Enrolling In Medicare When You Have an HSA
If you enroll in Medicare Part A and/or B, you can no longer contribute pre-tax dollars to your HSA. This is because to contribute pre-tax dollars to an HSA you cannot have any health insurance other than an HDHP. The month your Medicare begins, your account overseer should change your contribution to your HSA to zero dollars per month. However, you may continue to withdraw money from your HSA after you enroll in Medicare to help pay for medical expenses, such as deductibles, premiums, copayments, and coinsurances. If you use the account for qualified medical expenses, its funds will continue to be tax-free.
Whether you should delay enrollment in Medicare so you can continue contributing to your HSA depends on your circumstances. If you work for an employer with fewer than 20 employees, you may need Medicare in order to have primary insurance, even though you will lose the tax advantages of your HSA. This is because health coverage from employers with fewer than 20 employees pays secondary to Medicare. If you work at this kind of employer and fail to enroll in Medicare, you may have little or no health coverage because your health plan does not have to pay until after Medicare pays. Health coverage from an employer with 20 or more employees pays primary to Medicare, so you may choose to delay Medicare enrollment if you work at this kind of employer and continue putting funds into your HSA.
If you choose to delay Medicare enrollment because you are still working and want to continue contributing to your HSA, you must also wait to collect Social Security retirement benefits. This is because most individuals who are collecting Social Security benefits when they become eligible for Medicare are automatically enrolled into Medicare Part A. You cannot decline Part A while collecting Social Security benefits. The takeaway here is that you should delay Social Security benefits and decline Part A if you wish to continue contributing funds to your HSA.
Finally, if you decide to delay enrolling in Medicare, make sure to stop contributing to your HSA at least six months before you do plan to enroll in Medicare. This is because when you enroll in Medicare Part A, you receive up to six months of retroactive coverage, not going back farther than your initial month of eligibility. If you do not stop HSA contributions at least six months before Medicare enrollment, you may incur a tax penalty.
Click here for an AARP article regarding Medicare and HSAs. If you require counseling around HSAs, consult a tax professional.
Continue Using Your HSA
HSAs are not “use it-or lose it” accounts. Although individuals enrolled in Medicare are no longer eligible to make HSA contributions, they can continue to use their HSA savings to take tax and penalty-free distributions for qualified medical expenses, as defined in IRS Publication 502, Medical and Dental Expenses.
Paying Medicare Premiums with the HSA
Individuals who are age 65 or older can use their HSAs to pay for the following expenses:
- Medicare Premiums A,B, C, D, and Medicare Advantage plans (like an HMO or PPO)
- Employee share of premiums for employer-provided health insurance
- Premiums deducted from their Social Security checks
- Premiums for retiree health insurance, and out-of-pocket copays, co-insurance, and deductibles
To be clear, while Medicare premiums are qualified distributions and tax-exempt, other insurance premiums are not qualified medical expenses, such as:
- Medicare premiums if under age 65,
- Medigap (Medicare supplement) premiums, and
- a spouse’s Medicare premiums if the HSA owner is under age 65