Health savings accounts and Medicare: 6 things to know

Are you thinking about enrolling in Medicare at age 65? There are a few implications for your Health Savings Account (HSA). Here's what to know.

A growing number of Americans are appreciating the value of a HSA as a tax-advantaged long-term savings opportunity. That’s because these accounts offer savers an opportunity to build balances to reimburse qualified health-related expenses in retirement. A number of research organizations publish annual surveys showing the amount of money that retirees will spend on medical coverage and services. Those estimates exceed $270,000 for a couple retiring at age 65 this year.¹

Yes, at age 65 you can enroll in Medicare. But Medicare’s not free, and it doesn’t cover as much as you may be used to if you purchase comprehensive benefits through your employer. Here are six things to know about HSAs and Medicare that will be helpful to understand before you turn age 65.

1. Medicare enrollees can’t fund their HSAs

Once you enroll in any Part of Medicare, you can no longer contribute to your HSA. That’s true even if you remain active at work and are enrolled in your company’s HSA-qualified medical plan. Medicare doesn’t offer an HSA-qualified plan. When you’re enrolled in more than one coverage, all plans must meet the federal definition of HSA-qualified.

2. You’re not required to enroll in Medicare at age 65, unless... 

You’re eligible to enroll in Medicare (Medicare uses the word entitled) when you turn age 65. You may not be required to enroll then, however. If you’re collecting Social Security of Railroad Retirement benefits and are age 65 or older, you’re automatically enrolled in Part A and Part B (though you can defer Part B). The longer you delay these retirement benefits, the longer you may be able to remain eligible to fund your HSA.

If you work for a company with 19 or fewer employees and remain covered on the group medical plan, your employer’s insurer may require you to enroll in Part A and Part B as a condition of remaining on the group plan. That’s because small companies’ employees’ claims are submitted to Medicare first, then to the group plan. This process can reduce claims paid on the group plan. 

Note: Not all insurers require working seniors to enroll in Medicare. Be sure to check with your company’s insurer.

3. Your Medicare enrollment disqualifies only you

Medicare issues individual policies only. If you’re a working senior covered by your employer’s HSA-qualified plan and also enrolled in Medicare, you can’t fund your own HSA. If you cover one or more family members, they may be eligible to open and fund a HSA – even though you’re the plan subscriber.

For example, you’re age 65 and working for a small company whose insurer requires you to enroll in Part A and Part B. You also cover your spouse and 23-year old child (who’s no longer your tax dependent) on your medical plan. Both your spouse and your child can open and fund their own HSAs if they’re otherwise eligible because they can’t draw benefits from your Medicare coverage. Both can fund their accounts to the family limit ($7,200 in 2021, plus another $1,000 catch-up contribution if your spouse is age 55 or older in 2021). And your spouse can reimburse all your qualified medical expenses (except your Medicare premiums) tax-free from his or her account.

4. You can still reimburse qualified expenses tax-free

When you’re no longer HSA-eligible, you can’t make additional contributions to your account. But you can withdraw funds tax-free to reimburse your qualified expenses for the rest of your life until you exhaust your balance. This is an important concept. Being HSA-eligible refers to your opportunity to fund a HSA. You don’t need to be HSA-eligible to withdraw balances from your account without tax implications when you reimburse qualified expenses.

5. You can reimburse Medicare premiums tax-free

Many seniors believe that they prepay their Medicare premiums with payroll taxes during their working lives and are therefore surprised to learn that they must pay monthly premiums for Medicare coverage. Payroll taxes prepay the Part A premium. Part B has a premium that rises with income. Most enrollees pay $148.50 per month, or about $1,800 annually. Part D (prescription-drug coverage) is an optional plan sold by private insurers at an average cost of about $43 monthly, or about $500 annually. That’s $2,300 in premium costs alone. 

You can pay those premiums (both you and your spouse’s) directly from your HSA with pre-tax funds if you are age 65 or older (if your spouse is older, you can’t reimburse your spouse’s Medicare premiums tax-free until you turn age 65). Your Part B premium is deducted from your Social Security check. You can request a check from your HSA administrator to reimburse you for that expense. You can arrange to have your Part D premium deducted from your Social Security check (in which case you can follow the Part B reimbursement process) or pay it directly from your HSA.

Premiums for Medicare Supplement plans are not a qualified expense. If you withdraw funds from your HSA to reimburse these premiums, the distribution is included in your taxable income. But premiums for Medicare Advantage plans (a private alternative to Medicare), if any, are qualified for tax-free distributions.

6. You can reimburse expenses not covered by Medicare

You may have heard about the interest in Congress in including dental, vision, and hearing benefits in Medicare. Traditional Medicare offers only limited coverage for these services – and only when they fall under the broad definition of medical, such as cataract surgery. You can use your HSA balances to reimburse qualified dental services (like routine cleanings, fillings, crowns, implants, and dentures), qualified vision services (like prescription glasses, contact lenses, and vision-correction surgery), and qualified hearing services (like hearing aids) tax-free.