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Health Savings Accounts help pay for deductibles, coinsurance, copayments, and other medical expenses. Once the money goes into the Health Savings Account account, you can withdraw it for any medical expense, tax-free. Additionally, you can earn interest, your balance carries over each year, and this can become an investment for a retirement fund.
The rule reads that you should stop contributing to your Health Savings Account (HSA) six months before you're enrolled into Medicare. This is because if you continue to contribute and your Medicare coverage becomes retroactive, you may have to pay tax on those contributions. You cannot be enrolled in Medicare Part A or B, so you have to disenroll or reject both if you wish to continue to contribute to your HSA.
More key facts:
It's simplest to lay out the facts followed by an example to best help taxpayers and their advisers apply the nuances to specific situations:
- HSA contributions (including employer-provided ones) are disallowed when other coverage is in place, including Medicare Part A. Workers can still enroll in HSA-eligible plans and use funds already in HSAs for eligible expenses; they just can't contribute further once they are enrolled in Medicare.
- Workers may opt to participate in an HSA-eligible plan after enrolling in Medicare, typically because it's the only plan available to them at their workplace or because the lower premiums justify the choice, but they cannot contribute additional funds to their HSA nor can they accept contributions from their employer without penalty.
- There is a six-month lookback period (but not before the month of reaching age 65) when enrolling in Medicare after age 65, so a best practice is for workers to stop contributing to their HSA six months before the month they apply for Medicare to avoid penalties. Note that the month of application is what is used to calculate the six-month lookback, not the month the applicant wishes to begin benefits. See the examples below for more on this.
- Funds already in the HSA can still be used for qualified medical expenses upon enrollment in Medicare, including to reimburse taxpayers for Medicare premiums (but not premiums for Medicare supplemental insurance, aka "Medigap") as well as to pay for long-term-care costs and insurance premiums up to certain limits.
- If a worker is already collecting Social Security upon turning age 65, he or she will be automatically enrolled in Medicare and henceforth no longer be able to contribute to his or her HSA. The only way to opt out of this would be to rescind the Social Security election (within 12 months) and pay back all benefits received to date.
- A worker enrolling in Social Security upon reaching full retirement age will automatically be enrolled in Medicare Part A and consequently cannot make HSA contributions.
