A Health Savings Account can be an important and effective tool to help navigate the increasing costs of medical care. Designed to help incentivize individuals toward high-deductible health plans (HDHPs), Health Savings Accounts (HSAs) provide tax-free incentives for costs related to qualified medical expenses.
There are approximately 31 million open HSAs in the United States, covering more than 60 million Americans. While Americans of all ages find relief in utilizing an HSA, the accounts are particularly popular among younger individuals in their 30s and those nearing retirement age. As individuals move toward retirement age, it becomes increasingly more important to understand HSAs and how they might be affected should you enroll in Medicare.
The high-deductible health plan and the Health Savings Account
Individuals must be enrolled in a high-deductible health plan to qualify for a Health Savings Account. As its name sounds, HDHPs have a high deductible that enrollees must meet before receiving coverage. In most instances, insureds will be responsible for the entire “allowed amount” or “negotiated rate” until they reach the deductible. Individuals may use their HSA funds anytime, including before or after they meet their deductible. These funds can be used for qualified medical expenses, such as copayments for medical appointments, eligible over-the-counter drugs, preventative and diagnostic testing, and more.
Eligible individuals fund HSAs through pre-tax dollars, which can grow due to earned interest, investments, and in some cases, may even be supplemented by an employer match. Any interest earned is also tax-free to enrollees, with unspent funds growing year-over-year and rolling over to the following year, allowing individuals to develop a tax-free medical care fund. Health Savings Accounts are also transferrable, meaning you can bring the account with you if you change jobs, though often for a small fee. Once you qualify and open a Health Savings Account, you can spend funds from the account on qualified healthcare expenses, regardless of your current healthcare coverage.
Using a Health Savings Account while on Medicare
Medicare healthcare coverage, including Original Medicare, Supplemental coverage, or Advantage plans, does not qualify as a high-deductible health plan. As such, Medicare beneficiaries do not qualify for Health Savings Accounts. However, as the funds in the HSA belong to the individual and are not tied directly to a specific plan, if individuals enrolling in Medicare have a Health Savings Account from previous employment or healthcare coverage, they can still use the funds from that account. Beneficiaries, however, cannot make new Health Savings Account contributions or open a new HSA, and enrolling in any Medicare coverage, even enrolling in just Part A Hospital Insurance, is enough to disqualify an individual from contributing to an HSA.
Medicare beneficiaries may use HSA funds to pay for qualified medical expenses or reimburse themselves if they paid for it otherwise. In addition, funds from a Health Savings Account can help to pay for Medicare premiums, including Part B, Part D, and Medicare Advantage premiums, but cannot be used to pay for premiums for Medicare Supplemental – or Medigap – plans. Regardless, the beneficiary can still use the funds to pay for other important Medicare costs such as copayments, deductibles, and coinsurance amounts.
Additional considerations for a Health Savings Account after age 65
Continued use of HSA funds is not the only benefit of having an account after 65. Individuals who choose to delay Medicare coverage for reasons such as having other creditable healthcare coverage can continue to contribute to their Health Savings Account tax-free to help grow their account for when they make the transition to Medicare. As long as those individuals are not receiving Social Security payments, they can continue to contribute until they move to Medicare.
However, individuals who choose to delay Medicare coverage and continue contributing to Health Savings Accounts after age 65 should make every effort to plan ahead and stop contributing six months before their expected Medicare enrollment date. Centers for Medicare and Medicaid Services (CMS) regulations automatically grant individuals who enroll in Medicare after age 65 six months of retroactive coverage to ensure there is no lapse in coverage during the transition. These six months would disqualify the individual from contributing to the HSA, resulting in tax penalties if any contributions made during that time are not reversed.
Once at age 65, Health Savings Accounts do not need to be used exclusively on qualified medical expenses. Individuals can withdraw funds from an HSA account for qualified medical expenses as usual and use them for non-qualified expenses without the assessed 20% penalty. However, any funds not used for qualified medical expenses will be subject to income tax based on the tax bracket the individual falls into.
Let us help you make an informed decision
Medicare can be complicated, and making an informed decision about coverage is important. Speaking with a licensed insurance agent can help mitigate confusion that may arise during a critical decision-making period. Contact Aevo Insurance Services, a division of Brown & Brown Absence Services Group, to speak with an agent about your Medicare options. Our guidance extends through every step of the enrollment process, starting with helping select a Medicare plan that meets your unique medical and financial needs.
Nothing herein is considered legal advice. Nothing in this post is intended as advice or a suggestion to elect or not elect to claim benefits of any kind, including Social Security benefits, nor is it intended as financial advice in any way. The decision to claim benefits is a personal one that is contingent upon each individual’s unique circumstances.
We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all your options.