Medicare and HSA Contributions: Avoid the Tax Penalties

A Health Savings Account (HSA) is a great benefit individuals and families can use to help pay for their healthcare expenses. An HSA account is funded with pre-tax money, can be invested and grow tax-free, and can be spent on qualified medical expenses. However, once you’ve enrolled in Medicare, you are not eligible to contribute to an HSA. Doing so will cause you to incur tax penalties.

What Is a Health Savings Account?

A Health Savings Account (HSA) is available to anyone enrolled in a high-deductible health plan. Some employers even contribute funds to their employees’ accounts if they choose a high-deductible plan. Either way, the policyholder can also contribute tax-free dollars to the account, up to the annual limit.

Once the account is open, owners can choose to leave the funds as cash or invest them for potential growth. The investments grow tax-free, and earnings can be spent tax-free, as long as it’s on medically-approved items or services. The list of products you can purchase is quite extensive, but some of the items include:

• Medical bills
• Dental, vision, and hearing care
• Over-the-counter medications
• Sunscreen
• Batteries for medical devices
• First aid kits
• Humidifiers and air purifiers
• Hand sanitizer
• Medicated shampoos
• Insect repellent

If you use the funds for non-qualified expenses, you will pay tax, as well as a small penalty. However, once you are 65 years old, you can use the funds however you wish. If used for non-medical expenses, you'll only pay ordinary income tax.

When to Stop Contributing to Your HSA

While you can retain your HSA account when you transition to Medicare, you cannot actively contribute money to the account. This is true whether you are making a complete move to Medicare or if you are only enrolling in Part A. You must stop contributing the day before your Medicare coverage begins, which is always on the first of the month.

Sounds easy enough, right? For the most part, it is. This only becomes an issue when someone delays their Medicare enrollment. When that person decides to enroll, their Part A coverage will take a retroactive effective date of six months prior. (But it will never go back further than the first day of the month you became eligible.) In this case, it can make it harder to know when to stop contributing to your HSA.

The penalty won't be overwhelming if you recognize this error quickly. You’ll pay a 6% excise tax on any excess contributions. You can also correct the error by withdrawing the funds and avoid the excise tax altogether.

If you’re informed enough to plan ahead, you can calculate the amount you’re allowed to contribute for the year you plan to enroll in Medicare. The maximum amount will be prorated. For example, the maximum amount a family is allowed to contribute to an HSA in 2023 is $7,750. In addition, people aged 55 and older have a “catch-up” amount of $1,000. If you know your Medicare effective date will be July 1, you can only contribute half the maximum: $4,375.

Can an HSA Be Used to Pay Medicare Premiums?

If you’ve got a hefty HSA account, you’re at a huge advantage when it comes to your healthcare costs. So let’s talk about what you can use your HSA funds for once you’re enrolled in Medicare.

You can use your HSA to pay for Medicare Part A, B, C, and D premiums. You can also use it to pay any deductibles, copayments, or coinsurance costs. The only thing you cannot use it for is a Medicare Supplement (Medigap) premium.

Many beneficiaries have their premiums deducted from their Social Security benefits. However, you can still reimburse yourself for those premiums. Your HSA administrator will tell you how you can do this electronically. Keep all receipts and file them in case you are audited. 

If you have questions about Medicare or are ready to enroll, speak with a local Medicare agent. Our licensed advisors know the local markets and will help you find a plan that fits your healthcare needs. There is absolutely no cost to work with us, so let us help give you peace of mind that you’ve got the coverage you need.