Medicare and Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) have become a popular tool for managing healthcare expenses, especially for individuals with high-deductible health plans. These accounts offer triple tax advantages and can be a powerful way to save for future medical costs, including those that arise in retirement. But things get more complicated when you become eligible for Medicare.

Many people are surprised to learn that enrolling in Medicare affects their ability to contribute to an HSA. This can lead to unintended tax penalties and missed planning opportunities if not addressed ahead of time. If you're nearing Medicare eligibility and currently have an HSA - or plan to keep contributing - it’s important to understand how Medicare enrollment changes the rules. In this article, we’ll explain what you need to know about HSAs and Medicare so you can make smart, informed decisions.

What Is an HSA and Who Can Contribute?

A Health Savings Account (HSA) is a tax-advantaged savings account designed for people enrolled in a high-deductible health plan (HDHP). The idea behind HSAs is simple: you set aside money before taxes to pay for qualified medical expenses, and the funds can grow tax-free. When used for eligible healthcare costs, distributions from the account are also tax-free.

To contribute to an HSA, you must meet the IRS eligibility criteria. First, you must be enrolled in a qualified HDHP. Second, you cannot be enrolled in any other health insurance that disqualifies you - including Medicare. You also cannot be claimed as a dependent on someone else’s tax return.

For 2025, the IRS allows individuals to contribute up to $4,300 to an HSA ($8,550 for families), with an additional $1,000 catch-up contribution allowed for people aged 55 and older. These contributions reduce your taxable income, which is a key reason HSAs are attractive for long-term savings.

What Happens to HSA Eligibility When You Enroll in Medicare?

Once you enroll in Medicare - whether it's Part A, Part B, or both - you are no longer eligible to contribute to an HSA. This rule applies regardless of whether you’re still working or your employer offers HSA-compatible insurance. Even enrolling in only premium-free Medicare Part A ends your ability to contribute.

Many people working past age 65 assume they can enroll in Medicare Part A and still contribute to their HSA, especially since Part A doesn’t usually have a premium. Unfortunately, that assumption can lead to trouble. As soon as you are enrolled in any part of Medicare, the IRS considers you ineligible for HSA contributions, and any additional funds added after that point are considered excess contributions.

If you do accidentally contribute after enrolling in Medicare, you’ll need to withdraw those excess funds, and you may face taxes and penalties unless corrected promptly. In the year you enroll, your contribution limit must also be prorated based on how many months you were eligible before Medicare coverage began. For example, if you enroll in Medicare in September, you can only contribute to your HSA for eight months of the year.

The 6-Month Retroactive Medicare Rule

There’s another Medicare rule that catches many people off guard: retroactive Part A coverage. When you apply for Medicare after age 65, your Part A coverage is automatically backdated up to six months, so long as it doesn’t begin before your 65th birthday. This retroactive enrollment can have serious tax implications if you’ve been contributing to your HSA during those retroactive months.

Let’s say you apply for Medicare in June, and your Part A is backdated to January 1. If you made HSA contributions between January and June, those contributions are now considered excess because you were technically enrolled in Medicare during that time. You’ll need to withdraw the excess contributions and any earnings on them or risk a 6% excise tax on the excess amount.

To avoid this, most advisors recommend stopping HSA contributions at least six months before applying for Medicare, especially if you plan to enroll after age 65. Being proactive with this timing can help you avoid unexpected penalties and headaches during tax season.

Using HSA Funds After You’re on Medicare

The good news is that while you can’t contribute to an HSA once you’re on Medicare, you can still use the funds in your account for qualified expenses. In fact, HSAs can be a great way to pay for out-of-pocket healthcare costs in retirement.

Once enrolled in Medicare, you can use HSA funds to pay for:

• Medicare Part B and Part D premiums

• Medicare Advantage (Part C) premiums

• Copayments, coinsurance, and deductibles

• Dental, vision, and hearing services not covered by Medicare

• Prescription drug costs

One important caveat: you cannot use HSA funds to pay for Medigap premiums. The IRS specifically excludes these supplemental insurance premiums from the list of qualified medical expenses.

If you use HSA funds for non-medical expenses after age 65, you won’t be hit with the 20% early withdrawal penalty, but you will owe regular income tax on the amount withdrawn. Before age 65, non-qualified withdrawals are subject to both income tax and the 20% penalty.

Strategies for Transitioning from HSA to Medicare

If you’re approaching Medicare eligibility and want to avoid mistakes, a few key strategies can help ensure a smooth transition:

First, plan when you’ll stop contributing to your HSA. If you’re planning to retire and apply for Medicare at 65, your last HSA contribution should be made the month before your 65th birthday. If you plan to delay Medicare enrollment, stop contributing six months before the date you apply to account for the retroactive coverage rule.

Second, communicate with your employer or HR department to confirm when your group health plan ends and how it coordinates with Medicare. If your employer offers a high-deductible health plan with HSA eligibility, you may be able to delay Medicare and keep contributing—but only if your employer has 20 or more employees and you’re still actively working.

Third, consider whether you want to enroll in Medicare Part A at 65 if you’re still working and contributing to an HSA. While Part A is premium-free, enrolling will disqualify you from future contributions. Some people choose to delay Part A entirely until they stop working to keep making HSA contributions. If you do this, be sure to delay all parts of Medicare and coordinate closely with Social Security to avoid automatic enrollment.

Finally, consult a Medicare advisor or tax professional who understands these rules. They can help you calculate prorated contribution limits, correct any excess contributions, and time your Medicare application in a way that aligns with your financial goals.

Special Considerations for Spouses

If you’re married and your spouse is not enrolled in Medicare, there are a few additional planning opportunities. A spouse who remains HSA-eligible can continue making contributions to their own account - even if you’re on Medicare. You can still use both of your HSA funds to pay for each other’s qualified medical expenses, so long as the expenses are for someone covered under your HDHP.

Couples can also coordinate contributions strategically. For example, if one spouse is no longer HSA-eligible due to Medicare enrollment, the other spouse may be able to increase their contributions, including the $1,000 catch-up if they are over age 55 and have their own HSA.

Even if only one spouse is contributing, HSAs can remain a valuable shared resource in retirement. Proper planning ensures that both partners maximize the benefits without running afoul of IRS rules.

Get Your Medicare Questions Answered

Health Savings Accounts are one of the most powerful tools available for managing healthcare costs, but their benefits are closely tied to timing. Once you enroll in any part of Medicare, you can no longer contribute to an HSA, and failing to plan for this change can lead to penalties and missed savings.

The key is to understand how Medicare enrollment (especially the retroactive Part A rule) affects your eligibility. By stopping contributions at the right time, prorating your final year’s contributions, and using your funds wisely in retirement, you can continue to benefit from your HSA long after you’ve stopped contributing.

Whether you’re planning to retire at 65 or continue working, take time to evaluate your options. Speak with a Medicare advisor at Local Medicare Specialists, coordinate with your employer, and plan ahead. With the right strategy, you can avoid costly mistakes and make the most of your healthcare dollars for years to come.