Health Savings Account (HSA) and Medicare
Once you enroll in Medicare, you are no longer eligible to contribute pre-tax money to a health savings account (HSA). You’ll have to pay a penalty on any new money you put into the account. But you can use money you’ve already put into your HSA to pay for some Medicare costs.
How Does Medicare Work With an HSA?
A health savings account (HSA) allows you to put money away for medical expenses. The money you put into your HSA is pre-tax — meaning it doesn’t count toward your taxable income.
To qualify for an HSA, you must be enrolled in a high-deductible health plan and cannot have any other health insurance. So once you enroll in Medicare — considered another health insurance plan — you lose this tax advantage.
You can even face a tax penalty if you continue putting money in your HSA. But you can spend money from the account on certain Medicare out-of-pocket costs.
- Medicare and HSA eligibility
- Once you enroll in Medicare, you can no longer contribute to your HSA. But you don’t have to enroll in Medicare when you turn 65 so long as you have another health plan. As long as you are not enrolled in Medicare, you remain eligible to contribute to your HSA.
- Medicare and HSA tax penalties
- You can face tax penalties if you continue contributing to your HSA after enrolling in Medicare. You will owe back taxes on the contributions based on your income. If the IRS considers your contributions as “excess,” you’ll have to pay an additional six percent penalty. You’ll also have to pay back taxes and an additional 10 percent penalty if you enroll in Medicare during the yearlong HSA testing period. To avoid penalties, the IRS recommends that you stop making contributions six months before you enroll in Medicare.
- Medicare and HSA contributions
- If you enroll in Medicare when you’re first eligible, you can still contribute during the months you were eligible up until the month when you turn 65. Say your birthday is April 10. You can contribute during January, February and March.
- Medicare and HSA distributions
- You can still use your HSA money for certain Medicare out-of-pocket expenses. The money you spend on qualified medical expenses will be a tax-free distribution. Qualified expenses include:
- Medicare Part A & Part B deductibles
- Medicare Part B premiums
- Medicare Advantage plan premiums
- Medicare Part D drug plan premiums
- Medigap plan premiums (but you must pay taxes on the money for these premium payments)
- Copayments and coinsurance
- Dental expenses
- Insulin and diabetic supplies
- Over-the-counter medications
- Prescription drugs
- Vision expenses
- Delaying Medicare enrollment in favor of HSA
- As long as you still have a qualified health plan, you won’t face a late enrollment penalty from Medicare. For instance, if you keep your employer or spouse’s employer health plan, you can continue contributing to your HSA until you enroll in Medicare. If you drop your plan and delay enrolling in Medicare, you can face a late enrollment penalty from Medicare.
Can One Spouse Have Medicare and the Other Contribute to an HSA?
Receiving Medicare coverage does not disqualify your spouse from an HSA.
If your spouse is HSA-eligible, you can enroll in Medicare and your spouse can enroll in or continue in their HSA plan. You, your spouse or anyone for that matter can make contributions into their HSA up to the family maximum.
This lets some couples build tax-free savings in their health savings account that they can use during retirement. These couples can sometimes sock away tax-free income contributions for years after the older spouse retires and enrolls in Medicare.
You can continue to make post-tax contributions to your spouse’s HSA — meaning you must pay income tax on the money you contribute — and can do so through an automatic payroll deduction plan that puts money directly into their HSA.
Your spouse can even deduct your contributions from their income tax return — or if you file jointly, for your joint return.
Does Medicare Have Its Own Version of an HSA?
Medicare offers its own version of an HSA called Medicare Medical Savings Account (MSA) plans. MSA plans are sold through private insurance companies.
The plans must be used with a high-deductible Medicare Advantage plan, which replaces Medicare Part A and Part B and are also sold through private insurers. These plans only kick in to cover your medical bills after you reach a high yearly deductible.
Money you contribute to an MSA can cover dental, vision, hearing and long-term care not covered by Medicare. They do not cover Medicare Part D prescription drug plans.
5 Cited Research Articles
- Internal Revenue Service. (2021, February 16). Publication 969 (2020), Health Savings Accounts and Other Tax-Favored Health Plans. Retrieved from https://www.irs.gov/publications/p969
- Centers for Medicare & Medicaid Services. (n.d.). Fact Sheet: Deciding Whether to Enroll in Medicare Part A and Part B When You Turn 65. Retrieved from https://www.cms.gov/Outreach-and-Education/Find-Your-Provider-Type/Employers-and-Unions/FS3-Enroll-in-Part-A-and-B.pdf
- Centers for Medicare & Medicaid Services. (n.d.). Medicare Medical Savings Account (MSA) Plans. Retrieved from https://www.medicare.gov/sign-up-change-plans/types-of-medicare-health-plans/medicare-medical-savings-account-msa-plans
- Optum Financial. (n.d.). HSAs and Medicare. Retrieved from https://www.optum.com/content/dam/optum/consumer-activation/unknown/HSA_and_Medicare.pdf
- The HSA Authority. (n.d.). HSAs and Medicare FAQs. Retrieved from https://www.in.gov/spd/files/HSA_HSAandMedicare_HSA2.pdf