The Core Rule: You Cannot Contribute to an HSA on Medicare
Enrolling in any part of Medicare, including premium-free Part A, disqualifies you from making new contributions to an HSA. This rule applies even if you have an HSA-eligible High-Deductible Health Plan (HDHP) through an employer. Both your contributions and those from your employer must stop once you are enrolled in Medicare.
The Six-Month Retroactive Coverage Rule
If you enroll in Medicare after age 65, be aware of Medicare Part A's retroactive coverage, which can extend back up to six months (but not before age 65). HSA contributions made during this retroactive period are considered excess contributions by the IRS and are subject to a 6% excise tax. To avoid this, stop HSA contributions at least six months before you plan to enroll in Medicare or claim Social Security benefits.
The Impact of Social Security on Your HSA
Receiving Social Security benefits automatically enrolls you in Medicare Part A. If you wish to continue contributing to an HSA past age 65, you must delay both Medicare enrollment and claiming Social Security.
How to Maximize Your HSA Before Medicare
Since you cannot make new contributions after enrolling in Medicare, it's advantageous to maximize your HSA contributions beforehand. Individuals age 55 and older can make an additional $1,000 annual catch-up contribution.
Comparison: HSA vs. Medicare Medical Savings Account (MSA)
Understanding the differences between an HSA and a Medicare Medical Savings Account (MSA) is important:
| Feature | Health Savings Account (HSA) | Medicare Medical Savings Account (MSA) |
|---|---|---|
| Associated Plan | High-Deductible Health Plan (HDHP) | High-Deductible Medicare Advantage Plan |
| Contribution Source | You or your employer | Medicare deposits a fixed amount annually |
| Contribution Timing | Ongoing contributions while eligible | Annual, single deposit from Medicare |
| Tax Treatment | Tax-deductible contributions, tax-free growth, tax-free withdrawals for medical expenses | Deposits are tax-free. Tax-free withdrawals for qualified medical expenses |
| Eligibility | Not on Medicare; on a qualifying HDHP | Enrolled in an MSA Medicare Advantage plan |
| Fund Availability | Rollover funds from year to year; never expire | Unused funds roll over year to year |
What You Can Still Do with an Existing HSA
Even after you enroll in Medicare, you can still use your existing HSA funds for qualified medical expenses throughout your life.
- Qualified Medical Expenses: HSA funds can be used tax-free for deductibles, copayments, and coinsurance for all parts of Medicare.
- Medicare Premiums: You can use HSA funds to pay for Medicare Part B, Part D, and Medicare Advantage premiums. Note that Medigap premiums are not considered qualified unless taxed.
- Other Health Services: Funds can also cover costs for dental, vision, and hearing care that Original Medicare typically does not cover.
- Withdrawal After 65: After you turn 65, you can withdraw funds for any reason without the 20% penalty. Withdrawals not used for qualified medical expenses will be taxed as ordinary income.
Potential Penalties for Excess Contributions
Accidental contributions made after you enroll in Medicare are considered excess contributions and will incur a 6% excise tax annually. To correct this, withdraw the excess contributions and any earnings before the tax deadline.
Planning Your Transition from HSA to Medicare
A smooth transition requires careful planning:
- Monitor Eligibility: Be aware of when you or your spouse may become eligible for Medicare.
- Maximize Contributions: Contribute the maximum allowed before your Medicare enrollment.
- Halt Contributions Early: Stop contributions at least six months before you plan to enroll to avoid penalties related to retroactive coverage.
- Understand Post-Enrollment Use: Know which expenses your HSA can cover after you enroll in Medicare.
For additional details, refer to IRS Publication 969.
The Final Verdict
While new contributions to an HSA must stop once you enroll in Medicare, your existing HSA funds remain a valuable asset for managing healthcare costs in retirement. Careful planning ensures you can effectively use these savings for various medical expenses, including certain premiums.
