Health Savings Accounts do not play nice with Medicare
If you have an Health Savings Account (HSA), you’ll want to make sure you understand how Medicare and HSAs work together. Misunderstanding the rules Medicare has around HSAs could result in you having to pay some hefty penalties.
Once you have any form of Original Medicare, whether that is Part A only, or both Part A and Part B, neither you nor your employer may contribute to your HSA.
Depending on your company, this could be a substantial amount of money that you receive each year from your employer and may affect whether coming off your company insurance and switching to Medicare is a wise financial decision for you.
The timing of when you decide to go on Medicare will affect when you must stop your HSA contributions, and it all boils down to your effective date for Medicare.
Official verbiage from Medicare.gov:
“If you’re 65 or older, your Part A coverage will start up to 6 months back from the date you sign up for Medicare.”
We need to unpack this a bit.
This means that your Part A effective date will go back 6 months from when you sign up for Medicare OR to your 65th birthday, whichever is closer.
There are 3 main scenarios to discuss here and 2 other important points.
Scenario #1 -You take Medicare at 65 years old
The first scenario is if you go on Medicare at your 65th birthday.
Your Medicare start date would be the first day of your 65th birthday month. Medicare effective dates are ALWAYS the 1st of the month, so, if your birthday is, let’s say April 30th, your Medicare start date would be April 1st.
The one exception to this is if your birthday happens to be the 1st of a month. If this is the case, your Medicare start date would be the 1st of the month prior to your 65th birthday month.
The last month that you or your employer are allowed to make an HSA contribution is the month before your Medicare start date.
In the case of your birthday being in April – March would be when you would need to stop HSA contributions so that you are not making them from April onward.
Can you cheat the system?
Now, you may think to yourself, “I’ll just outsmart the system and make my full year’s worth of HSA contributions before my birthday month.”
I like how your mind works, however, this is not allowed.
You cannot front-load your HSA contributions.
You can make the pro-rated contributions for the number of months you are allowed to contribute.
In this example, the maximum HSA contribution for a family in 2024 is $8,300 per year.
Also, if you are over 55, which in this case we are if we’re talking Medicare, you can can contribute an extra $1000 per year as what are called “catch up” contributions.
We would take $8,300, add the $1000, and divide by 12.
You are able to make $775 worth of HSA contributions PER MONTH that you are eligible to make contributions. This number includes your employer if they are also making contributions.
In our example, January, February, and March are the months we are eligibly to make contributions (3 months X $775 per month) for a total of $2,325 worth of HSA contributions may be made in this year by any combination of your own contributions and your company’s contributions on your behalf.
Scenario #1 – You take Medicare just after your 65th birthday
If you decide to take Medicare just after your 65th birthday, we’ll say you are 65 years old and 4 months, you need to remember that your Part A effective date will be 6 months back from when you sign up for Medicare OR your 65th birthday month, whichever is closer.
In the case of you taking Medicare 4 months after your 65th birthday, your 65th birthday month is closer than 6 months back, so your Part A effective date would again be April 1st in our little example here. Same as before, you would need to stop contributions before April 1st.
Scenario #3 – You take Medicare well after your 65th birthday
The last example covers if you delay Medicare past 65 because you are working and covered by your company’s plan. So, let’s say you are 67 years old and you are going to start Medicare during your birthday month – Again, April.
Things get a little tricky here.
Medicare.gov places your Part A effective date as 6 months back from when you sign up for Medicare. It is NOT 6 months back from your birthday month.
If you know you will lose coverage from work on April 1st, you will likely want to start the Medicare sign up process in January. This means that if you complete that sign up process in January, your 6 month look back puts you all the way back at July of the previous year as to when you need to have stopped making HSA contributions.
If you don’t stop at that time, things get complicated with your taxes, assuming you already filed for the previous year.
This is one of the many reasons we ALWAYS recommend working with an agent around your Medicare decisions – especially as it relates to your HSA.
Similar to the previous scenarios, your previous year HSA contributions would be prorated for the number of months you are allowed to make contributions. You cannot front-load your HSA.
There are three other important points that come along with HSAs
If you retire before 65, can you still contribute to an HSA until you reach 65 and go on Medicare?
The answer is yes, as long as you are covered by a qualified High Deductible Health Plan (QHDHP).
If you are covered by an active QHDHP, you can continue to contribute to your HSA up until you go on Medicare.
If you are not covered by an active QHDHP, you cannot continue making contributions.
What if my spouse is older or younger than me and one of us goes on Medicare while the other stays on our high deductible plan through work?
If this is the case, the person in your household who is still covered and the primary insured through the High Deductible Health Plan through work may continue contributing to the HSA – as well as that employer, if applicable. Now, the contribution amount depends on how your work health plan is set up for you.
There is the individual HSA contribution limit per year and a higher, family limit. If you are on a family plan through work, either because you and a dependent are covered on that plan or you and your spouse are covered, and your spouse just happens to also have Medicare, then you may continue contributing at the higher, family HSA limit.
This is all based on the number of people in the family covered by the HDHP.
If your health insurance plan through work is set up to only cover you, as an individual policy and not a family policy because you do not have dependents on the plan and your spouse is ONLY on Medicare and no longer also on your work plan, then you may only contribute the individual HSA limit, not the family limit.
How may you use your HSA dollars once you are on Medicare
You’ve saved and accumulated these dollars, so how can you spend them to avoid penalties?
The good news is that HSA dollars may be used for qualified medical expenses, just like they were previously. However, there is one exception that many people aren’t aware of.
HSA dollars are your dollars and may be used for your Part B premiums, your Part D premiums & copays, and your Medicare Advantage plan premiums and copays. They can be used for dental and vision premiums and copays.
HSA dollars may NOT be used to pay for Supplement plan, also known as Medigap plan premiums. This just means Medicare Supplement plans are not considered qualified medical expenses, and you would be taxed on HSA dollars used to pay for Supplement plans.
You can use your HSA dollars to pay for the Part B deductible if you are on a supplement plan. You can use your HSA dollars to pay for the copays of say a Plan N and you can use your HSA dollars to pay the deductible of a High Deductible Plan G.
HRAs and FSAs
The last things to cover in this article are the Flex Spending Accounts (also known as FSA’s) and the Health Reimbursement Arrangements (HRAs).
FSAs and HRAs do not follow the same Medicare rules as HSA’s.
Someone who is Medicare eligible is able to have an FSA and contribute into an FSA while on Medicare parts A or B and actively employed.
Someone receiving an HRA is usually able to use those dollars for Supplement plan premiums.
Wrapping it in a bow
Hopefully, this has shed some light on how Medicare and HSA’s work together. Whether you just recently started contributing to an HSA or you’ve been diligently contributing to an HSA for years, the government has specific stipulations around what you can and cannot do with your HSA.
If you have other questions around your HSA, reach out and we are happy to help.
