If you’re like many workers in the U.S., you may have been saving money in a health savings account (HSA) for years, which can be helpful should you face medical expenses during retirement.
But once you reach age 65, which is when you reach Medicare eligibility, contributing to an HSA becomes a bit more complicated. While you can use HSA funds to pay Medicare premiums, you cannot continue contributing to your HSA after enrolling in Medicare.
Read on to learn about the rules surrounding HSAs and Medicare, including what options you have, when to stop contributing to your employer-sponsored HSA to avoid penalties and what happens if you plan to continue working past the age of 65.
What Is an HSA?
An HSA is a savings account that you can contribute pre-tax dollars to during your working years to save money that can then be used for health expenses. While you can use money from your HSA for medical expenses prior to retirement, you can also allow the money you contribute to grow over time and use it after retirement for qualified medical expenses.
“An HSA functions much like a 401k would in that any monetary contributions you make to your HSA will reduce your taxable income for the year, just like tax-deferred 401(k) contributions. And as long as you use the funds in your HSA for medical expenses, you won’t pay taxes on withdrawals,” says Lindsay Malzone, a Medicare expert at Medigap.com.
An HSA can be used for any qualified medical expense, such as Medicare Part B, C and D premiums and deductibles, dental, vision or hearing expenses, and over-the-counter medications, says Ari Parker, co-founder and head advisor at Chapter, an independent Medicare advisor organization.
Can You Contribute to an HSA Once Enrolled in Medicare?
Once you sign up for Medicare, you aren’t allowed to continue contributing to an existing HSA. This restriction is often a major reason why some people either continue to work past the age of 65 (and retain their employer-sponsored health insurance coverage) or choose to defer Medicare enrollment.
“You cannot contribute to an HSA account once you start Medicare Parts A or B,” explains Malzone. “If contributions continue after Medicare begins, those contributions will be subject to a 6% excise tax penalty.”
Deferring Medicare Enrollment
Enrolling in Medicare at age 65 doesn’t make sense for everyone. In the vast majority of cases, people delay Medicare enrollment because they’re satisfied with their coverage provided by their employer-sponsored health insurance plan (or are covered by their spouse’s). As more people work well past the Medicare-qualifying age of 65, this choice becomes increasingly common.
Can You Use HSA Funds for Medicare?
You can use your HSA funds to pay for any qualified medical expenses, according to Parker. These expenses include:
- Medicare Part B, C and D premiums
- Deductibles for all parts of Medicare
- Dental expenses (many Medicare plans don’t cover routine dental care)
- Vision care expenses (eye exams aren’t covered by Original Medicare)
- Hearing care expenses (hearing tests and hearing aids aren’t covered by Original Medicare)
- Over-the-counter medications
Essentially if you saved money in an HSA, you can use it in just about any way to help assuage the costs associated with Medicare (after all, despite the misconception, Medicare is not free). However, there is one exception: An HSA cannot be used to pay for premiums associated with Medicare Supplement plans or Medigap plans.
Qualified Medicare Expenses
Wondering exactly what’s covered under the different parts of Medicare and how your HSA dollars might be spent? See the breakdown of qualified Medicare expenses below.
Part A: Hospital Coverage
You’re automatically enrolled in Medicare Part A when you first enroll in Medicare. This part provides coverage for hospital stays and expenses, short-term rehabilitation services in a skilled nursing facility and hospice care.
You likely won’t pay a premium for Medicare Part A, but you will have to pay an out-of-pocket deductible each year. In 2023, the deductible is $1,600 per person. You also face certain co-insurance costs for hospital or rehabilitation facility stays longer than 60 days, as well as co-insurance costs in various other situations. Many people choose to purchase private Medicare Supplemental insurance (Medigap) to help cover these out-of-pocket costs.
Your HSA funds can be used to help pay for deductibles and coinsurance payments as well as expenses related to hospital or rehabilitation stays.
Part B: Doctor and Outpatient Coverage
Medicare Part B provides coverage for doctor visits, outpatient treatment, medical equipment, diagnostics and laboratory testing, and transport by EMS/ambulance. Part B involves more expenses for the individual than Part A, so some people delay enrolling for as long as they have other primary health insurance coverage. The minimum monthly Part B premium for 2023 is $164.90, which is automatically deducted from an enrollee’s Social Security benefit, along with a $226 annual deductible and 20% co-insurance for all charges.
HSA funds can be used to pay for the Medicare Part B premium, along with deductibles and coinsurance payments.
Part D: Prescription Coverage
If you choose to enroll in Original Medicare, which includes Medicare Parts A and B, you need to purchase separate Part D coverage if you want your prescription drugs covered as well.
There are numerous Part D plans, so it’s very important to compare what drugs are covered by each plan and their associated costs.
HSA funds can be used to pay for prescription co-pays, along with things like vitamins and supplements as long as they have been recommended by your doctor for a specific health condition. Otherwise, vitamins and supplements (those used for general health purposes) are not covered.
Have more questions about how a Medicare Supplement Plan works or what the benefits mean for you? Read this next: Medicare Supplement FAQ’s You Need to Know
By David Lasman – “Ask Medicare Dave” | President – Senior Healthcare Team
wwww.SeniorHealthcareTeam.com | 866-333-7340
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