With a Health Savings Account (HSA), there are certain rules that govern whether or not you can contribute to the account. One requirement is that you must be enrolled in a qualified high deductible healthcare plan (HDHP). As people get older and qualify for Medicare, HSA owners may be wondering how Medicare affects their HSA. Here are some things you should know about Medicare and HSA contributions.
What is a Health Savings Account (HSA)?
An HSA is a tax-advantaged benefit account that allows people enrolled in a qualified HDHP to set aside money in order to pay for out-of-pocket healthcare expenses. HSAs are owned by the participant, who can enjoy the triple tax advantage:
- Contributions are tax-free
- Distributions used for eligible expenses are tax-free
- Interest and investment income is earned tax-free
Another advantage is that the HSA owner can use the account as a supplemental retirement fund after age 65. Of course, the owner can continue using the account for medical expenses, or choose to spend the funds on other expenses without penalty. However, if the HSA is used to pay for non-eligible expenses, those distributions are taxable as income.
What is Medicare? Medicare is a federal health insurance program run by the Centers for Medicaid and Medicare Services. Medicare is available for:
- People aged 65 and older
- Those under 65 with disabilities who have been receiving Social Security Disability Insurance (SSDI) for 24 months
- People with End-Stage Renal Disease (ERSD)
There are four parts to Medicare:
- Part A, (Hospital Insurance), covers inpatient hospital care, inpatient stays in a skilled nursing facility, hospice and home health services
- Part B, (Medical Insurance) covers doctors and clinical lab services, outpatient and preventative care, home health care, screenings, surgical fees and medical supplies, and physical and occupation therapy
- Part C, (Medicare Advantage), combines Part A (hospital insurance) with Part B (medical insurance) into one plan. Medicare Part C is offered by private insurance companies that contract with Medicare. Most Part C plans can be combined with Part D (Prescription Drug Coverage).
- Part D, (Prescription Drug Plan), is a standalone plan that helps cover the cost of prescription drugs. It may also lower prescription drug costs and prevent higher future costs. Medicare Part D may be added to Original Medicare (Parts A and B), some Medicare Cost Plans, some Medicare Private-Fee-for-Service Plans, and Medicare Medical Savings Account Plans. Part D plans are offered by insurance companies and other private Medicare-approved companies.
Medicare and HSA Contributions
So, how does Medicare affect HSA contributions?
With Medicare and HSAs, there are a few limitations. First and foremost, in order contribute to an HSA, the HSA owner must be enrolled in an HDHP. Therefore, when the HSA owner starts receiving Medicare Part A and Part B coverage, he or she must stop making contributions to the HSA. The owner may, however, continue to use the HSA balance for out-of-pocket medical expenses, including deductibles, premiums, copayments and coinsurance, or take a distribution for non-medical expenses.
Another thing to consider is that premium-free Part A coverage begins 6 months back from the date a person applies for Medicare, but no earlier than the first month eligibility began for Medicare. In order to avoid a tax penalty, consider stopping HSA contributions at least 6 months before you apply for Medicare.
If the HSA participant wants to continue making HSA contributions, then he or she should not apply for Medicare, Social Security or Railroad Retirement Board benefits.
Will changes be coming soon?
Changes to the Medicare and HSA contributions policy may be coming as soon as 2019. According to ECFC, the 2019 budget proposed by President Trump’s administration would allow Medicare beneficiaries with an HDHP and HSA to make tax-free contributions.
DataPath Administrative Services offers HSA management services, in addition to FSA, HRA, COBRA, and Payroll services.