collecting Social Security, this means you can no longer contribute to an HSA account, even if you are still working and have an HSA qualified employer group insurance plan.  The employer must stop contributing as well.  If you do continue to contribute you are subject to an IRS penalty.

So, you may be thinking, “I am just going to continue working and not enroll in Medicare or take Social Security, so my employer and I can continue to make contributions to my HSA.”  Seems like the perfect solution, right?  However, be aware that if you delay enrollment into Medicare, at some point in the future when you do decide to start Medicare or Social Security, Medicare can begin your Part A coverage retroactive six months.  If you or your employer had contributed to the HSA for those months, you will either have to pay back the excess contributions or be subject to a penalty.

There is a limit to how much you can contribute to an HSA account which is set by the IRS each year, so check with your tax accountant to make sure you are not contributing above the allowed amount (including employer contributions).  For partial years of eligibility, you can prorate the amount of your contribution, based on the number of months you qualify.  For example, if the maximum amount you can contribute in a year is $3,550, then you can only contribute $1,775, if you are eligible for six months of the year.  If you have already contributed the full amount and later you find out that you were not eligible for the entire year, you can take back the excess contribution before the tax year filing deadline date, to avoid paying a penalty.

Great!  Now you have all this money saved, tax-free, in a savings account and I have already indicated that you can use it to pay for qualified medical expenses.  What? You want to know if you can use it to pay Medicare premiums?  Good question!

Among other premiums that the HSA money can be used for, you can pay premiums for Medicare Part A, B or D or a Medicare Advantage plan (for individuals over age 65)! That’s great news, if you don’t have many medical expenses and are wondering what to do with the money.

Informed Choice Insurance Agency is here to educate you about these situations when you are ready to get enrolled in Medicare or considering enrollment into Medicare vs. staying on your employer group insurance plan and we look forward to seeing you!