Specific rules govern whether or not an employee can actively contribute to a Health Savings Account (HSA). One requirement is that they be enrolled in a qualified high-deductible healthcare plan (HDHP). Another is that they cannot be enrolled in any form of Medicare. Here are some things you should know about how Medicare participation affects HSA contributions.
What is a Health Savings Account?
An HSA is a tax-advantaged benefit account allowing people enrolled in a qualified HDHP to set aside money to pay for out-of-pocket healthcare expenses. Participants own their HSAs, and they benefit from these triple tax advantages:
- Contributions are tax-free
- Distributions used for eligible expenses are tax-free
- Interest and investment income is earned tax-free
Another advantage is that HSA participants can use the account as a supplemental retirement fund after age 65. Of course, participants can continue using the account after age 65 for medical expenses or spend the funds on other expenses without penalty. However, those distributions are taxable as income if the HSA pays for non-eligible expenses.
What is Medicare?
Medicare is a federal health insurance program run by the Centers for Medicaid and Medicare Services (CMS). Medicare is available for:
- People aged 65 and older
- Those under 65 with disabilities who have been receiving Social Security Disability Insurance (SSDI) for 24 months
- People with End-Stage Renal Disease (ERSD)
There are four parts to Medicare:
- Part A (Hospital Insurance) covers inpatient hospital care, inpatient stays in a skilled nursing facility, hospice, and home health services.
- Part B (Medical Insurance) covers doctors and clinical lab services, outpatient and preventative care, home health care, screenings, surgical fees and medical supplies, and physical and occupational therapy.
- Part C (Medicare Advantage) combines Part A (hospital insurance) with Part B (medical insurance) into one plan. Private insurance companies who contract with Medicare offer Part C plans. Most of these can be combined with Part D (Prescription Drug Coverage).
- Part D (Prescription Drug Plan) is a standalone plan that helps cover the cost of prescription drugs. It may also lower prescription drug costs and prevent higher future costs. Medicare Part D may be added to Original Medicare (Parts A and B), some Medicare Cost Plans, some Medicare Private-Fee-for-Service Plans, and Medicare Medical Savings Account Plans. Insurance companies and other private Medicare-approved companies offer Part D plans.
How does Medicare affect HSA contributions?
First and foremost, to actively contribute to an HSA, participants must be enrolled in an HDHP. However, employees can be enrolled in an HDHP through their employer and in some parts of Medicare at the same time, with Medicare coverage having secondary responsibility for eligible expenses.
If enrolled in any part of Medicare, the employee must stop actively contributing to their HSA. They may, however, continue to use their HSA balances for out-of-pocket medical expenses, including deductibles, premiums, copayments, and coinsurance, or take a distribution for non-medical expenses.
It’s important to note that Medicare Part A coverage begins six months back from the date a person applies for Medicare but no earlier than the first month Medicare eligibility began. To avoid a tax penalty, Medicare applicants should consider ceasing their HSA contributions at least six months before applying.
HSA participants who become eligible for Medicare but want to continue making HSA contributions should talk with an advisor about their options. There may be premium penalties associated with late enrollment in certain Medicare coverages.
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