Medicare and HSA – Medicare and HSAs are two important topics that people often have questions about. In this blog post, we will give you a brief overview of Medicare and HSAs, including when you need to stop contributing to your HSA and what penalties you could face if you contribute for too long.
What is an HSA?
HSA is short for Health Savings Account. If you are enrolled in a high-deductible health insurance plan, you are allowed to open an HSA. If you have your medical insurance through an employer, sometimes they offer to open and contribute to an HSA on your behalf. If they don’t, you are free to open an account with any company you choose.
Once you’ve opened a Health Savings Account, you can use your income to contribute funds to the account. Any contributions you make will reduce your taxable income. The funds in the account can be left as “cash,” and you’ll be given a debit card that is linked to the account. If the funds are available as cash, you can use the debit card for any medically-approved services or products.
The list of what you’re allowed to purchase with an HSA is quite extensive. Some products include:
- All medical bills (surgeries, diagnostic tests, doctor’s exams, etc.)
- Dental care
- Over-the-counter medications
- Batteries for medical devices
- Hand sanitizer
- Humidifiers and air purifiers
- Insect repellent
- First aid kits
- Feminine hygiene products
- Medicated shampoos
The full list of reimbursable products is lengthy, but as you can see, there are probably things on that list you might not have thought of!
Instead of keeping your funds as cash, you can also choose to invest them. The investment choices you have for your HSA will depend on which company you choose as your HSA provider. Your investments will grow tax-free.
If you use the funds for non-qualified expenses, you will pay tax, as well as a penalty. However, once you turn 65, you are allowed to use the fund however you wish. If used for non-medical expenses, you’ll pay ordinary income tax.
When to Stop Contributing to Your HSA
You can not have an HSA if you are enrolled in any part of Medicare. Even if you are only enrolling in Part A and delaying Part B, you still cannot have an HSA. You are allowed to contribute up the start of your coverage, which always begins on the first day of the month.
If you delay enrollment, your Part A coverage will be retroactively effective. It will go back up to six months from when you enrolled, but never earlier than the first month you were eligible. For that reason, some people could have a harder time determining when to stop contributing to their HSA.
What happens if you continue contributing to your HSA once you’re on Medicare? As long as you recognize the error and discontinue your contributions, the penalty will not be overwhelming. A 6% excise tax will apply to the excess contributions. Once you become aware that you contributed to your HSA too long, you can withdraw some (or all) of the funds to avoid the excise tax.
If you’re planning ahead, you’ll need to calculate the amount you can contribute for the year in which you’re going to enroll in Medicare. Your maximum amount will be prorated. To calculate that amount, simply add the current IRS HSA maximum and the catch-up amount. Divide that number by 12 and then multiply it by the number of months you will not be on Medicare. That’s how much you can contribute without paying excise tax.
Can I use my HSA to pay Medicare premiums?
When you are a Medicare beneficiary, you can no longer contribute to your HSA. But isn’t that what you were saving for in the first place? Having a hefty HSA account during your retirement is an extremely beneficial thing to help pay for healthcare costs.
So, when it comes to Medicare, what can you use your HSA for?
You can use your HSA to pay for premiums associated with Parts A, B, C, and D (though Part A is premium-free for most people). You can also use it for copayments and coinsurance costs. You cannot, however, use it to pay for your Medicare supplement (Medigap) premiums.
Even if your Medicare premiums are deducted from your Social Security benefits, you can still reimburse yourself for any premiums paid. As with any expenses prior to Medicare coverage, you should keep receipts in case of an audit. You’ll likely have an online account where you can transfer money from your HSA to your checking or savings account.
If your 65th birthday is approaching, it’s never too early to start thinking about your Medicare options. Now that you know how Medicare and HSAs work together, you can start mapping your journey into the Medicare program.