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HSAs and Medicare: Things to consider when you turn 65

Retiring soon and wondering what to do with your health savings account (HSA)? You’re not alone – many people find the rules around HSAs and Medicare to be confusing. Here’s what you need to know about having an HSA after 65, spending your contributions and avoiding penalties and taxes.

Understanding the rules: How to keep your HSA alongside Medicare

A health savings account (HSA) is a specific type of savings account you can deposit pretax money into. Then you can use those funds to pay for qualified medical expenses. Many employer-sponsored health plans offer HSAs – you might even have one right now.

To be eligible for an HSA, you must have a high deductible health plan (HDHP), which has higher deductibles than typical health insurance plans. Those with an HDHP often pay more out of pocket until health insurance kicks in, and a health savings account can help pay for this and other expenses.

Once you turn 65 and qualify for Medicare, you’re no longer eligible to contribute money to your HSA. But don’t worry – the money you have left in your account doesn’t go away. If you have an HSA with available funds, you can still use that money when enrolled in Medicare.

HSA eligibility, contributions and Medicare enrollment: Are there penalties?

Because a Medicare plan is not an HSA-eligible plan, if you contribute to your HSA while enrolled in Medicare, you may be subject to IRS penalties. To avoid penalties, stop contributing to your HSA in time by following the six-month rule. This means that you should stop adding funds to your health savings account around six months before applying for your Social Security retirement benefits.

Also, keep in mind that if you sign up for your Social Security benefits after you fully retire, you may be subject to backdated tax penalties on your HSA.

Types of HSA Medicare penalties

There aren’t specific Medicare-based penalties that apply to your Medicare plan directly, but there are tax penalties. Contributions made to your HSA after enrolling in Medicare are subject to a 6% excise tax. You may also be subject to back taxes, as contributions made to your HSA after Medicare enrollment are no longer tax-deductible.

How you can use your HSA withdrawals after 65

After enrolling in Medicare after 65, you can still spend unused HSA distributions on qualified medical expenses. This can be a great option for seniors who may need extra help paying for things like Medicare deductibles, copays and coinsurance.

In general, qualified medical expenses refer to the types of health services and products that can be deducted as medical expenses on your yearly tax return. Some qualified medical expenses, like routine doctor visits and diagnostic testing, might also be covered by Medicare, while some, such as dental, hearing and vision services, may not be.

Can HSAs be used to pay for Medicare premiums?

Yes, HSAs can be used to pay for Medicare premiums across the different parts of Medicare. Premiums you can use your HSA to pay for, tax-free, include:

  • Part A (hospital coverage) premiums
  • Part B (medical coverage) premiums
  • Medicare Advantage plan (Part C) premiums
  • Prescription drug coverage (Part D) premiums

Medicare supplement plan (Medigap) premiums, however, aren’t considered a qualified medical expense. If you choose to pay for your Medicare supplement premium with HSA funds, you’ll pay taxes on those amounts.

Social Security and your health savings account

When you start receiving Social Security benefits, you’ll be automatically enrolled in Medicare Part A and will be disqualified from making contributions to your HSA.

If you delay Medicare coverage, you won’t have to pay a penalty when using HSA funds as long as your current health plan meets Medicare’s coverage requirements. And remember, when it’s time to start Medicare, you should still stop contributing to your HSA around six months before you plan to retire.

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