Editor’s Note: This post has been updated to reflect 2020 Medicare deductibles and figures.
HSA and Medicare parts do not go well together if you plan to continue contributing into your account. As a licensed insurance agent who has written many HSA-qualified insurance policies over the last decade, I can attest that health savings accounts are a handy retirement savings vehicle. However, you can’t contribute into an HSA once you enroll in any part of Medicare.
It’s really a shame, because prior to health savings accounts, we advised nearly everyone to enroll in Part A at age 65. Since Part A costs most Americans nothing, it did no harm to anyone.
Medicare and HSA Plan Contributions Are a No-No.
Today, however, we have many Medicare beneficiaries who are still working at large companies. Some are enrolled in group health insurance plans which are HSA-compatible.
This means that the insurance plan has a high deductible and is a qualified plan for which employees can open health savings accounts to save money toward future medical expenses. These contributions have many benefits for the employee, including tax savings benefits.
Both the employee and the employer can contribute funds into the health savings account, as long as the employee has no other insurance.
Enrolling into Medicare Part A (or any part of Medicare) makes that contribution illegal. It’s important that employees with health savings accounts look carefully at these rules, which we’ll cover below.
Benefits of HSA Plans
As an individual with a high-deductible health plan, you get to enjoy premiums that are considerably lower than a regular health insurance plan. However, that’s not the only benefit. When you open the health savings account that goes alongside your health insurance, you now have an opportunity to contribute money into the account tax-free. This means that you pay no income taxes or Social Security/Medicare taxes on that money.
You also pay no taxes on the money when you pull it out for qualified medical expenses, which include dental and vision expenses. You can even use funds in your health savings account to pay for qualified medical expenses of your dependents, whether they are on the health insurance policy with your not.
What’s more is that this money is yours forever. It compounds over time and can grow into a really great nest-egg of money that you can use for medical expenses, including Medicare premiums, during retirement.
With all of these great benefits, it’s easy to see why someone working at age 65 wants to continue contributing into their health savings account as long as possible. You just have to be aware that you can’t keep contributing into that HSA if you enroll in any part of Medicare.
Medicare Part A & Group Health Coordination
Most Medicare beneficiaries who are still working at age 65 choose to enroll in Medicare Part A. That’s because Part A can limit your hospital spending to $1408 (in 2020) if you ever have a hospital stay.
Let’s say your group health insurance has a $5000 deductible. This is a pretty considerable financial exposure, especially for someone who will retire in a few years. If this person has a hospital stay of even just 1 or 2 days, the likelihood that he would spend that $5K toward his deductible is pretty high.
However, this same person can enroll in Part A at age 65 and let Part A coordinate with this group insurance. Then that same hospital stay would cost him only $1408 (the Part A deductible). Medicare would pay the rest of any charges for the hospital stay itself. Wow! Part A doesn’t cost him anything if he has worked at least 10 years in the United States. Enrolling in it at age 65 is a no-brainer.
This all works beautifully unless that group health insurance plan is HSA-compatible, and you are actively contributing into a health savings account. Read on to find out why.
The HSA and Medicare Exception
Let’s first define what an HSA is. HSA stands for Health Savings Account. This is a tax-favored account that eligible individuals can open to save money for medical expenses. To be eligible, that individual must be enrolled in a qualified high-deductible health plan (HDHP) and must NOT be enrolled in any other insurance, including Medicare.
As we mentioned above, money in this savings account can be used for certain medical expenses for the policyholder or any dependents. Both the employee and the employer can contribute into this account, up to the allowed limits set by the IRS. Group health insurance plans paired with health savings accounts have become very popular in the last ten years.
Unfortunately, Medicare Part A is a form of health insurance. The IRS does not allow the employee or the employer to continue contributing into a health savings account for any employee who enrolls in ANY form of Medicare (Part A, B, C or D).
If you want to continue contributing into your health savings account after age 65, you should not enroll in any part of Medicare. Then you can continue to make contributions into the health savings account even past age 65. You will continue to be able to make those contribution tax-free.
You will just postpone applying for Medicare (or Social Security income benefits) until you decide to retire. There is no late enrollment penalty for Part A or Part B as long as you maintain your group health insurance and that insurance is primary to your Medicare.
The Potential Consequences of Having HSA and Medicare
What if you didn’t realize this and have already signed up for Part A and Social Security income benefits? You would need to stop contributing to the health savings account immediately. However, you can use the funds that are already in your health savings account for qualified medical expenses until you exhaust the account.
Do not attempt to cancel Part A that is already in force. It can have dire consequences to your Social Security income benefits. (You cannot cancel Part A after beginning your Social Security benefits. If you do, you’ll have to pay back all of the money you have already received from Social Security.)
Instead, you can just use the funds that were already in the savings account toward Medicare Part A, B and D premiums. Funds can also be used for ordinary approved medical expenses, such as doctor visits, lab work, etc.
If you have not yet enrolled in Social Security income benefits, you can withdraw your application for Medicare Part A. Please note that later on, after you turn 65, whenever you decide to apply for Social Security income benefits, it will automatically trigger your enrollment into Part A retroactively for either 6 months or until the 1st of your 65th birthday (whichever is the fewer number of months).
Applying for Medicare After Turning 65
If you apply for Medicare Part A after you turn 65, your Part A will become retroactive for up to 6 months. Therefore, if you plan on applying for Part A after you turn 65, you will want to stop contributing into your HSA up to 6 months prior to enrolling in Medicare. If you don’t, you could end up facing penalties.
However, if you plan on enrolling in Medicare before your 65th birthday month, then you can continue contributing to your HSA all the way up until the day before your Medicare is effective. This is because your Part A shouldn’t be retroactive if you apply for it prior to turning 65.
For example, if Paul plans to apply for Medicare at age 67 in June 2021, then his Part A will be retroactive 6 months to December 1, 2020. Therefore, Paul should stop his HSA contributions prior to December 1, 2020.
Here’s another example of when someone’s Part A would be retroactive to the first of their 65th birthday month.
If Alex turns 65 in October 2020, but doesn’t apply for Medicare until December 2019, then his Part A will be retroactive to the first of October, not the full 6 months. Therefore, Alex should stop his contributions no later than the day before October 1, 2020.
You’ll need to speak with your accountant about any penalties you may owe for contributing into your HSA over the prior six months.
Late Enrollment Penalty for Part D
There can be an IRS penalty with Medicare and an HSA. There can also be a late penalty for not enrolling in Part D if your group coverage is not considered creditable.
Many high-deductible health plans do not have drug coverage that is considered creditable for Part D. In other words, the insurance plan will not pay as much as the standard Part D plan would. If that is the case, your employer is responsible to send you an annual Medicare Part D notice prior to October 15th. They must advise you that your drug coverage is not creditable for Part D.
This means that later on when you enroll in Part D, you will likely owe a late enrollment penalty. Part D penalties are assessed at 1% (of the national average Part D premium) per month for every month that you could have been enrolled but were not. At just 1%, it is a small penalty, but it is cumulative. If you postpone Part D for several years, it can add up.
You will also pay the penalty for the rest of your life, so it does need to be considered. You should work with an insurance agent to help you calculate the potential penalty. Then make your own decision on whether it is still best to delay enrollment into Medicare so that you can continue your HSA contributions.
Common Questions about HSA and Medicare
Can you pay Medicare premiums from health savings accounts?
Yes, you can pay for Medicare premiums, deductibles, copays and coinsurance from existing funds in a health savings account. If you have long-term care insurance, you can use HSA funds for those premiums as well. You cannot, however, pay your Medigap premiums with these funds.
Should I delay Medicare enrollment to continue contributing into my HSA?
This depends on the situation. If your employer is a small employer, then Medicare is primary. You need to enroll in Medicare A and B and stop contributing in the HSA. If your employer is a large employer and contributing a fair amount of money each year into your HSA for you, then delaying Medicare might be wise.
Can my spouse continue contributing into the HSA even if I don’t?
Yes, as long as your spouse is covered by the qualifying insurance, he/she can continue contributing up to the individual maximum into the account in his/her name. The contribution just can’t be in your name. You can also use funds that are already in the account to pay for expenses for both of you until the fund are exhausted. For more rules about contribution, visit this page on the IRS website.
Can you contribute to an HSA if you are on Medicare?
No. Your spouse can, but you cannot. The IRS does not allow this. Medicare and HSA plans just do not mix.
What is the penalty for having an HSA and Medicare?
The penalty would usually be imposed upon you by the IRS if you are audited. The amount would depend entirely on your specific circumstances. You would pay taxes on the HSA funds that contributed and took deductions for as well as penalties. Your contributions might also be considered excess contributions by the IRS and then they would be subject to an additional 6% in excise tax when you withdraw those funds.
IRS Broadens Preventive Services for HSA Plans
The IRS announced this year that they are expanding the use and also the coverage in qualified high-deductible health plans. It will now allow these plans to cover a wider list of healthcare services as preventive care without making your HSA invalid.
Plans can now choose to allow people with certain chronic conditions to access specific medical services as preventive care covered at 100%. For example, the plan may allow people with diabetes to get retinopathy screenings and certain insulins covered at 100% without losing the ability to contribute into an HSA. If you are not yet on Medicare and still covered by your high-deductible health plan, check with your insurance carrier to find out what preventive care services like these that you might be able to access before you leave the plan to enroll in medicare.
Medicare and HSA: Confusing!
We realize these rules can be confusing and sometimes downright mind-boggling! That’s why the insurance experts at Boomer Benefits are here to guide you. Are trying to determine what to do about your Medicare coverage? Give us a call so we can help you consider all the moving parts. You should also consult your tax professional about your HSA contributions to receive guidance on the financial end of things.