Meaghan is an editor and writer who also has experience practicing holistic medicine as an acupuncturist and herbalist.
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If you’re like many workers in the U.S., you may have been saving money in a health savings account (HSA) for years, which can be helpful should you face medical expenses during retirement.
But once you reach age 65, which is when you reach Medicare eligibility, contributing to an HSA becomes a bit more complicated. While you can use HSA funds to pay Medicare premiums, you cannot continue contributing to your HSA after enrolling in Medicare.
Read on to learn about the rules surrounding HSAs and Medicare, including what options you have, when to stop contributing to your employer-sponsored HSA to avoid penalties and what happens if you plan to continue working past the age of 65.
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Find Top Medicare Supplement Plans to Fit your Needs at Healthcare.comAn HSA is a savings account that you can contribute pre-tax dollars to during your working years to save money that can then be used for health expenses. While you can use money from your HSA for medical expenses prior to retirement, you can also allow the money you contribute to grow over time and use it after retirement for qualified medical expenses.
“An HSA functions much like a 401k would in that any monetary contributions you make to your HSA will reduce your taxable income for the year, just like tax-deferred 401(k) contributions. And as long as you use the funds in your HSA for medical expenses, you won’t pay taxes on withdrawals,” says Lindsay Malzone, a Medicare expert at Medigap.com.
An HSA can be used for any qualified medical expense, such as Medicare Part B, C and D premiums and deductibles, dental, vision or hearing expenses, and over-the-counter medications, says Ari Parker, co-founder and head advisor at Chapter, an independent Medicare advisor organization.
Consider the following example of how an HSA might benefit contributors:
A family of four in the 24% tax bracket contributes $2,000 per year to an HSA for 20 years. After those 20 years, instead of having $40,000 in the account, the family would have more than $48,000 thanks to the HSA’s compounding interest [1] HSA Savings Calculator. HSAbank.com. Accessed 9/14/22. . Whatever funds remain in the HSA when the owners enroll in Medicare can be spent on healthcare expenses that aren’t already covered by Medicare or to pay for Medicare premiums, copays or coinsurance payments.
Most people become eligible for Medicare when they turn 65, although certain disabilities and medical conditions may hasten eligibility. At that point, a person has a seven-month period in which they can enroll in Medicare coverage without risking a penalty, says Chris Orestis, certified senior advisor and president of Retirement Genius, a website dedicated to helping older adults navigate retirement. Your individual Medicare enrollment period begins three months before your birthday and continues through your birth month and for three months after your birthday.
This timeframe is one you want to pay close attention to, says Orestis, since missing it can result in a penalty for late enrollment. What’s more, you’d have to wait until the annual open enrollment period for Medicare, which runs from October 15 to December 7, potentially causing a lapse in health coverage, he adds.
Note that if you have already started receiving Social Security benefits prior to or on your 65th birthday, you will automatically be enrolled in Medicare when you turn 65.
Once you sign up for Medicare, you aren’t allowed to continue contributing to an existing HSA. This restriction is often a major reason why some people either continue to work past the age of 65 (and retain their employer-sponsored health insurance coverage) or choose to defer Medicare enrollment.
“You cannot contribute to an HSA account once you start Medicare Parts A or B,” explains Malzone. “If contributions continue after Medicare begins, those contributions will be subject to a 6% excise tax penalty.”
Additionally, Medicare Part A coverage may begin up to six months prior to the date you sign up for Medicare, Social Security or Railroad Retirement Board benefits. Therefore, you or your employer should discontinue contributing to an HSA during this window to avoid tax penalties.
Enrolling in Medicare at age 65 doesn’t make sense for everyone. In the vast majority of cases, people delay Medicare enrollment because they’re satisfied with their coverage provided by their employer-sponsored health insurance plan (or are covered by their spouse’s). As more people work well past the Medicare-qualifying age of 65, this choice becomes increasingly common, says Parker.
It’s possible to delay Medicare enrollment without accruing a penalty is possible when you have what’s considered “creditable coverage,” says Malzone. “Creditable coverage indicates coverage that’s at least as good as or better than Original Medicare.” In this case, you can continue to contribute to your HSA. But in the following situations, you have to enroll in Medicare coverage as soon as possible to avoid incurring penalties, according to Orestis:
The quickest and easiest way to find out if your coverage is considered creditable for Medicare is to call your company’s benefits administrator, says Malzone.
You can use your HSA funds to pay for any qualified medical expenses, according to Parker. These expenses include:
Essentially, says Parker, if you saved money in an HSA, you can use it in just about any way to help assuage the costs associated with Medicare (after all, despite the misconception, Medicare is not free). However, there is one exception, according to Parker: An HSA cannot be used to pay for premiums associated with Medicare Supplement plans or Medigap plans.
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Wondering exactly what’s covered under the different parts of Medicare and how your HSA dollars might be spent? See the breakdown of qualified Medicare expenses below.
You’re automatically enrolled in Medicare Part A when you first enroll in Medicare. “This part provides coverage for hospital stays and expenses, short-term rehabilitation services in a skilled nursing facility and hospice care,” says Orestis.
You likely won’t pay a premium for Medicare Part A, but you will have to pay an out-of-pocket deductible each year. In 2022, the deductible is $1,556 per person. You also face certain co-insurance costs for hospital or rehabilitation facility stays longer than 60 days, as well as co-insurance costs in various other situations. “Many people choose to purchase private Medicare Supplemental insurance (Medigap) to help cover these out-of-pocket costs,” says Orestis.
Your HSA funds can be used to help pay for deductibles and coinsurance payments as well as expenses related to hospital or rehabilitation stays.
Medicare Part B provides coverage for doctor visits, outpatient treatment, medical equipment, diagnostics and laboratory testing, and transport by EMS/ambulance, says Orestis. “Part B involves more expenses for the individual than Part A, so some people delay enrolling for as long as they have other primary health insurance coverage. The minimum monthly Part B premium for 2023 is $164.90, which is automatically deducted from an enrollee’s Social Security benefit, along with a $226 annual deductible and 20% co-insurance for all charges,” he says.
HSA funds can be used to pay for the Medicare Part B premium, along with deductibles and coinsurance payments.
If you choose to enroll in Original Medicare, which includes Medicare Parts A and B, you need to purchase separate Part D coverage if you want your prescription drugs covered as well.
“There are numerous Part D plans, so it’s very important to compare what drugs are covered [by each plan] and their associated costs,” says Orestis.
HSA funds can be used to pay for prescription co-pays, along with things like vitamins and supplements as long as they have been recommended by your doctor for a specific health condition. Otherwise, vitamins and supplements (those used for general health purposes) are not covered.
A Medicare medical savings account (MSA) plan is simply a type of Medicare Advantage plan. According to Medicare.gov, in this type of plan, you have both a high-deductible health insurance plan and a medical savings account. The funds in your medical savings account are provided by Medicare and are meant to offset costs associated with your qualified medical expenses. Once you run out of your MSA funds, you’re responsible for paying all your medical expenses until you meet the plan’s deductible for the year.
