HSA and Medicare:
How do HSA and Medicare work together? An HSA is a Health Savings Account. It is a type of Consumer-Directed Healthcare account (CDH accounts). HSAs, Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSA) are all consumer-directed healthcare accounts. These accounts have special tax status.
If you are turning 65, you can keep the HSA that you’ve built up. But you should not contribute to it for six months prior to your 65th birthday. This is because of the “6-Month Lookback for HSA Contributions“.
Let’s take a look at how HSA and Medicare work.
- HSAs let you to contribute pre-tax money to your account.
- Later you can use the money tax-free for a wide variety of health services.
- Some of these services are not even eligible under Medicare – such as vision and hearing, but you can use your HSA to pay for them.
- You don’t pay taxes on Contributions and funds used for qualified expenses.
- HSA balances and interest roll over from year to year. You do not have a “use it or lose it” feature with an HSA.
- If you want to save as much tax-free money as you can, you’ll love HSAs! Younger people benefit more because they have longer for the money to grow.
Contributing to an HSA and Medicare do not go together.
An important aspect of HSAs is that the IRS can penalize you for contributing the HSA while on Medicare Part A or B. To avoid a tax penalty, stop contributing to your HSA at least 6 months prior to applying for Medicare. You can withdraw money from your HSA after you sign up for Medicare. The money is there to help pay for medical expenses. If you contribute to your HSA after obtaining Medicare status, (even six months prior), you can wind up with penalties of 6%. These penalties can have a dramatic impact on your finances. The IRS will look back to the first “bad” contribution when calculating the penalty.
You won’t pay taxes on funds used for qualified expenses after age 65. But you’ll pay taxes on funds used after age 65 for non-qualified expenses. Non-qualified expenses are typically non-medical expenses. The good news is that you won’t have a penalty for withdrawal after age 65. This is even for non-qualified expenses.
After Medicare, you should not add money to your HSA, and neither should your employer.
Make sure you understand the rules to avoid penalties and taxes from the IRS.
Don’t worry….you don’t have to cash out your HSA. It can continue to grow. You can continue to invest. Just don’t add any more money to it to avoid the 6% penalty.
- You can have an HSA, you just shouldn’t contribute to it six months before you sign up for Medicare.
- Because you don’t normally pay taxes on funds withdrawn for qualified expenses, HSAs are incredibly useful funds.
- If you’d like to continue to get health benefits through an HSA-like benefit structure after you sign up for Medicare, a Medicare Advantage Medical Savings Account (MSA) Plan might be an option.
As usual, always discuss the implications of enrolling in Medicare Parts A and B with your HR department before you do it. Even better: Discuss it with your tax advisor.
For more detailed information on Medicare, go to Medicare for Dummies.
You can go to the IRS website for more information on HSAs and Medicare: