Key Takeaways:
HSA accounts are a way to pay for certain medical expenses tax free.
With an employer plan, you can contribute to an HSA before you pay taxes.
You must stop contributing to an HSA account once your Medicare starts. Please see the “6-month rule” below.
What Is a Health Savings Account (HSA)?
Health Savings Accounts (HSA) is a type of savings account designed to help people with high-deductible health insurance plans (HDHPs) pay for health care costs. It allows individuals to use HSA funds tax-free to pay for medical expenses.
An individual can contribute to their HSA by payroll deduction or manual deposits.
The funds in the account can be used to pay for eligible medical expenses, including deductibles, copayments, prescriptions, certain premiums and other out-of-pocket medical costs. The HSA has tax advantages that reduce medical costs to the consumer.
Are HSA Accounts Tax-free?
Health Savings Accounts’ funds you contribute are tax deductible or using pre-tax contributions deducted from your paycheck. Distributions from the HSA account can be tax free if used to cover qualified medical expenses.
You can withdraw money from your HSA anytime, but if funds withdrawn are NOT used towards a qualified medical expense, those funds will be taxed as ordinary income that calendar year and the IRS will impose a 20% penalty.
To limit excess contributions, there is an annual contribution limit for HSA accounts. This limit is adjusted annually. Contribution limits varies depending on your age and whether you have individual or family coverage.
How Do I Qualify For an HSA Contribution (and Tax Deduction)?
According to the IRS Publication 969, you must meet the following requirements:
• You are covered under a high deductible health plan (HDHP), on the first day of the month.
• You are not eligible for other coverage from an insurance company except what is allowed under Other health coverage (see below).
• You do not yet have Medicare coverage.
• You can’t be claimed as a dependent on someone else’s tax return.
Upon meeting these requirements, you are eligible for tax-deductible HSA contributions, even if your husband or wife has non-HDHP family coverage, provided your spouse’s coverage doesn’t cover you.
Also, you may be eligible for an HSA even if you receive hospital care or medical services under any law administered by the Secretary of Veterans Affairs for a service-connected disability.
Employer contributions to your HSA may be excluded from your gross income taxes. The contributions remain in your account until you use them. The interest or other earnings on the assets in the account are tax-free.
What Is Other Health Coverage When Qualifying For an HSA Contribution?
You may be eligible for an HSA even if your spouse has non-HDHP coverage, provided you aren’t covered by that plan.
You can have insurance in addition to your health plan for the following items:
• Liabilities incurred under workers’ compensation laws, tort liabilities, or liabilities related to ownership or use of the property.
• A specific disease or illness. (like cancer protection)
• A fixed amount per day (or other period) of hospitalization. (a hospital indemnity plan)
You can also have coverage (whether provided through insurance or otherwise) for the following items:
• Accidents.
• Disability.
• Dental care.
• Vision care.
• Telehealth and other remote care
What Are Qualified Medical Expenses?
Qualified medical expenses are expenses that would generally qualify for the medical and dental expenses deduction. They include expenses for diagnosis, cure or mitigation, treatment or prevention of disease and more.
This is explained in further detail in the IRS Pub. 502, Medical and Dental Expenses.
Qualified expenses are medical out-of-pocket expenses not reimbursed by other insurance or other sources, including:
• Medical plan deductibles
• Copay and coinsurance
• Dental and vision expenses
• Insulin and diabetic supplies
• Over-the-counter drugs and medicine with a prescription drug plan
In addition, certain insurance premiums can be expensed, including premiums for:
• enrolling in Medicare Part B and Medicare Part D (prescription drug coverage)
• enrolling in Medicare Part C
For HSA purposes, expenses incurred before you establish your HSA are not qualified medical expenses. State law determines when an HSA is established.
If, under the last-month rule, you are eligible for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are considered to be qualified.
Qualified medical expenses are the expenses incurred by the following persons:
1. You (self-only coverage); both you and your spouse.
2. All dependents you claim on your tax return.
3. Any person you could have claimed as a dependent on your return except that:
A) The person filed a joint return;
B) The person had gross income of $4,400 or more; or
C) You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s 2022 return.
Insurance premiums
Insurance premiums are not qualified medical expenses unless the premiums are for any of the following:
• Long-term care insurance.
• Health care continuation coverage (such as coverage under COBRA).
• Health care coverage while receiving unemployment compensation under federal or state law.
• Medicare coverage and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).
Can I Keep My HSA Account When Enrolled in Medicare?
You can keep your Health Savings Account (HSA) account after your Medicare enrollment, but there are some restrictions.
Once you enroll in Medicare, you are no longer eligible to contribute to an HSA account. However, after your Medicare enrollment, you can still use the funds in your HSA to pay for medical expenses tax-free. This includes deductibles, copayments, and coinsurance for Medicare-covered services. You can also use the funds to pay the Medicare Part B premium.
You can also use the funds in your HSA account to pay for certain medical expenses not covered by Medicare, such as vision and dental care, hearing aids, and long-term care expenses.
Lastly, if you’re already enrolled in Medicare and you continue to contribute to an HSA account, those contributions will be subject to tax penalties. See the 6-month rule below.
What is the HSA Medicare 6-month Rule?
The HSA 6-month rule is about when you should stop HSA contributions when you enroll in Medicare. Depending on when you enroll in Medicare, you may want to stop HSA contributions up to six months prior to your Medicare enrollment application.
If you delay Medicare enrollment until after your Initial Enrollment Period or after your birthday month, Medicare Part A will start retroactive to your application. In this case, your Medicare Part A retroactive coverage start date will be either 6-months prior to your application month or the first day you were eligible for Medicare, whichever is soonest.
That means you must stop HSA contributions 6 months before you enroll in Medicare IF you enroll in Medicare more than 6 months after your Medicare initial enrollment date. In this case, your Part A start date will be different than your Part B start date because Part B does not start retroactive to your application to enroll in Medicare.
The 6-month rule only pertains to those who delay Medicare enrollment. It does not pertain to those who start Medicare on their Initial Enrollment date. You simply need to stop contributing to your HSA prior to your Medicare Part A start date.
Can I Use HSA to Pay Medicare Premiums?
Your Medicare premiums are paid directly out of your Social Security benefits upon
enrolling in Medicare – but you can withdraw money tax-free from your Health Savings Account (HSA) to reimburse yourself for those expenses.
Continue funding and continue contributing to your HSA. After you turn 65 and enroll in Medicare, you can use HSA funds tax-free to reimburse for Medicare Part B and Part D premiums, as well as premiums for Medicare Advantage plans and other out-of-pocket medical expenses.
You can reimburse yourself for any eligible expenses you have incurred since you opened the HSA. But technically, Social Security benefits are paying your Medicare costs of premiums.
Can I Use My HSA to Pay for Someone Else?
As mentioned above, you can use your Health Savings Account (HSA) to pay for eligible medical expenses for your spouse and tax dependents, even if they are not covered under your high-deductible health plan (HDHP).
But remember, you can’t use your HSA to pay for medical expenses for someone who is not your spouse or tax dependent, even if you have incurred those expenses as an account holder. For example, you can’t use your HSA to pay for medical expenses or health insurance for a friend or other family member who is not your tax dependent.
Can I Use HSA to Pay Medicare Supplement Premiums?
No, you can’t use Health Savings Account (HSA) funds to pay for Medicare Supplement (Medigap) premiums. Medigap policies are designed to cover health insurance costs that are not covered by Original Medicare (Part A and Part B), and they are not considered qualified medical expenses for HSA purposes.
What is an MSA Plan?
You may also consider Medicare health savings accounts (MSA plans), which combine a high-deductible insurance plan with a Medicare medical savings account. They are offered by private insurance companies.
These plans are similar to Health Savings Account Plans available outside of Medicare. Medicare MSA plans cover Medicare services that all Medicare Advantage Plans must cover. Also, some Medicare MSA plans may cover some extra benefits like dental, vision, and hearing services.
To learn more about what Medicare covers, check out this blog post on “What does Medicare Cover?”
Sources:
https://www.healthcare.gov/glossary/health-savings-account-hsa/
https://www.irs.gov/publications/p969
https://www.optum.com/content/dam/optum/consumer-activation/unknown/HSA_and_Medicare.pdf
https://www.forbes.com/health/medicare/medicare-using-your-hsa-for-medicare/
https://www.askcip.com/resources/hsa-medicare/
https://www.fidelity.com/viewpoints/wealth-management/hsas-and-your-retirement
Matthew Claassen
Matthew Claassen, CMT and CEO of Medigap Seminars Insurance Agency. Medigap Seminars is an award winning premier national Medicare Insurance Brokerage, ranked among the top in the U.S.A. Matthew is considered a leading national expert on Medicare and Social Security. Mr. Claassen is a distinguished member of the Forbes Business council, an invitation only organization of business leaders and entrepreneurs. He and his team have received awards from many of the countries largest insurance companies including Mutual of Omaha, Aetna, Humana, Cigna, United American, United Healthcare and others. His videos have become the most popular Medicare educational videos on YouTube with millions of views. As a financial analyst Matthew lead a team of researchers to win the 2009 Best Equity Research & Strategy Award from The Technical analysis magazine.
