Many people use a health savings account (HSA) to save money on medical expenses. These accounts allow you to make tax-free contributions and use those funds to pay for qualified medical expenses.
However, some strict eligibility rules must be met to qualify for an HSA. Unless you meet the rules, you cannot make HSA contributions. So, what are those rules, and how does Medicare enrollment affect your eligibility for an HSA?
Keep reading as we provide all the details. We will tell you exactly how to qualify for an HSA and what you need to know when you’re approaching the age for Medicare coverage.
What Is A Health Savings Account?
So, what is an HSA, and how does an HSA work? A health savings account is a tax-advantaged savings account that allows you to use the money to pay for qualified medical expenses. You can put money into the account on a pre-tax basis and withdraw the funds without paying taxes as long as the money is used to pay for specific medical expenses.
The IRS recognizes this type of account and provides certain tax advantages for individuals who use these accounts.
- Using the withdrawals from your HSA to pay for expenses other than qualified medical expenses will lead to tax penalties and tax payments being due.
- The IRS also sets maximum contribution limits on these accounts. In 2024, you can contribute up to $4,150 to an individual account or $8,300 to a family account.
Most HSA accounts are set up like checking accounts. Many include a debit card for paying healthcare expenses directly from the account.
For example, the funds could be used to pay copays, coinsurance amounts, or deductibles for medical services. The HSA funds can also be used for prescription and over-the-counter medications.
The IRS requires that contributions to your HSA be reported on your income tax return, and you should also keep detailed records of the distributions or withdrawals. In the event of an audit, you might be required to produce documentation proving that the funds were used to pay for medical expenses that meet the IRS requirements.
KEY TAKEAWAYS
- An HSA or health savings account is a tax-advantaged savings account that allows you to use tax-free funds for qualified medical expenses.
- To qualify for an HSA, you must be enrolled in a qualifying high-deductible health plan (HDHP) and have no other healthcare plans.
- Once you enroll in Medicare, you can no longer contribute to an HSA.
HSA Eligibility
The health savings account rules prevent just anyone from contributing to an HSA. You must meet the eligibility requirements to qualify for one of these accounts.
- First, you must be enrolled in a high-deductible health plan (HDHP). This means that you are enrolled in a health insurance plan with a high deductible, so you will need to cover many medical expenses out-of-pocket before your health insurance begins to pay for services.
- Next, you must not be enrolled in any other health care coverage. The high-deductible plan must be the only plan in which you are enrolled.
- The IRS rules state that the deductible must be at least $1,600 per year for an individual or $3,200 per year for a family for the plan to qualify as an HDHP. These plans usually come with lower premiums but incur higher out-of-pocket costs when you receive treatment.
If you qualify, there are different ways to obtain an HSA. Some health savings plans are managed through your employer, while many banks and credit unions offer health savings plans. You might choose to enroll directly with your bank, but you must prove to them that you qualify for the account before making contributions.
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How Medicare Enrollment Affects Your HSA
Many people wonder how Medicare enrollment will affect their health savings accounts. Perhaps you are still employed and enrolled in a high-deductible plan for health coverage through your employer. Will enrolling in Medicare affect your HSA benefits? Medicare enrollment can affect your HSA contributions and HSA withdrawals differently. Here are the details.
HSA Contributions
Enrolling in Medicare will immediately stop your eligibility to make HSA contributions. This applies to both Medicare Part A and Medicare Part B. If you are enrolled in Part A or Part B, you can no longer make HSA contributions. This is because the HSA rules state that you cannot be enrolled in any other health coverage besides an HDHP, and Medicare does not qualify as an HDHP.
If you are still employed and enrolled in an HDHP, you might choose to delay your Medicare enrollment to continue contributing to your health savings plan. You should also delay receiving your Social Security benefits since those benefits can qualify you for automatic Medicare enrollment. If you delay your benefits, you should stop your HSA contributions at least six months before enrollment in Medicare. We will discuss the reason why later in this article.
HSA Payments & Reimbursements
What if you still have funds in an existing HSA when you enroll in Medicare? You can still use those funds tax-free to pay for qualified medical expenses. Enrolling in Medicare does not affect your ability to use the funds already in your account. You can continue to use those funds to pay for eligible expenses for the rest of your life or as long as you have a balance in your account.
You can even use the funds to pay for Medicare premiums, like your Medicare Part B or Part D prescription drug coverage premiums and Medicare Advantage plan premiums. However, you cannot use HSA funds for Medicare supplement insurance or Medigap.
TIP
Contributing to an HSA can result in significant tax savings and provide tax-free funds for future medical needs. It is advantageous to put as much money as possible for as long as possible into an HSA.
Delaying Medicare Enrollment To Keep Your HSA
Many people choose to delay their Medicare enrollment so they can continue contributing to a health savings account. Since these accounts are tax-advantaged, continued contributions can save some individuals a lot of money on their taxes.
However, you likely know you become eligible for Medicare upon your 65th birthday. You will be automatically enrolled in Medicare if you have already received retirement benefits from the Social Security Administration.
- You cannot delay your enrollment, even if you are still employed.
However, if you are not receiving Social Security retirement benefits yet, you can delay your Medicare enrollment beyond age 65.
Employer-Sponsored HDHP
Suppose you choose to delay your Medicare enrollment because you are already enrolled in an employer-sponsored HDHP. In that case, you will likely qualify for a Medicare special enrollment period upon retirement. This means you can still sign up for Medicare later without paying late enrollment penalties. You can learn about the basics of Medicare, along with special enrollment periods and how COBRA coverage might also affect the timeframe in which you can enroll without a penalty.
Spouse HSA Eligibility
You should also understand that your spouse might still be eligible to contribute to an HSA even if you are already enrolled in Medicare. For example, suppose you and your spouse are covered through your employer-sponsored high-deductible health plan. Even though your spouse is not the primary insured, they could still contribute to an HSA after you start receiving Medicare benefits.
This might allow you to receive Medicare coverage while getting some tax benefits from the health savings plan.
The Six Month Loopback Period Explained
If you delay your Medicare enrollment to continue contributing to a health savings account, you need to be aware of the six-month loopback period. Remember that you typically can start Medicare coverage the month you turn 65. However, delaying your benefits can provide for a different start date.
- When you enroll in Medicare Part A late, you are entitled to retroactive benefits up to six months before enrollment.
- Remember that you cannot contribute to an HSA while enrolled in Medicare coverage.
So, when you delay your Medicare coverage, you must stop your HSA contributions at least six months before signing up for Medicare. Otherwise, you could be making HSA contributions during a period in which you will have retroactive coverage under Medicare.
This could lead to additional taxes due and even some tax penalties. You might qualify to utilize a flexible spending account (FSA) if you are still employed during this period. These accounts provide many of the same tax advantages as a health savings account, but the eligibility criteria are not as strict.
The Bottom Line
Health savings accounts can be a great way for those enrolled in a high-deductible health plan to take advantage of tax savings.
Your medical insurance company should be able to tell you whether your plan is considered an HDHP, but generally, it should have a deductible of at least $1,600 per year.
You cannot make new contributions to an HSA if enrolled in Medicare. However, you can continue using the funds in your account to pay for qualified medical expenses, like monthly premiums, copays, and coinsurance.
Frequently Asked Questions
Yes, you can have an HSA and be on Medicare. However, you will not be allowed to make contributions to your HSA once you enroll in Medicare.
Part of Medicare is the fact that it is meant to reduce your overall healthcare expenses. Therefore, it has a fairly low deductible. Since Medicare does not qualify as a high-deductible health plan, you cannot contribute to an HSA once you are enrolled.
If you have an existing HSA prior to enrolling in Medicare, you can continue to use those funds to pay for qualified medical expenses.
If you are enrolling in Medicare during your initial enrollment period, you can contribute to an HSA up until the month of your 65th birthday. You can make HSA contributions until your Medicare coverage is effective.
If you delay your Medicare benefits, you might be entitled to a six-month retroactive period of coverage. This means that your coverage could apply retroactively up to six months prior to your enrollment date. So, if you are delaying your Medicare enrollment, then you should stop HSA contributions at least six months before enrolling in Medicare.
Otherwise, you might be making contributions during a period in which you will be covered by Medicare. This could have adverse tax consequences.
Nothing happens to your HSA at 65. If you are delaying your Medicare coverage, you can continue to make contributions and use your HSA account as normal.
However, if your Medicare coverage starts at 65, you can no longer make HSA contributions. You can still keep the HSA account, though.
You can even use the funds in the account to continue to pay for qualified medical expenses. Some people even choose to use the funds to pay their Medicare premium, deductible, or coinsurance amounts.
No, if you are enrolled in Medicare, you cannot contribute to an HSA. Your eligibility for making contributions to a health savings account stops once you are enrolled in Medicare.
Even if you are still enrolled in an HDHP, you cannot be enrolled in any other health care coverage. Although you can no longer contribute to the account, you can still use the funds to pay for eligible medical expenses.
You can find a Social Security Administration office near you by using our SSA office locator and searching for your closest location.
